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REDUCING IRS PENALTIES
Reducing IRS Penalties
Robert E McKenzie, Attorney ©2009
INTRODUCTION
Procedural
Requirements for Imposition of Penalties and Additions to Tax
The Internal Revenue Service Restructuring Act requires
that each notice imposing a penalty include the name of the penalty, the Code
section imposing the penalty, and a computation of the penalty. The Act also requires the specific approval
of IRS management to assess all non‑computer generated penalties unless excepted. This
provision does not apply to failure to file penalties, failure to pay
penalties, or to penalties for failure to pay estimated tax. The
provision is effective with respect to notices issued, and penalties assessed,
after December 31, 2000. [Act '3306] [IRC '6751]
1.
FAILURE TO FILE TAX RETURN OR PAY TAX
1.10
The
Failure to File and Failure to Pay Penalties are:
·
IRC Section
6651(a) Failure to File a Return
·
IRC Section
6651(a)(1) Failure to File a Tax Return
·
IRC Section
6651(a)(2) Failure to Pay a Tax
·
IRC Section
6651(a)(3) Failure to Pay a Tax within 10 days of Notice and Demand
·
IRC Section
6651(d) Increase in the Penalty for Failure to Pay in Certain Cases
·
IRC Section
6651(f) Increase in the Penalty for Fraudulent Failure to File
·
IRC Section 6698
Failure to File a Partnership Return
1.20 Common
Features
Generally, a failure to file (FTF) and/or failure to
pay (FTP) penalty discussed in this chapter is based on the amount of tax
required to be shown on a late‑filed or late paid return, reduced by any
portion of the tax paid on or before the prescribed due date of the return. An
exception to this general rule is the Failure to File a Partnership return, IRC
section 6698, which is based on a penalty of $50 per month, per partner for
each month the return is late.
1.30 Coordination
between FTF and FTP Penalty Rates
1.
If both the FTF
(under IRC section 6651(a)(1)) and FTP (under IRC
section 6651(a)(2)) penalties apply, the FTP penalty amount is allowed as an offset
against the FTF penalty for any month in which both apply. When this occurs,
the combined penalty rate for the month will not exceed five percent.
2.
For example; if
the FTP penalty rate of one‑half of one percent (.005) is applicable, the
FTF penalty would be assessed at 4.5 (.045) percent.
3.
When both the
FTP penalty and minimum failure to file penalty apply (income tax returns
only), the minimum failure to file penalty is not reduced by the amount of the
FTP penalty.
1.40 Who
Asserts
Generally, all areas of
the Service may assert or assess the penalty, based on the circumstances at the
time the return is received. On a
delinquent tax return mailed to the Service after the due date of the return:
1.
Master File
assesses any appropriate FTF and/or FTP penalty at the time the tax is assessed
and the taxpayer will be sent a balance due notice.
2.
Additions to tax
(penalty and interest) will accrue.
1.50 Extension
of Time to File
1.
General Rule:
IRC section 6081 and the related regulations provide for a reasonable extension
of time to file a return.
2.
That
"reasonable extension" is not to exceed 6 months (unless the taxpayer
is overseas).
A. If the taxpayer has a valid extension of time for
filing a return, that taxpayer is not liable for the FTF penalty for the duration
of the extension period. The computation of the FTF penalty begins immediately
after the extended due date.
B. However, an extension of time to file is not an
extension of time to pay. Generally, once the signed return is received, the
FTP penalty will be computed from the original due date of the return to the
date the tax is paid.
C. Individuals are granted the automatic four month
extension of time to file if the following conditions are satisfied: (Treas. Regs. 1.6081‑1 and 1.6081‑4 and 4T)
(1) The individual must have completed Form 4868,
Application for Automatic Extension of Time to File U.S. Individual Income Tax
Return.
(2) Signed the request as required in IRC section 6061,
Signing of returns and other documents by individuals.
(3) Filed the application on or before the due date of
the return.
(4) Effective for tax year 1991 and prior: (1) the application must have shown
the amount of tax properly estimated to be due; and (2) the amount properly
estimated to be due, must have been paid with the application.
(5) Effective for the tax year 1992 and subsequent,
Notice 93‑22, 1993‑1 C.B. 305, issued April 7, 1993, granted
individuals a four month extension of time to file even if they are unable to pay the amount of tax properly estimated to
be due. They must however: (1) complete and file the Form 4868 prior to the
original due date of the return; (2) sign the request; and (3) properly
estimate the amount of tax due.
1.60 Received
Date, IRC Section 7502
1.
A return is
considered timely, if received prior to, or on, the due date or extended due
date of the return.
2.
A. A postmark with a date after the prescribed due date is
late.
B. When more than one United States Postal Service
postmark date appears on an envelope, consider the earlier postmark date as the
date the return was mailed.
3.
Privately
Metered Mail. In general, consider a return timely filed if it contains a postal
meter stamp that:
A. Bears the date on or before the last date (or last
day of the period) prescribed for filing the return, and
B. The return is received not later than the time the
return would normally have been received if it had been mailed on the last date
(or last day of the period) prescribed for filing the return.
4.
If the return is
received after the normal time , the taxpayer must prove the factors in IRC
section 301.7502‑1(c)(iii)(b) which in general states:
A. The document must show a postmarked date that is on
or before the last day of the period prescribed for filing the document.
B. The document must be received by the Service not
later than the time the document would have been received if it were postmarked
at the same point of origin by the United States Post Office.
C. In addition, the person who is required to file the
document must show: the document was deposited before the last collection of
the mail (from the place of deposit) on or before the last day prescribed for
filing the document, any delay in receiving the document was due to a delay in
the transmission of the mail, and caused the document to be received after the
due date of the document.
5.
Designated
1.70 Definition
of Month
1.
If the date prescribed
for filing a return is the last day of a calendar month, each succeeding
calendar month or (fraction thereof) during which the failure to file or pay
continues is a month for the purposes of the FTF/FTP penalty. For example, when
a return is due January 31, 1989, the first month ended on February 28, and the
succeeding months ended on March 31, April 30, etc.
2.
If the date
prescribed for filing the return or paying the tax is other than the last day
of the calendar month, the period ends with the corresponding day in the
following month.
3.
If there is no
corresponding day, consider the last day of the following month as the ending
date.
4.
Example: The
failure to pay due date falls on January 30, 1992,
A. 1992 is a leap year.
February has no corresponding due date.
B. The period from January 30th through the last day of
the following month (February 29, 1992) shall be considered a month for the
purposes of the FTF and FTP penalty.
C. If the tax remains unpaid, the FTP penalty due date
will fall on the 30th day of each succeeding month.
5.
If a return is
not timely filed or the tax is not timely paid, the fact that the date
prescribed for filing the return or paying the tax, or the corresponding date in
any succeeding calendar month, falls on a Saturday, Sunday, or a legal holiday
is immaterial in determining the number of months for the FTF/FTP penalty.
Treas. Reg. 301.6651‑1(b)(3).
1.80 Net Tax Due
The
net tax amount is the amount of tax required to be shown on the return less
allowable credits, such as general business credits, foreign income tax
credits, SIC and fuel tax credits. This amount is reduced by payments made on
or before the prescribed due date of the return (excluding extensions), such as
withholding credits, tax deposits, estimated tax payments, overpayments from
prior periods, or other payments made on or before the prescribed due date of
the return.
The
penalty applies not only to tax shown on a taxpayer's original return, but also
to any additional tax later found due on the return.
The
net tax amount required to be shown on the return includes all income taxes as
well as employment taxes. For example, the uncollected employee FICA tax on
tips is a tax required to be shown on Form 1040, Individual Tax Return; thus,
this uncollected FICA tax on tips should be included in the net tax amount.
When
computing the net tax amount, the IRS will not consider amounts which were paid
after the due date of the return, but before the date of filing.
1.90 Minimum
Failure to File
For late returns a minimum FTF penalty applies to all
individual and corporate income tax returns delinquent for more than 60 days.
The minimum FTF penalty shall not be less than the lesser of: $135.00 or 100
percent of the amount required to be shown as tax on the return.
1.95 Penalty for Failure to File Income Tax
Return Increased
If you do not file your return by the due date
(including extensions) you may have to pay a failure-to-file penalty. For income
tax returns required to be filed after 2008, the failure-to-file penalty for
returns filed more than 60 days after the due date (including extensions) is
increased. In this situation, the minimum penalty is the smaller of $135 or
100% of the unpaid tax.
1.100 Failure
to File a Tax Return IRC Section 6651(a)(1)
IRC section 6651(a)(1) imposes a penalty for failure
to file (FTF) a tax return, by the date prescribed (taking into consideration
any extension of time for filing), unless it is shown that the failure is due
to reasonable cause and not due to willful neglect.
1.110 Penalty
Computation
To calculate the penalty:
1.
determine the
penalty period (number of months including a part of a month
2.
determine the
penalty rate (4 1/2 or 5 percent);
3.
determine the
net tax due for each month (including a part of a month) the penalty is
applicable; and
4.
Multiply the
number of months (including a part of a month) the return is past due, times
the penalty rate, times the net tax due.
1.120 Penalty
Period
The penalty period extends from the prescribed due
date, including valid extensions, to the date the Service receives the return.
1.
The prescribed
due date is the date taxpayers are required to file their returns.
2.
If the due date falls
on a Saturday, Sunday, or legal holiday, and the
return is filed by the next business day, consider it tiled on the due date.
3.
If the taxpayer
has a valid extension of time for filing a return, he/she is not liable for the
FTF penalty for the duration of the extension period.
1.130 Penalty
Rate
1.
Generally, the
FTF penalty is 5 percent of the amount of the tax required to be shown on the
return for each month, or fraction thereof, that the
failure continues, not to exceed 25 percent of the tax.
2.
When the FTP
penalty under IRC section 6651(a)(2) also applies, the FTF penalty of 5 percent
(.05) is reduced by 1/2 of 1 percent per month to 4 1/2 (.045) percent for each
month or part of a month that the FTF and FTP both apply.
3.
Be aware, that
both the FTF and the FTP penalties may apply at the full rate, for the same
amount of money, but for different periods in time.
1.140 Tax (FTP)
IRC Section 6651(a)(2)
1.
IRC section
6651(a)(2) imposes a FTP penalty if the tax shown on
any return, other than an information return, is not paid by the due date of
that return. The FTP penalty under this provision applies to original and
amended returns filed by the taxpayer. This penalty applies to the following
returns:
A. Income tax returns;
B. Employment tax returns;
C. Excise tax returns;
D. Gift tax returns;
E. Estate tax returns;
2.
It does not
apply to:
A.
Information
returns required under Chapter 61, Subchapter A, Part III;
B.
Payments of
estimated tax;
C.
Partnership
returns.
1.150 Penalty
Period
The period for computing the IRC Section 6651(a)(2) penalty, which applies to original returns, is from the
due date of the return until the tax is paid.
1.160 Penalty
Rate
IRC section 6651(a)(2) provides that the FTP penalty
be assessed at one‑half of 1 percent (.005) of the unpaid tax for the
first month the penalty applies and an additional one‑half of 1 percent
(.005) for each additional month or fraction of the month the tax is unpaid,
not to exceed 25 percent of the tax.
1.170
Failure to Pay Tax IRC Section 6651(a)(3)
1.
IRC section
6651(a)(3) imposes a FTP penalty on any tax required
to be reported on a return, other than information returns, but was not
reported on the return.
2.
The FTF penalty
is not reduced by the FTP penalty imposed under IRC section 6651(a)(3).
A. The FTF penalty will be computed from the original
due date of the return for up to five months.
B. The FTP penalty imposed under IRC section 6651(a)(3) begins with the assessment (23C) date and continues
until the additional tax is paid, not to exceed 25 percent of the tax.
C. Therefore, the FTF and FTP penalties may be assessed
on the same amount of unpaid tax, but for different periods of time.
3.
For the first
notice and demand (first balance due notice) made:
A. Prior to January 1, 1997, the FTP penalty, under IRC
section 6651(a)(3), was assessed when payment was not
made within 10 days of notice and demand.
B. After December 31, 1996, the FTP penalty, under IRC
section 6651(a)(3), is assessed if payment is not made
within 21 calendar days (or 10 business days if the balance due amount equals
or exceeds $100,000) of notice and demand.
1.180 Net
Amount Due
Net amount due as it relates to IRC section 6651(a)(3) is the amount of tax stated in the balance due notice. For
purposes of computing the FTP penalty, the net amount due may be reduced by any
payments made after the balance due notice but prior to the beginning of the
following month.
1.190 IRC
Section 6651(d) Increase in the FTP
1.
IRC section
6651(d) increases the FTP penalty under IRC section 6651(a)(2) or (3) on any
tax required to be reported on a return, from one‑half of one percent
(.005) to one percent (.01) of the tax after either:
A. The day, 10 days after the date notice of intent to
levy (IRC section 6331(d)), or
B. The day on which notice and demand for immediate
payment is given (IRC section 6631(a)).
2.
The increased
penalty rate (1 percent) applies to all subsequent assessments on that module.
However, once a module is fully paid, a later assessment will accrue at the one‑half
of one percent rate until notice of intent to levy is sent.
1.200 Failure
to Pay Penalty When Paying in Installments Decreased
Taxpayers who make '6159 installment payments under
an agreement with IRS are now subject to a '6651(a) .0025 percent a month
penalty instead of .0050 percent a month penalty for failure to pay taxes if
the individual filed the tax return in a timely manner, including extensions (Act '3303; new Code
'6651(h); effective for purposes of determining additions to the tax for months
beginning after December 31, 1999).
1.210 Penalty
Calculations
Example: Failure to File and Failure to Pay Form 1040
|
Return Due Date (041599) – Tax year 1998 |
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Code |
Date Received |
Amount |
Comments |
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TC150 |
122699 |
$1,753.00 |
Amount of tax on return |
|
TC610 |
112199 |
$953.00 |
Payment received with the return |
|
TC660 |
061798 |
$800.00 |
Estimated tax payment |
The tax is received seven months and 5 days after the
due date of the return. For the purpose of computing the failure to file and
failure to pay penalties, this equals eight months. Because both the failure to
file and failure to pay penalty apply, the FTF will be computed at .045 for the
first five months after the due date of the return.
|
$ 953.00 |
|
|
x .045 |
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$ 42.89 |
amount
per month |
|
x 5 |
number
of months |
|
$214.45 |
Failure
to file penalty |
The failure to pay penalty continues to apply for the
entire eight months and is computed at one half of one percent (.005).
|
$ 953.00 |
|
|
X .005 |
|
|
$ 4.77 |
amount per month |
|
x 8 |
number of months |
|
$ 38.16 |
failure to pay penalty |
|
$214.45 |
FTF |
|
+ 38.16 |
FTP |
|
$252.62 |
total penalty |
|
$252.61 |
total penalty |
In this example the failure to pay penalty will
continue for three months after the failure to file penalty reached the maximum
amount.
2. FRAUDULENT
FAILURE TO FILE
2.10 Fraudulent
Failure to File IRC section 6651(f)
1. For returns due after December 31, 1989 (determined
without regard to extensions), the civil fraud penalty, IRC section 6663, can
only apply to situations when a return has been filed. This restriction was
legislated in IRC section 6664(b) by OBRA 89.
2.
OBRA 89 enacted
IRC section 6651(f), Increase in Penalty for Fraudulent Failure to File (FFTF).
This penalty generally has an impact equal to the severity of the civil fraud
penalty.
3.
The burden of
proof is on the government to establish FFTF.
2.20 Penalty
Rate
The FFTF penalty is 15 percent per month of the net
amount due for each month the return is delinquent, up to a maximum of five
months or 75 percent.
2.30 Estimated
Tax Penalties, Overview
1.
IRC section 6654
provides for a penalty when individuals, estates and most trusts underpay any
required installment(s) of estimated income tax liabilities reportable on Forms
1040 (U.S. Individual Income Tax Return) and Forms 1041 (U.S. Fiduciary Income
Tax Return).
2.
For taxable
years beginning before January 1, 1998, taxpayers will not be subject to
estimated tax penalties if the tax shown on their return (or, if no return is
filed, their tax liability), minus tax amounts withheld from wages during the
year, is less than $500. The Taxpayer Relief Act of 1997 increased the $500
threshold to $1,000 for taxable years beginning after December 31, 1997.
2.40 Penalty
Rate
Although the estimated tax penalty is not interest,
it is computed in the same manner as interest, except it is NOT COMPOUNDED
DAILY. Use the debit interest rate in effect for the appropriate time period.
A. In accordance with IRC section 6621, the debit interest rate is determined
quarterly. This means that the penalty on a $1000 underpayment for one
quarterly tax period may be different from the penalty on a $1000 underpayment
for a different quarterly tax period. B. Interest rates can be found in the
Internal Revenue Bulletin (IRB), News Releases, TAX NEWS, Taxpayer Service
Electronic Bulletin Board (TEBB) and Notice 433, Yearly Interest and Certain Penalty
Rates.
3. FAILURE TO DEPOSIT
3.10 Failure To Deposit
Penalty, Overview And General
1.
The Internal
Revenue Code (IRC) section 6656 provides for a Failure To
Deposit (FTD) Penalty if a taxpayer does not deposit tax in the correct amount,
within the prescribed time period, and/or in the required manner.
2.
The obligation
to deposit employment/excise taxes is ongoing and requires that the taxpayer
continues to follow the requirements as long as the taxpayer is incurring these
taxes. For example, as long as an employer has employees and is issuing a
payroll, that employer must deposit as required.
3.20 Failure‑to‑Deposit
Penalty Rate
The FTD Penalty is charged for any failure to deposit
correctly. The three components of a correct deposit are that it is made
timely, in the correct amount, and in the correct manner.
A. A failure to comply with any of these components will
subject the deposit to an FTD Penalty.
B. Because there may be multiple deposits (with each
individual deposit subject to scrutiny for compliance) on any one account, the
FTD Penalty that is assessed on the account will be a sum of the "time‑sensitive"
penalty(ies) and/or the
"avoidance" penalty(ies).
3.30 Time
Sensitive Portion of the FTD Penalty
For deposits required after December 31, 1989, there
is a four tier penalty system. The
penalty rate assessed depends on the number of days a deposit is late, as shown
below:
·
percent for
deposits 1‑‑5 days late,
·
5 percent for
deposits 6‑‑15 days late,
·
10 percent for all
direct payments and those deposits made more than 15 days late, but paid on or
before the 10th day following notice and demand.
·
15 percent
(actually, a 5 percent addition to the 10 percent for late payment in (c)
above) for all un-deposited taxes still unpaid after the 10th day following the
first balance due notice or the day on which notice and demand for immediate
payment is given.
3.40 Correction
of Cascading Failure to Deposit Penalty
Under prior law, deposits of payroll taxes were
allocated to the earliest period for which a deposit was due. If the business
makes an insufficient or no deposit, later deposits were first applied to the
earlier period and the remainder is applied to the current period. Cascading
penalties usually resulted that could have been avoided if later deposits were
applied first to the current period. Now businesses can designate the period to
which each deposit is applied during the 90‑day period beginning on the
date of a related IRS penalty notice. Also, the IRS now has the authorization
to waive the failure to deposit penalty to the first deposit the business is
required to change the frequency of the taxpayers deposits (e.g., from monthly
to semi-weekly). (Act '3304; Code '6656; applicable to deposits required to be
made more than 180 days after July 22, 1998. A deposit required to be made
after December 31, 2001, must be applied to the most recent period or periods
within the tax period to which the deposit relates unless the person making the
deposit designates otherwise.)
4. REASONABLE
CAUSE
4.10 Reasonable
Cause
1.
Reasonable cause
is based on all the facts and circumstances in each situation and allows the
Service to provide relief from a penalty that would otherwise be assessed.
Reasonable cause relief is generally granted when the taxpayer exercises
ordinary business care and prudence in determining their tax obligations but is
unable to comply with those obligations.
2.
In the interest
of equitable treatment of the taxpayer and effective tax administration, the nonassertion or abatement of civil penalties based on
reasonable cause or other relief provisions provided in this IRM must be made
in a consistent manner and should conform with the considerations specified in
the Internal Revenue Code (IRC), Regulations (Treas. Regs.),
Policy Statements, and Part 20.1.
3.
Reasonable cause
relief is not available for all penalties; however, other exceptions may apply.
A. For those penalties where reasonable cause can be
considered, any reason which establishes that the taxpayer exercised ordinary
business care and prudence, but was unable to comply with a prescribed duty
within the prescribed time, will be considered.
B. If a reasonable cause provision applies only to a specific
Code section, that reasonable cause provision will be discussed in the IRM 20.1
chapter relating to that IRC section.
C. Remember that an acceptable explanation is not
limited to those given in IRM 20.1.
4.
The wording used
to describe reasonable cause provisions varies. Some IRC penalty sections also
require evidence that the taxpayer acted in good faith or that the taxpayer's
failure to comply with the law was not due to willful neglect. See specific IRM
sections for the rules that apply to a specific Code section.
5.
Taxpayers have
reasonable cause when their conduct justifies the nonassertion
or abatement of a penalty. Each case must be judged individually based on the
facts and circumstances at hand. Consider the following in conjunction with
specific criteria identified in the remainder of IRM 1.3.
(1) What happened and when did it happen?
(2) During the period of time the taxpayer was non‑compliant,
what facts and circumstances prevented the taxpayer from filing a return,
paying a tax, or otherwise complying with the law?
(3) How did the facts and circumstances prevent the
taxpayer from complying?
(4) How did the taxpayer handle the remainder of their
affairs during this time?
(5) Once the facts and circumstances changed, what
attempt did the taxpayer make to comply?
6.
Reasonable cause
does not exist if, after the facts and circumstances that explain the
taxpayer's noncompliant behavior cease to exist, the taxpayer fails to comply
with the tax obligation within a reasonable period of time.[IRM 20.1.1.3.1]
4.20 Standards
1.
Any reason that
establishes a taxpayer exercised ordinary business care and prudence but was
unable to comply with the tax law may be considered for penalty relief.
2.
The following
regulations contain examples of circumstances that may be helpful in
determining if a taxpayer has established reasonable cause:
A. Accuracy‑Related Penalty: 1.6664‑4
B. Failure to Pay Penalty: 301.6651‑1(c)
C. Failure to File: 301.6651‑1(c)
D. Failure to Deposit Penalty: 301.6656‑1(b);
301.6656‑2(c)
E. Information Returns Penalty: 301.6723‑1A(d);
301.6724‑1
4.30 Ordinary
Business Care and Prudence
1.
Ordinary
business care and prudence includes making provision for business obligations
to be met when reasonably foreseeable events occur. A taxpayer may establish
reasonable cause by providing facts and circumstances showing the taxpayer
exercised ordinary business care and prudence (taking that degree of care that
a reasonably prudent person would exercise), but nevertheless was unable to
comply with the law.
2.
In determining if
the taxpayer exercised ordinary business care and prudence, review available
information including the following:
A. Taxpayer's Reason. The taxpayer's reason should
address the penalty imposed. To show reasonable cause, the dates and
explanations should clearly correspond with events on which the penalties are
based. If the dates and explanations do not correspond to the events on which
the penalties are based, request additional information from the taxpayer that
may clarify the explanation (See IRM 20.1.1.3.1).
B. Compliance History. Check the preceding tax years (at
least 2) for payment patterns and the taxpayer's overall compliance history.
The same penalty, previously assessed or abated, may indicate that the taxpayer
is not exercising ordinary business care. If this is the taxpayer's first
incident of noncompliant behavior, weigh this factor with other reasons the
taxpayer gives for reasonable cause, since a first time failure to comply does
not by itself establish reasonable cause.
C. Length of Time. Consider the length of time between
the event cited as a reason for the noncompliance and subsequent compliance.
See IRM 20.1.1.3.1. Consider: (1) when the act was required by law, (2) the
period of time during which the taxpayer was unable to comply with the law due
to circumstances beyond the taxpayer's control, and (3) when the taxpayer
complied with the law.
D. Circumstances Beyond the
Taxpayer's Control. Consider whether or not the taxpayer could have anticipated
the event that caused the noncompliance. Reasonable cause is generally
established when the taxpayer exercises ordinary business care and prudence
but, due to circumstances beyond the taxpayer's control, the taxpayer was
unable to timely meet the tax obligation. The taxpayer's obligation to meet the
tax law requirements is ongoing. Ordinary business care and prudence requires
that the taxpayer continue to attempt to meet the requirements, even though
late.
4.40 Ignorance
of the Law
1.
In some
instances taxpayers may not be aware of specific obligations to file and/or pay
taxes. The ordinary business care and prudence standard requires that taxpayers
make reasonable efforts to determine their tax obligations. Reasonable cause
may be established if the taxpayer shows ignorance of the law in conjunction with
other facts and circumstances.
2.
For example,
consider:
A. The taxpayer's education,
B. If the taxpayer has been subject to the tax,
C. If the taxpayer has been penalized, or
D. If there were recent changes in the tax forms or law which
a taxpayer could not reasonably be expected to know.
3.
The level of
complexity of a tax or compliance issue is another factor that should be
considered in evaluating reasonable cause because of ignorance of the law.
4.
Reasonable cause
should never be presumed, even in cases where ignorance of the law is claimed.
5.
The taxpayer may
have reasonable cause for noncompliance if:
A. A reasonable and good faith effort was made to comply
with the law, or
B. The taxpayer was unaware of a requirement and could
not reasonably be expected to know of the requirement. [IRM 20.1.1.3.1.2.1]
4.50 Mistake
was Made
The taxpayer may try to establish reasonable cause by
claiming that a mistake was made.
1.
Generally, this is
not in keeping with the ordinary business care and prudence standard and does
not provide a basis for reasonable cause.
2.
However, the
reason for the mistake may be a supporting factor if additional facts and
circumstances support the determination that the taxpayer exercised ordinary
business care and prudence.[IRM 20.1.1.3.1.2.2 ]
4.60 Forgetfulness
1.
The taxpayer may
try to establish reasonable cause by claiming forgetfulness or an oversight by
the taxpayer or another party caused the noncompliance. Generally, this is not
in keeping with ordinary business care and prudence standard and does not
provide a basis for reasonable cause.
A. Relying on another person to perform a required act
is generally not sufficient for establishing reasonable cause.
B. It is the taxpayer's responsibility to file a timely
and accurate return and to make timely deposits or payments. This
responsibility cannot be delegated.
2.
Information to
consider when evaluating a request for an abatement or non-assertion of a
penalty based on a mistake or a claim of ignorance of the law includes, but is
not limited to:
A. When and how the taxpayer became aware of the
mistake.
B. The extent to which the taxpayer corrected the
mistake.
C. The relationship between the taxpayer and the
subordinate.
D. If the taxpayer took timely steps to correct the
failure after it was discovered.
E. The supporting documentation.[IRM
20.1]..3.1.2.3]
4.70 Death,
Serious Illness, or Unavoidable Absence
1.
Death, serious
illness or unavoidable absence of the taxpayer may establish reasonable cause
for late filing, payment, or deposit for the following:
A. An individual: If there was a death, serious illness,
or unavoidable absence of the taxpayer or a death or serious illness in the
taxpayer's immediate family (i.e. spouse, sibling, parents, grandparents,
children).
B. A corporation, estate, trust, etc.: If there was a death, serious illness, or
other unavoidable absence of the taxpayer (or a member of such taxpayer's
immediate family), and that taxpayer had sole authority to execute the return,
make the deposit, or pay the tax (person responsible).
2.
If someone,
other than the taxpayer or the person responsible, is authorized to meet the
obligation, consider the reasons why that person did not meet the obligation
when evaluating the request for relief. In the case of a business, if only one
person was authorized, determine whether this was in keeping with ordinary
business care and prudence.
3.
Information to
consider when evaluating a request for penalty relief based on reasonable cause
due to death, serious illness, or unavoidable absence includes, but is not
limited to, the following:
A. The relationship of the taxpayer to the other parties
involved.
B. The date of death.
C. The dates, duration, and severity of illness.
D. The dates and reasons for absence.
E. How the event prevented compliance.
F. If other business obligations were impaired, and
G. If tax duties were attended to promptly when the
illness passed, or within a reasonable period of time after a death or
absence.[IRM 20.1.1.3.1.2.4]
4.80 Unable
to Obtain Records
1.
Explanations
relating to the inability to obtain the necessary records may constitute
reasonable cause in some instances, but may not in others.
2.
Consider the
facts and circumstances relevant to each case and evaluate the request for
penalty relief.
3.
If the taxpayer
was unable to obtain records necessary to comply with a tax obligation, the
taxpayer may or may not be able to establish reasonable cause. Reasonable cause
may be established if the taxpayer exercised ordinary business care and
prudence, but due to circumstances beyond the taxpayer's control they were
unable to comply.
4.
Information to
consider when evaluating such a request includes, but is not limited to an
explanation as to:
A. Why the records were needed to comply.
B. Why the records were unavailable and what steps were
taken to secure the records
C. When and how the taxpayer became aware that they did
not have the necessary records.
D. If other means were explored to secure needed information.
E. Why the taxpayer did not estimate the information.
F. If the taxpayer contacted the Service for
instructions on what to do about missing information.
G. If the taxpayer promptly complied once the missing
information was received; and
H. Supporting documentation such as copies of letters
written and responses received in an effort to get the needed information.
.[IRM 20.1.1.3.1.2.5]
4.90 Statutory
Exceptions & Administrative Waivers
1.
These two very
separate categories are placed together because in many instances an
Administrative Waiver is an extension of rules that were provided for by
statute.
Tax legislation (Internal Revenue Code (IRC)) may provide an exception
to a penalty. Specific statutory exceptions can be found in either the penalty‑related
IRC section or the accompanying regulations. For example:
A. IRC section 6654(e)(1), (2),
or (3), Estimated Tax Penalties for Individuals (IRM 20.1.3).
B. IRC section 7502(a) and 7502(e), Timely Mailing
Treated as Timely Filing and Paying (IRM 20.1.2).
C. IRC section 6724(a) or 6724(c), Waiver; Definitions
and Special Rules, Information Return Penalties (IRM 20.1.7).
D. IRC section 6404(f), Abatement of Penalty or Addition
to Tax Attributable to Written Advice of the Internal Revenue Service (see IRM
20.1.1).
E. IRC section 7508, Time for performing certain Acts
Postponed by Reason of Service in Combat Zone. This provision applies only in a
Presidentially‑declared "Combat Zone."
2.
Legislation with
retroactive provisions may provide guidance on associated penalties. As a
result of that retroactive provision, the Service may issue a News Release or
other guidance with instructions for the disposition of the related penalties.
3.
Some Statutory
Exceptions are assigned their own Penalty Reason Code (see the specific topic).
However, many are not.
4.100 Administrative
Waiver
1. The Service may formally interpret or clarify a
provision to provide administrative relief from a penalty that would otherwise
be assessed. An administrative waiver may be addressed in either
a Policy Statement, News Release, or other formal communication stating
that the policy of the Service is to provide relief from a penalty under
specific conditions.
2. An administrative waiver may be necessary when there
is a delay by the Service in:
A. Printing or mailing of forms
B. Publishing guidance, writing of regulations, or
C. Other conditions.
3. An example of an administrative waiver is Notice 93‑22,
1993‑1 C.B. 305. This allowed individuals who requested an automatic 4‑month
extension of time to file an income tax return, an extension of time without
remitting the unpaid amount of any tax properly estimated to be due. [IRM
20.1.1.3.2.2]
4.110 Undue Hardship
1.
An undue
hardship may support the granting of an extension of time for paying a tax or
deficiency. Treas. Reg. 1.6161‑1(b), provides
that an undue hardship must be more than an inconvenience to the taxpayer. The
taxpayer must show that they would sustain a substantial financial loss if
forced to pay a tax or deficiency on the due date.
2.
The extension of
time to pay does not provide the taxpayer with an extension of time to file.
Nor does the extension of time to pay relieve the taxpayer of any appropriate
penalties.
3.
Undue hardship
generally does not affect a person's ability to file and therefore would not
provide a basis for penalty relief in a failure to file situation. However,
each request must be considered on a case‑by‑case basis. Undue
hardship may establish reasonable cause for failure to file on magnetic media,
under Treas. Reg. 301.6724‑1.
4.
Undue hardship
may also support relief from the addition to tax for failure to pay tax if, the
explanation for the noncompliance supports such a determination. However, the
mere inability to pay does not ordinarily provide the basis for granting penalty
relief. Under Treas. Reg. 301.6651‑1(e), the
taxpayer must also show that they exercised ordinary business care and prudence
in providing for the payment of the tax liability.
A. The taxpayer may claim that enough funds were on hand
but, as a result of unanticipated events, the taxpayer was unable to pay the
taxes.
B. Consider an individual taxpayer's inability to pay a
factor when considering penalty relief if the taxpayer shows that, had the payment
been made on the payment due date, undue hardship (as defined in Treas. Reg.
1.6161‑1(b)) would have resulted. In the case
where a taxpayer files bankruptcy, consider inability to pay a factor if the
insolvency occurred before the tax payment date.
5.
If a payroll was
met, taxes were withheld and should be available for deposit. Employers must
reserve money withheld from employees' wages in trust until deposited. The
employer should not use the money for any other purpose. Undue hardship does
not support relief from the IRC section 6672, Failure to Collect
and Pay Over Tax, or attempt to Evade or Defeat Tax (Trust Fund Recovery
Program).
6.
Information to
consider when evaluating a request for penalty relief includes, but is not
limited to, the following:
A. When did the taxpayer know they could not pay?
B. Why was the taxpayer unable to pay?
C. Did the taxpayer explore other means to secure the
necessary funds?
D. What did the taxpayer supply in the way of supporting
documentation, such as copies of bank statements?
E. Did the taxpayer pay when the funds became available?
4.120 Advice
1.
This section
discusses three basic types of advice: written and/or oral advice provided by
the Service, and advice provided by a tax professional.
2.
Information to consider
when evaluating a request for abatement or nonassertion
of a penalty due to reliance or advice, includes, but is not limited to, the
following:
A. Was the advice in response to a specific request and
was the advice received related to the facts contained in that request?
B. Did the taxpayer reasonably rely on the advice?
3.
The following
examples address situations where a taxpayer relies on written advice from the
Service regarding an item on a filed return.
A. The taxpayer did not reasonably rely on the advice
regarding an item included on a return if the advise was received after the
date the return was filed;
B. A taxpayer may be considered to have reasonably
relied on advice received after the return was filed if they then filed an
amended return that conformed with such written advice;
C. A taxpayer may not be considered to have reasonably
relied on written advice unrelated to an item included on a return, such as
advice on the payment of estimated taxes, if the advice is received after the
estimated tax payment was due.
4.
Did the taxpayer
provide the Service or the tax professional with adequate and accurate
information?
5.
The taxpayer is
entitled to penalty relief for the period during which they relied on the
advice. The period continues until the taxpayer is placed on notice that the
advice is no longer correct or no longer represents the Service's position.
6.
The taxpayer is
placed on notice as the result of any of the following events that present a contrary
position and occur after the issuance of the written advice:
A. Written correspondence from the Service that its
advice is no longer correct or no longer represents the Service's position;
B. Enactment of legislation or ratification of a tax
treaty;
C. A U.S. Supreme Court decision;
D. The issuance of temporary or final regulations; or
E. The publication of a revenue ruling, revenue
procedure, or other statement in the Internal Revenue Bulletin.
7.
Taxpayers should
submit the necessary supporting information and documentation with Form 843,
Claim. However, if the information provided demonstrates that abatement of the
penalty is warranted, the penalty should be abated, whether or not a Form 843
is provided..[IRM 20.1.1.3.2.4]
4.130 Written
Advice from the Service
1.
The Service is
required by IRC section 6404(f) and Treas. Reg. 301.6404‑3 to abate any
portion of any penalty attributable to erroneous written advice furnished by an
officer or employee of the Service acting in their official capacity.
2.
If the taxpayer
does not meet the criteria for penalty relief under IRC section 6404, the
taxpayer may qualify for other penalty relief. For instance, taxpayers who fail
to meet all of the above criteria may still qualify for relief under reasonable
cause if the Service determines that the taxpayer exercised ordinary business
care and prudence in relying on the Service's written advice.
4.140 Oral
Advice from the Service
1.
The Service may
provide penalty relief based on a taxpayer's reliance on erroneous oral advice
from the Service. The Service is required by IRC section 6404(f) and Treas.
Reg. 301.6404‑3 to abate any portion of any penalty attributable to
erroneously written advice furnished by an employee acting in their official
capacity. Administratively, the Service has extended this relief to include
erroneous oral advice when appropriate.
2.
In addition to
considering the criteria provided in above, consider the following:
A. Did the taxpayer exercise ordinary business care and
prudence in relying on that advice?
B. Was there a clear relationship between the taxpayer's
situation, the advice provided, and the penalty assessed?
C. What is the taxpayer's prior tax history and prior
experience with the tax requirements?
D. Did the Service provide correct information by other
means (such as tax forms and publications)?
E. What type of supporting documentation is available?
3.
The following
are types of supporting documentation:
A. A notation of the taxpayer's question to the Service;
B. Documentation regarding the advice provided by the
Service;
C. Information regarding the office and method by which
the advice was obtained;
D. The date the advice was provided, and
E. The name of the employee who provided the
information. [IRM 20.1.1.3.2.4.2]
4.150 Advice
from a Tax Advisor
1.
Reliance on the
advice of a tax advisor generally relates to the reasonable cause exception in
IRC section 6664(c) for the accuracy‑related penalty under IRC section
6662. See IRM 20.1.5, Preparer Promoter Penalty, and Treas. Reg. 1.6664‑4(c).
2.
However, in very
limited instances, reliance on the advice of a tax advisor may apply to other
penalties when the tax advisor provides advice on a substantive tax issue.
3.
Example: The employer
researched all available Service publications on the subject of contract labor,
provided clear and convincing documentation as to the duties of the workers to
the tax advisor, and requested an opinion from the tax advisor as to whether
the workers were "contract labor" or employees. As a result, the tax
advisor advised the employer that the workers were "contract labor".
However, the Service later determined that the workers were
"employees" and not "contract labor" .
4.
Reliance on the
advice of a tax advisor is limited to issues generally considered technical or
complicated. The taxpayer's responsibility to file, pay or deposit taxes cannot
be excused by reliance on the advice of a tax advisor.[IRM 20.1.1.3.2.4.3]
4.160 Fire,
Casualty, Natural Disaster, or Other Disturbance
Relief
from a penalty may be requested if there was a failure to timely comply with a
requirement to file a return or pay a tax as the result of a fire, casualty,
natural disaster, or other disturbance.
Relief
from a penalty because the taxpayer suffered from a fire, casualty, natural
disaster, or other disturbance should be identified by the use of the
appropriate PRC. It could be that as a result of the fire the taxpayer was
unable to access their records
Fire,
casualty, natural disaster, or other disturbance are
factors to consider. One of these circumstances by itself does not necessarily
provide penalty relief.
Penalty
relief may be appropriate if the taxpayer exercised ordinary business care and
prudence, but due to circumstances beyond the taxpayer's control they were
unable to comply with the law.
Factors
to consider include:
A. Timing.
B. Effect on the taxpayer's business.
C. Steps taken to attempt to comply.
D. If the taxpayer complied when it became possible.
The
determination to grant relief from each penalty must be based on the facts and
circumstances surrounding each individual case.[IRM
20.1.1.3.2.5]
4.170 Official
Disaster Area
When a significant disaster occurs affecting a wide
area of taxpayers, the Service often issues special instructions to facilitate
evaluating the request for penalty relief. [IRM 20.1.1.3.2.6]
4.180 Service
Error
A Service error can be any error made by the Service
in computing or assessing tax, crediting accounts, etc. [IRM 20.1.1.3.3].
5. ACCURACY
PENALTIES
5.10 OBRA 89 Consolidated And Renumbered The
Following Penalty Code Sections:
1.
The accuracy‑related
penalty rate is 20 percent of the underpayment attributable to any adjustments
on the above. The penalty increases to 40 percent when there is a gross
valuation misstatement as defined in IRC section 6662(h).
2.
OBRA 89 changed
the civil fraud penalty from IRC section 6653(b) to 6663. The penalty rate is
75 percent of the underpayment attributable to fraud.
3.
OBRA 89 added IRC
section 6664 to provide definitions and special rules that apply to both the
accuracy‑related penalties and the civil fraud penalty.
5.20 Common Features: Accuracy‑Related
and Civil Fraud Penalties
1.
All accuracy‑related
and civil fraud penalties are associated with the examination of a tax return.
See Treas. Reg. 1.6662‑2(a). Penalty review,
abatement, and reconsideration follow guidelines established for the
examination of the return.
2.
Return Filing
Requirement: The accuracy‑related penalty and the civil fraud penalty
apply when a return has been filed, either timely or late. The accuracy‑related
penalties under IRC section 6662 and the civil fraud penalty under IRC section
6663 cannot be asserted on a substitute‑for‑return filed under IRC
section 6020(b). See IRC section 6664(b).
3.
Uniform
Definition of Underpayment: IRC section 6664(a) provides a common definition of
underpayment. The accuracy‑related and civil fraud penalties are
calculated only on the underpayment (or portion of the underpayment) of tax
attributable to the misconduct or fraud, as applicable. See IRC sections
6662(a) and 6663(a).
4.
Coordination of
Accuracy‑Related and Civil Fraud Penalties: The accuracy‑related
and civil fraud penalties cannot be asserted on the same portion of the same
underpayment. However, the accuracy‑related penalty and the civil fraud
penalty may be asserted on the same return when civil fraud applies to one
portion of the underpayment and the accuracy‑related penalty applies to
another portion of the underpayment. See IRC section 6662(b).
5.30 Negligence
or Disregard of Rules and Regulations
OBRA 89 redesignated the
negligence penalty from IRC section 6653(a) to). IRC section 6662(b)(1) applies to returns due after December 31, 1989 (without
regard to extensions). 2.6662(b)(1) creates a negligence penalty of 20 percent of the
underpayment attributable to negligence or disregard of rules or regulations.
5.40 Negligence
Penalty Assertion
1.
Negligence
includes any failure to make a reasonable attempt to comply with the provisions
of the tax law, exercise ordinary and reasonable care in tax return
preparation, or keep adequate books and records. (See Treas. Reg. 1.6662‑3(b).)
2.
The regulations
also provide that negligence is strongly indicated when a taxpayer fails to report
income shown on an information return, fails to make a reasonable inquiry into
the correctness of a deduction, credit, or exclusion on a tax return that seems
"too good to be true," or when the returns of partners or S
corporation shareholders are clearly inconsistent with the tax returns of their
respective entities.
3.
Some indications
of negligence follow:
A. Unreported or understated income,
B. Deductions or credits significantly overstated,
C. Careless, improper, or exaggerated deductions,
D. Misrepresenting or miscategorizing
deductions in such a manner as to conceal the true nature of the deduction,
E. Unexplainable items,
F. Inadequate books and records,
G. Cooperative state programs and state reports showing
a negligence penalty (taking into account other factors and not relying
entirely on the findings of another taxing agency),
H. Substantial errors on an issue that had been adjusted
in a prior year,
I.
Giving the
preparer incorrect or incomplete information to prepare the returns.
5.50 Penalty
Relief
1.
Reasonable Cause.
The penalty does not apply if the taxpayer has reasonable cause and acted in
good faith, i.e., if an error was due to an honest misunderstanding of the
facts or the law and the taxpayer took reasonable steps to comply with the law.
2.
Adequate
Disclosure. Disclosure is adequate if: A. It is made with the return, or on a
qualified amended return, and B. Unless otherwise prescribed by the
Commissioner, a completed Form 8275, Disclosure Statement, is filed with the
original return or qualified amended return. Form 8275‑R, Regulations
Disclosure Statement, is necessary for disclosing a position contrary to a
regulation. C. Treas. Regs. 1.6662‑3(c), 1.6662‑4(e) and (f) define adequate methods of disclosure for
returns due after December 31, 1991, the effective date of the regulations. D.
3.
When disclosure
is not adequate. The exception for adequate disclosure will not apply if: A.
The item on the return is attributable to a tax shelter, B. The taxpayer has not
kept adequate books and records, or fails to substantiate items on the return,
C. For returns due (without regard to extension) before January 1, 1994, the
item or position on the return is frivolous (i.e., patently improper), or D.
For returns due (without regard to extension) after December 31, 1993, the item
or position on the return does not have a reasonable basis. (Applies to
disregard of rules and regulations only.)
4.
Adequate
Disclosure Determination. The applicability of the disclosure exception is
determined for each item or group of similar items separately. When the
adequate disclosure exception is met (except in the case of a tax shelter), the
tax attributable to the disclosed item is not included in the calculation of
the underpayment for penalty purposes.
5.
Negligence and
Adequate Disclosure: A. For returns due after December 31, 1989 and before
January 1, 1994 the adequate disclosure exception does not apply if the item is
frivolous. See Notice 90‑20, 1990‑1 C.B. 328. B. For returns due
after December 31, 1993, adequate disclosure does not apply. Whenever the
taxpayer has a reasonable basis for an item or position taken, negligence by
definition does not apply.
6.
Disregard of
Rules or Regulations and Adequate Disclosure: A. Adequate disclosure is an
exception to the penalty attributable to disregard of rules or regulations.
Since the penalty attributable to negligence (for returns due after December
31, 1993) is not subject to a disclosure exception, the distinction between
negligence and disregard of rules and regulations will sometimes have to be
made. B. The penalties attributable to negligence and disregard of rules or
regulations often overlap, seem to apply equally to any given case, and are
often difficult to distinguish. (See Treas. Reg. 1.6662‑3(b)(1) and (2) for the definitions of negligence and
disregard.) C. For returns due after December 31, 1991 (without regard to
extensions) and before January 1, 1994, the disclosure exception is met for
disregard of rules or regulations only when the required form is filed by the
taxpayer (Form 8275 or 8275‑R), and the item or position on the return
has a realistic possibility of being sustained on its merits. D. For returns
due after December 31, 1993 (without regard to extensions), the disclosure
exception is available if the position taken on the return has a reasonable
basis. E. The penalty for disregard usually applies if an item on the return is
contrary to the Internal Revenue Code, temporary or final regulations issued
under the Internal Revenue Code, or a revenue ruling or notice (other than
notices of proposed rule making) published in the Internal Revenue Bulletin.
However, the penalty does not apply to a position contrary to a revenue ruling
or notice if the item has a realistic possibility of being sustained on its
merits.
5.60 IRC
Section 6662(d): Substantial Understatement
1.
OBRA 89 repealed
IRC section 6661, Substantial Understatement of Liability, and replaced it with
the accuracy‑related penalties in IRC section 6662(d).
2.
The penalty is
20 percent of the underpayment of income tax when there is a substantial
understatement of income tax. An understatement is substantial when it exceeds
the greater of 10 percent of the tax required to be
shown on the return for a taxable year, or $5,000 ($10,000 for C‑corporations).
5.70 Substantial
Authority Exception
1.
The penalty
under IRC section 6662(d) will not be asserted if there is substantial
authority for the tax treatment of an item or return position. When the
taxpayer's authority for the item or return position is substantial with
respect to the authority against it, the penalty will not be asserted.
Authorities relevant to both sides of the tax treatment of an item are taken
into account.
2.
Substantial
authority is an objective standard involving an analysis and application of the
law to the relevant facts. It is not determined with reference to what the
taxpayer actually believed to be the correct treatment of the item. Every item
must be separately evaluated to determine whether there is substantial
authority for the tax treatment of an item.
A. The substantial authority standard is less rigid than
the "more likely than not" standard. The "more likely than
not" standard is met when there is more than a 50 percent likelihood that the
position would be sustained.
B. The substantial authority standard is more rigid than
the reasonable basis standard. The reasonable basis standard has not been
defined by regulation, but per the committee reports associated with section
13251 of the Uruguay Round Agreement Act, P.L. 103‑465 dated December 8,
1994, is the same standard that precludes the assertion of the penalty for
negligence and disregard of rules and regulations. A position having a
reasonable basis is a position that is arguable but fairly unlikely to prevail
in court.
C. Therefore, the substantial authority exception can be
met when the taxpayer has less than a 50 percent, but more than a one‑in‑three likelihood of being sustained on
the issue.
3.
"Authority"
under Treas. Reg. 1.6662‑4(d)(3)(iii) is established by reference to:
A. The Internal Revenue Code and other statutory
provisions;
B. Proposed, temporary and final regulations;
C. Revenue rulings and revenue procedures;
D. Tax treaties, the regulations thereunder,
and Treasury Department and other official explanations of such treaties;
E. Court cases;
F. Congressional intent as reflected in committee
reports, joint explanatory statements of managers included in conference
committee reports, and floor statement made prior to enactment by one of a bill's
managers;
G. General Explanations of tax legislation prepared by
the Joint Committee on Taxation (the "Blue Book" );
H. Private letter rulings and technical advice memoranda
issued after October 31, 1976;
I.
Actions on
decisions and general counsel memoranda issued after March 12, 1981 (as well as
general counsel memoranda published in pre‑1955 volumes of the Cumulative
Bulletin);
J.
IRS information
releases and press releases;
K. Notices, announcements and other administrative
pronouncements published by the Service in the Internal Revenue Bulletin.
4.
Taxpayers
automatically meet the substantial authority standard if:
A. They have been named in a technical advice
memorandum,
B. Have been issued a district director's determination
letter,
C. Have been issued a private letter ruling, or
D. Received a revenue agent's report for a prior taxable
year with an affirmative statement on the same item.
E. Taxpayers do not automatically meet the substantial
authority standard if a private letter ruling is revoked or is inconsistent with:
(1) Subsequent proposed regulations
(2) Subsequent revenue rulings, or
(3) Other administrative pronouncements published in the
Internal Revenue Bulletin.
(4) See Treas. Reg. 1.6662‑4(d)(3)(ii).
(5) The term "authority" does not include
treatises, legal periodicals, legal opinions or opinions rendered by other tax
professionals.
(6) An authority does not continue to be an authority if
it is overruled or modified, implicitly or explicitly, by a body having the
power to overrule or modify an earlier authority such as a U.S. Court of
Appeals overruling a district court which originally issued the authority used
by the taxpayer.
(7) A Tax Court opinion is not considered to be overruled
or modified by a court of appeals to which a taxpayer does not have a right of
appeal, unless the Tax Court adopts the holding of the court of appeals.
(8) Substantial authority is determined as of the date of
filing or the last day of the taxable year. (See Treas. Reg. 1.6662‑4(d)(3)(iv)(C).)
(9) For determining the weight of
various "authorities" see Treas. Regs.
1.6662‑4(d)(3)(ii).
5.80 Adequate
Disclosure Exception
1.
When the
adequate disclosure exception is met, the tax attributable to the disclose item
or return position is not included in the calculation of the understatement for
penalty purposes.
2.
Generally, the
accuracy‑related penalty attributable to substantial understatement will
not be asserted on the underpayment attributable to an item that is adequately
disclosed. However, even when the item is adequately disclosed the penalty will
still be asserted if:
A. For returns due after January 31, 1991, but before
January 1, 1994‑‑the disclosed item is frivolous, i.e., patently
improper (see former Treas. Regs. 1.6662‑3(b)(3)),
B. For returns due after December 31, 1993‑‑the
disclosed item does not meet the reasonable basis standard,
C. The taxpayer failed to keep adequate books and
records or failed to substantiate the disclosed item. (IRM 4271, Inadequate
Records Cases), or
D. The item is attributable to a tax shelter as defined
in IRC section 6662(d)(2)(C)(iii) and Treas. Reg. 1.6662‑4(g)(2).
3.
Disclosure is
adequate if it is made in a statement attached to a return, i.e., Form 8275,
Disclosure Statement, or Form 8275‑R, Regulation Disclosure Statement. A.
Disclosure is considered adequate for tax return line item entries identified
in and disclosed according to the annual revenue procedure that applies for the
year of the return. B. If the revenue procedure does not expressly provide that
disclosure of an item on the return is sufficient, disclosure should be made on
Form 8275.
4.
The definition
of adequate disclosure provided by the following revenue procedures only
pertains to the accuracy‑related penalty attributable to a substantial
understatement.
6. HISTORY
AND REQUIREMENTS
6.10 History And Requirements Of Abatement Of Interest Claims
IRC 6404(e)(1) was added by
the Tax Reform Act of 1986 to provide for abatement of interest on deficiencies
or payments attributable to errors or delays in the performance of ministerial
acts by the Service. A ministerial act is a procedural, mechanical, processing‑type
act that does not involve the exercise of judgment, and that occurs after all
prerequisites to the act have taken place. See Revenue Procedure 87‑42
and regulation section 301.6404‑2T for additional guidance.
6.20 As
originally enacted, IRC Section 6404(e)(1) allows the
Service to abate interest when an IRS employee fails to perform a ministerial
act in a timely manner or makes an error in the performance of that act.
Interest attributable to the delay may be abated provided no significant aspect
of the delay is attributable to the taxpayer. Only delays in the performance of
a ministerial act that would be "widely perceived as grossly unfair"
(Committee Reports) will merit abatement. (For purposes of this provision,
Chief Counsel employees will be treated as employees
of the IRS.)
6.30 On
July 30, 1996, the Taxpayer Bill of Rights 2, was enacted amending IRC section
6404(e)(1) to add "unreasonable" before each reference to
"error" in the statute and to replace each reference to performing a
"ministerial act" with a reference to performing a "ministerial
or managerial act." P.L. 104‑168, 110 Stat. 1452. These changes to
IRC section 6404(e) are effective with respect to deficiencies or payments for
taxable years beginning after July 30, 1996. Therefore, each reference in this
discussion to an "error or delay" refers to "an error of delay
in performing a ministerial act" for taxable years beginning on or before
July 30, 1996, and "unreasonable error or delay in performing a
ministerial or managerial act" for taxable years beginning after July 30,
1996.
6.40 The
Service has the authority to abate only the amount of interest that accrued
during the period attributable to an error or delay in performing the
ministerial or managerial act. Section 6404(e)(1)
applies only to an error or delay that occurs after the date the Service
contacts the taxpayer in writing with respect to the deficiency or payment.
Accordingly, there is no abatement of interest applicable from the return due
date to the date the Service first contacts the taxpayer in writing, except as
noted in paragraph 6.80.
6.50 Jurisdiction
The Tax Court has jurisdiction to review the
Commissioner's failure to abate interest only when each of the following
requirements has been met: a) The taxpayer filed a request for abatement of
interest (generally via Form 843) with the Service after July 30, 1996, or the
Service did not deny the request prior to July 31, 1996; b) the IRS mailed the
taxpayer a notice of Final Determination not to abate interest; c) the taxpayer
filed a petition for review with the Tax Court within 180 days of the mailing
of the Final Determination notice; and d) the taxpayer meets the net worth
requirements of I.R.C. ' 7430(c)(4)(A)(ii).
6.60 Suspension of Interest
The Internal Revenue Service Restructuring Act
suspends the accrual of certain penalties and interest after eighteen (18) months
if the IRS has not sent the taxpayer a notice specifically stating the
taxpayer's liability for additional taxes (and the basis for the liability)
within eighteen (18) months following the date that is the later of (1) the
original due date of the return or (2) the date on which the individual
taxpayer timely filed the return. The
suspension only applies to individuals who file a timely tax return and does
not apply to the failure to pay penalty, in the case of fraud, or with respect
to criminal penalties. The provision is
effective for taxable years ending after the date of enactment. With respect to taxable years beginning
before January 1, 2004, the eighteen (18) month period is decreased to twelve
(12) months. Interest and penalties
resume 21 days after the IRS sends a notice to the taxpayer specifically
stating the taxpayer's liability and the basis for the liability. The provision is applied separately with
respect to each item or adjustment. [Act '3305] [IRC '6404(g)]
6.70 Abatement
of Interest in Presidentially Declared Disaster Areas
The Internal Revenue Service Restructuring Act
provides that taxpayers located in a Presidentially declared disaster area do
not have to pay interest on taxes due for the length of any extension for
filing their tax returns granted by the Secretary of the Treasury, effective
for disasters declared after December 31, 1997, with respect to taxable years
beginning after December 31, 1997. The
provision is designated as emergency legislation under Section 252(e) of the
Balanced Budget and Emergency Deficit Control Act. [Act '3309] [IRC '6404(h)]
6.80 Notice of Interest Charges
The Act requires every IRS notice that includes an
amount of interest required to be paid by the taxpayer that is sent to an
individual taxpayer to include a detailed computation of the interest charged
and a citation to the Code section under which such interest is imposed,
effective for notices issued after December 31, 2000. ['3308] [IRC '6631]