20.1.2. Failure To File/Failure To Pay Penalties

(1) IRC 6061 through IRC 6065 requires any return made under the provisions of the internal revenue laws must be signed by the taxpayer (or other such authorized individual) under penalties of perjury. A return not signed by the taxpayer (or an authorized individual) fails to meet the filing requirement , and may subject the taxpayer to penalties for failure to file. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(2) If it is determined the failure to sign a return was an intentional attempt to avoid civil or criminal penalties associated with signing a false return (see IRC 7206), then the penalty for failure to file should be duly explored to the fullest extent of the law. See IRM 20.1.2.3.7.5, Fraudulent Failure to File.

(3) Also see IRM 20.1.2.2.9, Frivolous Returns.

(1) 26 CFR 301.7502(d) provides IRC 7502 also applies to timely electronic postmarks for e-filed returns. All timely conditions are considered met if the return:

1. Was transmitted via an authorized Electronic Return Transmitter

2. Includes a timely electronic postmark and

3. Received by IRS in processable form.

(2) An authorized Electronic Return Transmitter (ERT) transmits return information from the return originator to the IRS as defined in Rev. Proc. 2000-31. Generally, an electronic return is prepared with preparation software and then converted to processable format by another entity that originates the return and transmits to the IRS. The following entities may transmit returns to the IRS:

1. An Electronic Return Transmitter (ERT). These are the entities providing or transmitting the electronic return information directly to the IRS.

2. An Electronic Return Originator (ERO) originates or creates the electronic submission of returns it either prepares or collects from taxpayers who want to e-file their returns. An ERO originates the electronic submission of a return after the taxpayer authorizes the filing of the return via IRS e file. The ERO must have either prepared the return or collected it from a taxpayer. An ERO originates the electronic submission by electronically sending the return to a Transmitter who transmits the return to the IRS; directly transmitting the return to the IRS (this would make the ERO an ERT as well) or providing a return to an Intermediate Service Provider for processing prior to transmission to the IRS.

3. An Intermediate Service Provider (ISP) receives tax information from an Electronic Return Originator (ERO) (or from a taxpayer who files electronically using a personal computer and commercial tax preparation software), processes the tax return information and either forwards the information to a Transmitter or sends the information back to the ERO or taxpayer (for On-line Filing).

   Note: The categories above represent examples of authorized IRS e-file providers and are not mutually exclusive. For example, an ERO can, at the same time, be an ERT or ISP depending on the functions performed.

(3) Electronic postmark is a record of the date and time an authorized ERT receives the transmission of a taxpayer’s electronically filed return on its host system in the ERT’s time zone.

1. A return filed electronically with an ERT is deemed to be filed with the IRS on the date of the electronic postmark.

2. If the electronically filed return is rejected by the IRS’s e-file system, but the electronic postmark is timely, the return will be considered timely if received by the IRS after the due date as long as the return is either (1) timely re-transmitted electronically, or (2) physically mailed to the IRS in complete, processable form, after initial notification of rejections.

   Note: Please see Publication 1345 for more information regarding electronic return rejection and procedure for resubmission of a rejected return.

   Exception: If the return as originally received was invalid, the electronic postmark is irrelevant if the return was rejected for any reason that would have also made a paper return unprocessable. The requirement for filing the return in question, penalties for filing late, and the ASED update need not be determined based on an assumption of timely filing

(4) For purposes of IRC 7502, the postmark of an electronic return is only valid if the postmark represents when the return is sent to an ERT, (or ERO/ISP when they are acting as an ERT). Because an electronic postmark is only created when an ERT receives an electronic return; any postmark relating to the time an ERO/ISP receives tax information, or originates a return, alone will not meet the electronic postmark requirements under IRC 7502.

(1) IRC 7508 provides a certain period relating to duty in a combat zone as designated by the President by executive order (or in a contingency operation designated by the Secretary of Defense) is to be disregarded in determining whether a taxpayer has complied with statutory requirements to perform certain acts by a given date.

(2) With respect to the time available (after the end of a tax year) to prepare and file a return, and to pay the tax, the period to be disregarded in determining any penalty for filing late or paying late is as follows:

1. The period of service in the combat zone or in the contingency operation, plus

2. Any period of continued hospitalization attributable to service in the combat zone or in the contingency operation, plus

3. 180 days following the exit date or end of hospitalization, plus

4. The number of days remaining in the filing season on the date the taxpayer entered the combat zone. If the taxpayer entered the combat zone prior to the beginning of the fling season, the entire length of the filing season is added.

(3) The period to be disregarded applies to individuals serving in the Armed Forces of the United States and to those serving in support of those Armed Forces.

(4) The period to be disregarded also applies to the spouses of those serving in the combat zone. However, the period to be disregarded does not apply to the spouses for any taxable year beginning more than two years after the date of termination of combat activities in the combat zone.

(1) IRC 7508A provides the Secretary of the Treasury may specify a period of up to one year to be disregarded with respect to acts required to be performed by taxpayers determined by the Secretary to have been affected by a federally declared disaster, a terroristic action, or military action.

(2) In order for the period to be disregarded to impact either the penalty for filing late or the penalty for paying late, the due date for filing or paying must fall within the disaster period as determined by the Secretary. If the normal due date for filing or paying falls within the disaster period, the taxpayer's return or payment will be considered on time if it is mailed by the date published by IRS for timely filing or paying for the covered disaster area.

(3) IRS identifies taxpayers qualifying for disaster relief based on their zip code. Qualifying taxpayers receive a Transaction Code (TC) 971 with Action Code 086, 087, or 688 posted in the entity module of their account. Disaster TC 971 transactions contain a transaction date and a secondary date. The transaction date is the beginning date of the disaster period, and the secondary date is the ending date. The ending date corresponds with the date published by IRS for timely filing or paying.

(4) Unlike periods disregarded due to time spent in a combat zone, disaster periods beginning after the end of the taxable year, and ending on or before the return due date, do not extend the time for filing and paying.

(5) Any penalties for filing or paying late of affected taxpayers are computed using the disaster end date as the new "disaster due date" for determining the correct penalty.

(6) Before 2015, IRS did not charge a penalty for paying late during disaster periods even in cases where the payment due date was prior to the start of the disaster period, as long as the extended return due date fell within the disaster period.

(7) For disaster periods beginning after 12/31/2014, IRS will no longer suspend accrual of the penalty for paying late for any tax due prior to the start of the disaster period. See 26 CFR 301.7508A-1(f), Example 6. The penalty will continue to accrue during the disaster period, and will only be removed if the taxpayer is able to show reasonable cause for failure to pay at the time payment was due, or if the taxpayer qualifies for the first time abatement (FTA) administrative waiver. See IRM 20.1.1.3.3.2.1, First Time Abate (FTA).

(8) The following taxpayers also qualify for relief under IRC 7508A; however, they generally must call the IRS disaster hotline at 866–562–5227 to request relief.

1. Taxpayers who are unable to meet a filing or payment deadline either because their books or other necessary records are located within a disaster area, or because their tax professional who maintains their books or records is located within a disaster area. This applies even if the taxpayer's business (or residence in the case of individuals) is not located in the disaster area.

2. Relief workers affiliated with a recognized government or charitable organization assisting in the relief activities in a covered disaster area.

(9) Taxpayers (or their authorized representatives) may call or write to self-identify if they qualify for disaster relief even though their address is outside the covered disaster area. Employees should research their functional IRM for instructions with respect to the input of TC 971 with Action Code 688 when taxpayers self-identify themselves as affected by the disaster. TC 971 with Action Code 688 should only be input after the specific disaster provisions for which the taxpayer qualifies have been verified.

(10) Employees who do not have the ability to manually input the TC 971 for disaster relief should refer callers to the Disaster Special Services toll-free line at 1-866-562-5227.

(11) IRS employees should not abate or adjust any penalties because of a federally declared disaster unless the appropriate TC 971 with AC 086, 087 or 688 is already posted in the entity, and the penalty is restricted from automatic computation by a restricting penalty transaction code or by other systemic limitations.

(12) Some taxpayers may have been affected by multiple disaster declarations with respect to a single tax period.

(13) When two or more disaster declaration periods overlap, they are treated as a single period beginning on the earliest disaster start date of the overlapping disaster periods and ends on the latest end date of the overlapping disaster periods.

(14) When the original return due date falls within one disaster period, and the extended return due date falls within another non-overlapping disaster period, the earlier disaster period is ignored in computer programming in effect prior to 01/01/2022. The programming updates should compute the penalty correctly. If programming ignores an earlier disaster period, manual intervention is necessary to ensure the taxpayer receives the disaster relief provided by law. The following table provides instructions for resolving penalty issues in tax modules impacted by non-overlapping disasters.

(15) IRS employees can research disaster areas by going to http://www.icce.irs.gov/fema/, or to SERP - Disaster Assistance Information (irs.gov). Information on tax relief in disaster situations is available to the general public at www.irs.gov .

(1) In order to qualify for an extension of time to file, all taxpayers must estimate the amount of their tax for the year. When a specific form is designated for requesting an extension of time to file, the request for the extension should be filed on that form. However, if a specific form has not been designated, an extension may be requested by mailing a letter to the IRS office where the return is required to be filed. Such letter must include the following information:

1. The form for which the extension is requested, including the taxable year.

2. The reason why the extension should be granted.

3. In most cases the letter requesting the extension must also include an estimate of the tax due and payment of tax.

(2) Qualified taxpayers may request an automatic extension of time to file by filing the appropriate form, depending on the type of tax return. For a list of forms provided to request an extension of time to file, see Document 6209. Section 2, Part 4, Extension Forms.

(3) In order to obtain an automatic extension of time to file, corporations are required to pay the amount properly estimated as the tax for the year covered by the extension request.

1. The payment must be made on or before the due date for payment.

2. The payment should accompany Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns.

(4) For taxable years ending 12/31/1993 and later, individuals are no longer required to pay the amount they estimate they will owe when they file Form 4868 in order to obtain the automatic extension of time to file; however, they are still required to enter their estimate of their tax liability on the applicable line of the form.

(5) An extension of time to file does not extend the time to pay. However, 26 CFR 301.6651-1(c)(3) and 26 CFR 301.6651-1(c)(4)provides reasonable cause will be presumed for the period of the extension in the case of failure to pay income tax if the following criteria are met:

1. In the case of an individual, at least 90 percent of the amount of tax shown on the return must have been paid on or before the due date for payment, and the remainder must be paid with the return.

2. In the case of a corporation, at least 90 percent of the amount of tax shown on the return must have been paid on or before the due date for payment, and the remainder must be paid by the extended return due date.

(6) IRS computers are programmed to automatically apply this waiver of the late payment penalty for reasonable cause if the taxpayer qualifies.

(7) Joint extension requests apply equally to each spouse, even if they subsequently file separate returns.

(8) There are no regulations covering an extension of time to file employment tax returns. Therefore, these returns do not qualify for an extension of time to file. However, no penalty for filing late is asserted if the taxpayer paid (For example, via Federal tax deposits, and so on) 100 percent of the tax required to be paid on or before the due date for payment.

(9) Partnerships and S corporations electing to have a taxable year other than a required taxable year (in other words, their taxable year does not end on December 31st), are required under IRC 7519 to file Form 8752, Required Payment of Refund Under Section 7519, and pay the amount shown on the return. The due date for the return is May 15th of the calendar year following the calendar year in which the fiscal year begins. For example, if the fiscal year began on November 1, 2015, then the return and payment are due May 15, 2016. Taxpayers may request an extension of time to file Form 8752 by writing a letter to the service center or director where they are required to file, on or before the May 15 due date. The director may approve an extension of time to file for up to 90 days (up to 6 months, if the taxpayer is abroad), or the request may be denied. The extension will be denied if the request was late, or if payment of the estimate has not been made. The extension request letter must include the following:

• A detailed explanation why the extension is needed.

• The amount of additional time needed (not to exceed 90 days, unless the taxpayer is abroad, in which case it's not to exceed 6 months).

• An estimate of the amount due.

• Payment of the estimated amount due.

(10) Extensions of time to file are recorded in the applicable tax module with Transaction Code (TC) 460 carrying the extended due date.

(11) The computer generally will not allow the input of an extension beyond 6 months after the normal return due date. However, for IMF returns, when a longer extension is allowed by law, the extension may be input by using a "foreign" universal location code (ULC) on the TC 460 input screen. The foreign location codes available are:

• Philadelphia — 98 (IMF)

• Austin — 20 (IMF)

(12) Service centers not listed in (11) are not able to process an extension in excess of 6 months. The ULC used with this extension request does NOT extend the time to pay. If the taxpayer qualifies for an automatic extension of time to pay under 26 CFR 1.6081-5, the taxpayer's return will need to be processed with the proper file location code or computer condition code as applicable. See IRM 20.1.2.2.3.3, Taxpayers Abroad.

(1) Taxpayers may use Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship, to apply for an extension of time to pay tax shown on their return. The IRS will grant the extension provided the taxpayer is able to show undue hardship will be suffered if payment is made on the payment due date. See IRC 6161(a) and regulations relating thereto. If granted, the extension generally may not exceed 6 months (12 months in the case of estate tax).

(2) Taxpayers may also use Form 1127 to request an extension of time to pay certain taxes determined as a deficiency, providing the deficiency is not the result of negligence, intentional disregard of rules and regulations, or fraud with the intent to evade tax. The Secretary must be satisfied that payment of the deficiency upon the date fixed for the payment thereof would result in undue hardship to the taxpayer. If granted, the extension may not exceed 18 months; and in exceptional cases, an additional 12 months.

(3) If an extension of time to pay is granted, the failure to pay (FTP) penalty for the underlying tax will not begin to accrue until after the expiration of the extension period.

(4) For extensions of time to pay estate and gift taxes, see IRM 4.25.2.8.2.4, Extension of Time to File and IRC 6161 Extension of Time to Pay through IRM 4.25.2.8.2.6 , Estate Tax Extension of Time to Pay Under IRC 6163 and IRM 1.2.2.5.3, Delegation Order 4−3 (formerly DO−20, Rev. 3).

(5) Except in the case of an extension to pay gift tax, IRS currently is not able to compute the FTP penalty systemically if an extension of time to pay was granted under IRC 6161 and the tax is not paid in full by the extended due date. In all such cases the FTP penalty must be manually computed and assessed. For specific processing instructions, see IRM 5.1.12.1, Overview—Cases Requiring Special Handling.

(6) Extensions of time to pay are disregarded in determining the date prescribed for payment for the purpose of computing interest or the penalty for filing late. See IRC 6601(b)(1).

(1) 26 CFR 1.6081-5 provides for an automatic extension of time to file and pay for certain partnerships, corporations, and U.S. citizens and residents. The extended due date is the 15th day of the 6th month following the close of the taxable year. The extension applies to the following:

1. Partnerships whose records and books of account are kept outside the United States and Puerto Rico;

2. Domestic corporations transacting their business and keeping their records and books of account outside the United States and Puerto Rico;

3. Foreign corporations that maintain an office or place of business within the United States;

4. Domestic corporations whose principal income is from sources within the possessions of the United States;

5. United States citizens or residents whose tax homes and abodes, in a real and substantial sense, are outside the United States and Puerto Rico; and

6. United States citizens and residents in military or naval service on duty, including non-permanent or short term duty, outside the United States and Puerto Rico, if the period of the tour of duty includes the entire due date of the return.

(2) With respect to item e) above, an individual’s tax home and abode must both be outside the United States and Puerto Rico.

(3) A taxpayer’s tax home is outside the United States and Puerto Rico if either of the following two conditions apply:

1. The taxpayer’s principle place of business (or official duty station) is (or was on the return due date) outside the United States or Puerto Rico for a continuous period reasonably expected to last at least 12 months, or

2. The taxpayer has no principle place of business or official duty station and the taxpayer’s abode, in a real and substantial sense, is outside the United States and Puerto Rico.

(4) A taxpayer’s abode is outside the United States and Puerto Rico, in a real and substantial sense, if the taxpayer’s principle residence is (or was on the return due date) outside the United States and Puerto Rico.

(5) A tax payer may have multiple residences; however, the taxpayer’s principle residence is where the taxpayer spends the majority of time. If the taxpayer does not spend more than half of their time at one residence, then the taxpayer’s principle residence is determined based on all pertinent evidence. Pertinent evidence includes, but is not limited to, where the taxpayer lists their address for legal documents, where the taxpayer’s family resides (for instance children attend school), where mail is received, and so on.

(6) In order to qualify for this automatic extension of time to file and pay, the taxpayer must attach a statement to their return stating the taxpayer qualifies for this extension of time to file. Please note the attachment of the required statement does not guarantee the taxpayer will be identified as qualifying for this extension.

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1. If the taxpayer’s address was not outside the US and Puerto Rico prior to filing the most recent return, ask the taxpayer to provide documentary evidence to show the requirements in paragraph (2) were met.

2. If the taxpayer is unable to provide the necessary evidence, explain why the taxpayer does not qualify for the extension. Determine if the taxpayer qualifies for other penalty relief.

3. If the taxpayer provides the necessary evidence (copy of rental agreement or utility bills received at foreign address, or similar evidence), abate any erroneous penalties assessed as a result of the missing extension. Use penalty reason code (PRC) 045.

4. If the taxpayer’s address was outside the US and Puerto Rico, and the taxpayer states they qualified for the waiver, abate any erroneous penalties assessed as a result of the missing extension. Use penalty reason code (PRC) 045.

(8) Forms 1040 identified during pipeline processing as qualifying for this automatic extension of time to file are coded with a special file location code in the DLN, or with a special computer condition code:

1. The File Location Codes 20 and 98 are used for U.S. citizens and residents residing outside the U.S. and Puerto Rico.

2. Computer condition code "N" is used for military personnel on permanent or temporary duty outside the U.S. and Puerto Rico.

3. Computer condition code "D" is used for an 8 month extension of time to file for qualifying individuals who requested an additional extension beyond the automatic two month extension.

(9) Partnerships and corporations identified during pipeline processing as qualifying for this automatic extension are identified by computer condition codes "D" and "R". These codes prevent Master File from ever automatically assessing either the penalty for filing or for paying late for that year's return; therefore, if either penalty ever applies, it must be manually computed and assessed.

(10) If one of the entities in paragraph (1) qualifies for this automatic extension but needs additional time to file, the taxpayer must file the appropriate application for an extension on or before the due date as extended under 26 CFR 1.6081-5. A statement must be attached to the extension request stating the taxpayer qualifies for the extension in 26 CFR 1.6081-5.

(1) IRM 20.1.1.3, Criteria for Relief From Penalties, provides guidance for determining if the taxpayer meets the criteria for penalty relief. See IRM 20.1.1-2, Penalty Reason Code Chart, in IRM 20.1.1, Introduction and Penalty Relief, for a complete list of penalty reason codes.

(2) The IRS will abate the penalty for failure to file or pay when the taxpayer shows that the failure to comply was due to reasonable cause and not due to willful neglect.

1. Reasonable cause determinations must be based on the individual facts and circumstances of each case.

2. The reasonable cause exception under IRC 6651(a) requires the taxpayer to show to the satisfaction of the Secretary that the failure to file or pay was due to reasonable cause and not due to willful neglect. Reasonable cause requires the taxpayer to demonstrate they exercised ordinary business care and prudence but was nevertheless unable to file/pay within the prescribed time. Willful neglect involves a conscious, intentional failure or reckless indifference. See United States v. Boyle, 469 U.S. 241, 245 (1985), E. Wind Indus., Inc. v. United States, 196 F.3d 499, 504 (3d Cir. 1999), and Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).

3. Continued failure to file or pay (beyond the effect of the "reasonable cause") may be evidence that the underlying reason for the failure to file or pay is willful neglect and not the "reasonable cause" claimed by the taxpayer.

4. Insufficient funds generally is not reasonable cause for failure to pay unless the funds were depleted due to unusual or unforeseen circumstances. For example, a taxpayer who incurs lavish or extravagant living expenses to the extent the remainder of their assets and anticipated income is insufficient to pay their tax, has not exercised ordinary business care and prudence in providing for the payment of tax liability.

5. Reasonable cause for failure to pay exists if payment of the tax would result in a significant hardship for the taxpayer. For example, a taxpayer who was able to pay, but who needed the money to pay for necessary medical expenses, may be able to demonstrate paying of the tax (in lieu of paying for the medical expense) would have resulted in a significant hardship. Similarly, significant hardship also exists if the taxpayer would only have been able to pay by liquidating assets well below fair market value.

6. Generally, the penalty for failure to pay should not be abated until the underlying tax has been paid in full. Abatement for reasonable cause may not be denied merely because the underlying tax has not yet been paid. Therefore, remove the penalty if the taxpayer has reasonable cause for the failure to pay, and there is no evidence of willful neglect. However, if the FTP penalty was abated for reasonable cause, and a subsequent review of the account shows the taxpayer willfully continued in the failure to pay, then the penalty may be reasserted in full, computed from the original penalty start date.

7. The penalty for failure to file can be abated for reasonable cause regardless of payment of tax, because a continued failure to pay would not constitute evidence that the failure to file was due to willful neglect. However, a prolonged failure to file beyond the effect of the "reasonable cause", or the failure to file other required returns, may be evidence that the underlying reason for the failure to file is willful neglect, and not the reasonable cause claimed by the taxpayer.

(3) Reasonable cause determinations for failure to pay must be made separately for each assessment (i.e., tax shown on the return, math error assessment, amended return, or deficiency). For example, a taxpayer may not have had reasonable cause for his failure to pay the tax shown on his return, while he may have had reasonable cause for his failure to pay additional tax assessed as a result of a math error correction.

(4) When the failure to pay (FTP) penalty is abated for reasonable cause (Reason Code 062), the abatement should include the entire related penalty computed on the underlying tax liability, even if the penalty has not yet been assessed.

(5) Examiners should address the reason for any failure to file or failure to pay when securing or examining returns where the penalty appears to apply. Making this initial determination will prevent the need for subsequent abatements.

(6) Reasonable cause abatement requests must be documented via an adjustment with a source document.

1. If the taxpayer qualifies for relief, abate the applicable penalty amount with the appropriate transaction code. Enter Reason Code (RC) 062 in any of the first three reason code fields, and the applicable Penalty Reason Code (PRC) in the fourth reason code field.

2. If the taxpayer does not qualify for relief, notify the taxpayer of his appeal rights (following your functional area's guidelines), and document the abatement request with Transaction Code (TC) 290 for zero amount, with Blocking Series 98 or 99, and with RC 062 in any of the first three reason code fields.

(7) When penalties for failure to pay are abated for reasonable cause using TC 271 with RC 062, Master File will not restrict future computer computations of the penalty (provided it was not previously restricted). The computer continues to compute the penalty for failure to pay, but will waive the amount associated with RC 062. Use TC 271 with RC 062 only if the underlying tax has been paid in full, and always abate the entire penalty related to the tax in question, including accruals.

(8) A TC 271 input without RC 062 restricts subsequent computation of the penalty. Input TC 272 with a zero amount to remove the manual restriction on the FTP penalty when a module has been restricted in error.

(9) A TC 271 without RC 062 (or a TC 270 for zero amount) should only be used to abate the FTP penalty for reasonable cause (and/or to prevent additional accrual of the penalty when the failure to pay is due to reasonable cause) under the following circumstances:

(10) An abatement of the penalty for failure to pay (or TC 270 for zero amount) without the use of RC 062 should be very rare. A restricting penalty transaction precludes any future penalty assessments or accruals for failure to pay, and presupposes the taxpayer's continued reasonable cause beyond the present. A penalty abatement, pre-determined with respect to future conditions, can seldom be objectively valid. An exception to this general rule involves the first-time-abate provision in IRM 20.1.1.3.3.2.1, First Time Abate (FTA).

(11) Field personnel in contact with taxpayers, being provided more detailed information regarding the conditions relating to the original penalty assessment, may abate the assessment in whole or in part; or, they may re-assess a prior penalty abatement provided supporting facts warrant it and the statute of limitations on assessment is still open. Field personnel should follow established local procedure to adjust penalties in accordance with the policies laid out in this IRM.

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(13) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡See IRM 20.1.1.3.2, Reasonable Cause, and IRM 20.1.1.3.3.2.1, First Time Abate (FTA).

(14) Also see IRM 20.1.1.3.3.2.1, First Time Abate (FTA), for first-time-abate/clean-compliance-history provisions.

(1) A taxpayer may write in to request a waiver of FTP penalties based on relief granted under Notice 2013-24. The relief applies only to returns for tax periods ended 12/31/2012 or later, with a return due date before June 2013, without regard to extensions. This relief should be applied before applying "first time abate" (FTA) provisions.

(2) Before granting the relief, verify the taxpayer has met all of the requirements for relief:

1. The taxpayer's return included one of the forms listed in the table at the end of this IRM subsection.

2. The amount of tax paid by the return due date (without regard to extensions) is a reasonable estimate of the amount due, considering the impact of the form(s) referenced above that are included in the return.

3. The taxpayer paid the balance of the tax shown on the return no later than the extended return due date, and any additional amount (math error assessment) no later than the 21st day following notice and demand for payment ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡. Any additional amount must have been paid within 10 business days of notice and demand for payment ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ if the amount due in the notice was $100,000 or more.

   Note: If the taxpayer paid the amount shown on the return by the extended return due date, but failed to pay any additional amount as required, abate only so much of the FTP penalty as is attributable to the tax shown on the return.

(3) If the taxpayer qualifies for relief under this provision, abate the FTP penalty with TC 271, Reason Code 062, Penalty Reason Code 030. Include unassessed FTP penalty accruals in the abatement.

(1) Notice 2015-09 provides penalty relief for qualifying taxpayers with respect to the penalty for failure to pay tax shown on their 2014 return. It also provides for relief with respect to the penalty for underpayment of estimated tax for 2014. (See IRM 20.1.3, Estimated Tax Penalties, for estimated tax waiver information.) Qualifying taxpayers requesting relief under Notice 2015-09 should be provided this relief before applying relief provided for in IRM 20.1.1.3.3.2.1, First Time Abate (FTA).

(2) To qualify for the relief from the penalty for failure to pay, all of the following criteria must be met:

1. A portion of the unpaid balance is attributable to the reconciliation of the Repayment of the Excess Advance Payment of the Premium Tax Credit (Form 8962 line 29, Form 1040 line 46, or Form 1040A line 29).

2. All returns required to be filed have been filed or the taxpayer has obtained an extension of time to file.

3. All other taxes required to be paid have been paid, are in the process of being paid under a valid installment agreement (which is not in default), or the taxpayer has entered into an offer in compromise. (Exclude unpaid taxes which have not been paid due to a genuine dispute as to whether they are owed.)

4. The 2014 return was filed timely (including extensions) and reported the amounts due as a result of the reconciliation of the Excess Advance Payment of the Premium Tax Credit (Form 8962 line 29, Form 1040 line 46, or Form 1040A line 29).

5. If the return was filed after April 15, 2015, but by an extended due date, the taxpayer has fully paid the balance of their 2014 tax by April 15, 2016. This deadline is not applicable for taxpayers filing 2014 returns before or on April 15, 2015.

(3) If any portion of the unpaid balance qualifies for relief under Notice 2015-09, the entire failure-to-pay penalty should be abated, even the portion that is unrelated to the repayment of the excess advance payment of the Premium Tax Credit.

(4) If the taxpayer qualifies for the penalty relief and the tax has already been paid in full, abate the penalty as described in IRM 20.1.2.2.4.1 (4) with reason code 062 and penalty reason code 022.

(5) If the taxpayer qualifies for the penalty relief and the tax has not yet been paid, abate the assessed penalty with TC 271, reason code 065, and penalty reason code 029.

(1) Notice 2015-30 provides penalty relief for qualifying taxpayers with respect to the penalty for failure to pay tax under IRC 6651(a)(2) and IRC 6651(a)(3) on their 2014 return. It also provides for relief with respect to the penalty for underpayment of estimated tax under IRC 6654, and the accuracy-related penalty under IRC 6662 for 2014. (See IRM 20.1.3, Estimated Tax Penalties, for estimated tax waiver information, and IRM 20.1.5.7, Penalty Relief, for information on accuracy-related penalty relief.) Qualifying taxpayers requesting relief under Notice 2015-30 should be provided this relief before applying relief provided in IRM 20.1.1.3.3.2.1, First Time Abate (FTA).

(2) To qualify for the relief from the penalty for failure to pay, all of the following criteria must be met:

1. The taxpayer received a delayed Form 1095-A or a Form 1095-A the taxpayer believes to be incorrect.

2. The taxpayer timely filed their 2014 federal income tax return, including extensions.

Note: If a taxpayer was not enrolled in a qualifying plan during 2014, and erroneously received a Form 1095-A and used it to file the return, in order to be eligible for the relief, the taxpayer must have amended the 2014 income tax return by April 15, 2016 to reflect the taxpayer was not eligible to claim the premium tax credit, and pay any additional tax liability due.

(3) If any portion of the unpaid balance qualifies for relief under Notice 2015-30, the entire failure-to-pay penalty should be abated, even the portion that is unrelated to the late receipt or incorrect Form 1095-A.

(4) If the taxpayer qualifies for the penalty relief, abate the penalty as described in IRM 20.1.2.2.4.1 (4) with reason code 062 and penalty reason code 022.

(1) IRS employees are not required to "second-guess" every penalty assessment encountered. However, in order to preserve the trust of taxpayers, it is expected IRS employees will review penalty computations when penalties are questioned by taxpayers, and errors will be corrected when they are identified.

(2) Below are some examples of errors identified and corrected by diligent employees. It is expected IRS employees identify these errors. Please note this list is not all-inclusive:

1. A late filing penalty has been assessed based on the received date of a return, and the postmark date of the return shows the return was mailed on time.

2. An employee has reason to review a penalty computation (for instance, the taxpayer has contacted the IRS with questions in respect to the penalty), and the review of IRS’s penalty computation reflects an error. (Examples of errors are a missing payment or credit, incorrect penalty start date, a missing installment agreement indicator for a timely filed return, or any other error that should be discovered by an IRS employee trained in the manual computation of the penalty in question.)

3. The assessed (billed) penalty amount is excessive based on the underlying tax liability or for the period of non-compliance. (For example, a FTP penalty exceeds 25 percent of the net tax assessment or a FTF penalty was charged for 5 months even though the return was only 2 months late)

(3) Beginning in July 2014, IDRS command code INTST began using the same programming as master file for nearly all failure to pay penalty and interest computations. The total penalty and interest reflected on corporate files on-line (CFOL) (IDRS command code IMFOLT or BMFOLT) for a specific tax module should therefore match the total penalty and interest computed by INTST when computed to the interest date shown on CFOL. If there is a discrepancy in the interest and/or penalty between INTST and CFOL, and the discrepancy cannot be traced to a pending transaction, then the discrepancy must be reported to the responsible analyst in the Office of Servicewide Penalties or in the Office of Servicewide Interest. Penalties analyst assignments can be found on the irweb on the Knowledge Management Penalties’ News and Contacts page at Penalties Knowledge Base - PenaltyNewsAndAlertsAndContacts - GrpByChap (sharepoint.com).

(1) The penalty for failure to pay is asserted beginning with the return due date with respect to "tax shown" on the taxpayer’s return. This amount is not synonymous with "total tax per taxpayer." "Tax shown" on a taxpayer’s return must take into account certain refundable credits claimed by the taxpayer, even if those credits are not allowed during return processing. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡"≡ ≡ ≡ ≡ ≡ ≡"≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(2) When tax or certain refundable credits reported or claimed by the taxpayer are either not recorded or recorded incorrectly, the result is an incorrect penalty calculation for failure to pay tax shown on the return, because "tax shown" will not have been computed correctly during return processing.

(3) "Tax shown on the return" is defined as total tax per taxpayer minus certain credits claimed by the taxpayer on his return. IRM 20.1.2.3.8.4.1 lists the credits taken into consideration in the computation of "tax shown on the return."

(4) We can record the correct "tax shown on the return" amount via IDRS command code ADJ54 using item reference number 871 whenever necessary. The following are some circumstances where the recorded "tax shown" may require correction:

• Tax or refundable credits per taxpayer were either not recorded, or recorded incorrectly, resulting in an incorrect amount to be computed and recorded as "tax shown" on the return.

• The taxpayer filed a superseding original return after the original return posted.

• When an incorrect amount was recorded because of a mixed period or mixed entity condition, or as a result of preparer misconduct.

• When no amount was recorded because a substitute for a return (SFR) was posted, and the assessed tax (or the tax that will be assessed after the adjustment) is greater than the "tax shown" on the taxpayer’s own return.

(5) "Amount" in the bullets above refers to the amount of "tax shown" recorded for the return. (See IMFOLR and BMFOLR.) "Tax shown" is corrected or recorded in the account via ADJ54 by including item reference number 871 with the correct "tax shown" amount in the adjustment. Use appropriate Hold Code and Priority Code. See IRM 20.1.2.2.6.3 for additional information." Tax shown" is corrected or recorded in the account via AMCLS by including IRN 871 with the correct "tax shown" as an item 15 in the closing transaction. Use appropriate Hold and Priority Codes.

(6) IMF returns pose a special challenge when computing "tax shown on the return" because not all of the tax shown on Form 1040 is necessarily assessed on MFT 30. Therefore, amounts assessed on MFT 29 (excise taxes from Form 5329) and on MFT 35 (shared responsibility payments) must be excluded when computing "tax shown on the return" for MFT 30 and MFT 31. The following table was designed to assist in the computation. Not all rows in this table will apply to all years. An IAT tool (or something similar) will be provided to aid in this computation.

(7) Computing "tax shown on the return" is simpler for forms other than Form 1040.

1. For employment tax returns (Forms 940, 941, 943, 944, and 945), "tax shown on the return" is simply total tax per taxpayer. Refundable credits on employment tax returns are treatable as payments for FTP penalty purposes. This includes the credit for advance EIC paid by the employer (TC 766 with credit reference number (CRN) 000), the VOW credit (TC 766 with CRN 290), the HIRE credit (TC 766 with CRN 296), and the COBRA credit (TC 766 with CRN 299).

2. For all other returns, "tax shown on the return" is total tax per taxpayer less claimed refundable credits other than withholding and regulated investment company credit (Form 2439). Withholding is reported on Form 8805, Form W-2, Form 1042-S, or Form 1099; however, it may be reported in other ways as well, such as on Schedule K-1. It is posted on the account as TC 806 or as TC 766 with CRN 330 - 333, or as TC 766 without a CRN. (For Form 1040 and Form 1041, "withholding" also includes excess social security tax or railroad retirement tax withheld posted to the account with TC 766 with CRN 252.)

(1) Prior to 2016, the computer was not able to accurately compute the FTP penalty on tax shown on a taxpayer’s return if FTP penalty was due in any of the following conditions:

• The taxpayer filed a superseding return with tax shown greater than on the return creating the transaction code (TC) 150 transaction.

• The return creating the TC 150 transaction was intended for a different tax period (mixed period case).

• The return creating the TC 150 transaction belonged to a different taxpayer (mixed entity case).

• The return that created the TC 150 transaction was filed by an identity thief.

• The return that created the TC 150 transaction was filed by a return preparer without the taxpayer’s informed consent (preparer misconduct).

(2) Since the computer was unable to compute the FTP penalty for these cases prior to 2016, FTP penalty had to be manually computed and assessed when applicable. See IRM 20.1.2.2.5, Manual Penalty Adjustment, paragraph 2(a).

(3) Programming implemented in January 2016 allows for systemic computation of the FTP penalty for superseding returns and in cases where the wrong return posted first and created the posted TC 150 transaction. The following steps must be followed if the correction will result in a balance due, or if any of the tax due on the correct return was paid after the original return due date without regard to extensions:

1. Use command code ADJ54 to back out the tax, refundable credits, and prepayment credits (for example withholding) posted with the TC 150 return. Also reverse any penalties in the module other than the bad check penalty and the FTP penalty. Use Hold Code 4 to prevent any notice or refund from being issued for this action. (Any FTP penalty in the module will automatically reverse when the tax is backed out. Any bad check penalty should also be reversed if the dishonored payment was not tendered by the "good" taxpayer, or if the penalty does not apply due to reasonable cause.)

   Exception: If the ASED has expired for the return that posted as the TC 150, do NOT abate the tax unless it is a duplicate assessment (for example, the tax is also already assessed in the module where the return should have posted). Instead, follow the procedures in IRM 25.6.1.9.9.3, Correct Records On Expired Statute Periods.

2. If the return that posted first resulted in an erroneous offset to another liability, reverse the erroneous portion of the offset. Do not use TC 570 on the debit side of the reversal to suppress CP 60 or CP 260 from being generated unless a letter explaining the reversal is being sent to the taxpayer. The erroneous portion of an offset is the amount (if any) that would not have offset if the correct return had posted first.

3. If the return that posted first resulted in an erroneous refund, follow erroneous refund procedures to recover the erroneous portion of the refund, and/or to credit the tax module. See IRM 21.4.5, Erroneous Refunds.

4. Compute the tax shown on the correct return for the tax period. This is the net of the total tax per taxpayer minus the "per taxpayer" amounts of the credits listed in IRM 20.1.2.3.8.4.1 (2).

5. Determine the correct tax, refundable tax credits, prepayment credits and other relevant reference amounts (correct AGI, TXI, and others).

6. Determine if any ES tax penalty, FTF penalty, or other penalty needs to be manually computed and assessed. Do not compute the FTP penalty as it will be systemically computed.

7. Use command code ADJ54 to enter the correct tax, credits, any penalties, and item reference amounts, including the new IRN 871 amount if required, (see IRM 20.1.2.2.6.2). Also use item reference number 871 to enter the tax shown on the correct return computed in step (d) above. With ADJ54 use Priority Code 2. Use Hold Code 0 so an assessment notice will be issued. Command code AMCLS cannot be used to enter the correct tax, credits, etc., unless the TC 150 is an SFR return, or if no FTP penalty is due with respect to tax shown on the taxpayer’s return. If FTP penalty should be charged with respect to tax shown on the taxpayer’s original return, Forms 3870 should be prepared to back out the module, and to enter the correct amounts via TC 290 using command code ADJ54.

   Note: Use a posting delay if necessary to ensure the assessment posts after all other actions have posted. If the module balance was debit prior to backing out the tax, the module balance should be zero before the correct tax, etc. is posted. If the module balance is not zero (For example, due to un-reversed offset or refund issued to the taxpayer), the “prior balance” shown in the notice must be explained to the taxpayer so the taxpayer will understand the notice.

   Example: Based on information provided by a taxpayer, it is determined the return that posted first was altered by the preparer. (Alleged preparer misconduct.) The return reflects a direct-deposit refund of $5,000. The taxpayer’s correct return reflects a refund of $250. The taxpayer indicates he received $250 from the preparer. After backing out the erroneous tax, credits, and $4,750 of the refund, the module will reflect a debit balance of $250. Explain to the taxpayer the "prior balance" being shown in the notice represents the amount claimed as a refund which was previously paid to the taxpayer in the form of cash (or check) and services.

   Reminder: Use Form 2859 to make the assessment if the ASED for correct return will expire within 60 days. See IRM 25.6.1.9.9.1, Procedures for Expeditious Assessments.

8. In the case of a mixed period case where the refund was received by the correct taxpayer, the refund should be moved to the period for the return causing the refund, to the extent it was comprised of payments and refundable credits for that period.

   Example: A taxpayer’s late-filed 2012 return posted to the 2013 tax module. The return reflected an overpayment of $500 comprised of withholding and earned income credit claimed on the return in excess of total tax. The refund issued by IRS also include $1,200 in estimated tax payments, for a total refund of $1,700. Of the refund, $500 should be transferred to the 2012 tax module, and the remaining $1,200 should be treated as an erroneous refund to the extent the amount exceeds the refund (if any) claimed on the 2013 return.

(4) Following the above procedures will ensure the FTP penalty will be computed correctly and systemically as applicable for the taxpayer’s correct return, and for any future adjustments. While the above procedures are only required for certain situations, they are encouraged to be used in any situation where the wrong return posted first.

(1) The IRS provides explanations of all penalty and interest charges to the taxpayer when a Master File assessment notice is issued. Penalties and interest may also be explained to taxpayers "on request" using the Penalty and Interest Notice Explanation (PINEX) system.

(2) Upon request, command code PINEX generates a notice of explanation to the taxpayer. The specific tax module requested must be on the Taxpayer Information File (TIF) data base and at least one unreversed penalty or interest transaction must be posted.

(3) The PINEX notice includes a computation and explanation of selected computer generated penalty and interest charges.

(4) PINEX notices must be reviewed for accuracy by the tax examiner requesting the notice. If the notice is correct it may be mailed to the taxpayer. The review should include comparison with penalty and interest on Master File. See IRM 20.1.2.2.6.1 (3), Identifying Incorrect Assessments, paragraph (3).

(5) PINEX also provides screen displays of penalty and interest computations for an immediate response to telephone inquiries or requests at taxpayer assistance centers and field offices. IRS personnel may find the screen displays helpful in analyzing penalty and interest transactions in general. Available screen display command codes are:

• INTST with definer "D" for Failure to Pay penalties and interest. (INTST with definer "D" has replaced FTPIN.)

• PIFTF for systemic Failure to File penalties, including failure to file via the correct media, and failure to file partnership or S corporation returns.

• PIEST for systemic estimated tax penalty assessments.

• PIVAR for various other penalties that are systemically assessed.

• FTDPN for systemic Failure to Deposit penalties.

• PICRD for systemic credit interest computations.

(6) See the applicable subsection of IRM 20.2.1 for more information about command codes listed above related to interest.

(7) If a PINEX notice or screen display referenced above does not match the Master File computation, and the discrepancy cannot be traced to a pending transaction, then the penalty may need to be manually computed and adjusted, with a manually prepared explanation of the penalty computation provided to the taxpayer. See IRM 20.1.2.2.6.1 , Identifying Incorrect Assessments for additional instructions.

(8) Prior to processing cycle 201603 for BMF tax modules, and 201604 for IMF tax modules, command code INTST with definer "D", and PINEX FTP penalty computations, will display tax changes and credit changes separately in the FTP penalty computation table. After those cycles tax changes will be netted with changes in refundable tax credits to determine if the net amount is an increase or a decrease. A net increase will be depicted as a tax increase, and a net decrease will be depicted as a tax decrease. For example:

• A posted TC 301 for $-500.00 with a secondary TC 765 for $800.00 will be depicted as TC 300 for $300.00.

• A posted TC 290 for $600 with a secondary TC 766 with CRN 336 for $-1,000.00 will be depicted as TC 291 for $-400.00.

• A posted TC 300 for $1,000.00 with a secondary TC 767 with CRN 260 for $500.00 will be depicted as TC 300 for $1,500.00.

• A posted TC 295 for $-600.00 with a secondary TC 764 for $-200.00 will be depicted as TC 295 for $-800.00.

• A posted TC 298 for $300.00 with a secondary TC 765 for $200.00 will be depicted as TC 298 for $500.00.

(9) Carryback tax transactions will only be netted with those refundable tax credits affected by carryback adjustments.

• If a carryback transaction carries one or more secondary refundable tax credit transactions that are not affected by carryback adjustments, those refundable tax credit transactions will be taken into account separately as a tax increase or tax decrease, depending on the net amount of the transactions.

• If a carryback tax transaction is secondary to a non-carryback tax transaction (other than TC 290 or TC 300 for zero amount), the refundable tax credits will be netted with the non-carryback tax transaction.

(1) When the tax required to be shown on a return is less than the tax shown on the return (or less than the tax previously assessed), the FTP penalty is computed on the lesser amount. See IRC 6651(c)(2).

(2) Net tax decreases are applied against tax increases, and against tax shown on the return, in last in, first out (LIFO) order, in determining the amounts subject to the FTP penalty under either IRC 6651(a) paragraph (2) or (3).

(3) The examples in paragraphs (4) and (5) illustrate the mechanics of this process.

(4) Taxpayer files an original return reflecting $10,000 tax. IRS corrects a math error during processing of the return, and decreases tax to $8,000. During a subsequent examination it is determined the correct tax is $13,000, and the additional tax is assessed.

• At time of processing of the return, tax determined as required to be shown is less than tax shown. Therefore, amount subject to FTP penalty under IRC 6651(a)(2) is the lesser amount of $8,000, and this amount becomes tax shown on the return.

• After the examination the amount subject to FTP penalty under IRC 6651(a)(3) is the excess of $13,000 over $8,000.

(5) Taxpayer files an original return reflecting $8,000 tax. IRS corrects a math error during processing of the return, and increases tax to $13,000. During a subsequent examination it is determined the correct tax is $10,000, and the excess $3,000 is abated.

• At the time of processing of the return, tax shown on the return is less than tax required to be shown as determined during processing. Therefore, the amount subject to the FTP penalty under IRC 6651(a)(2) is $8,000.

• After the math error assessment the amount subject to the FTP penalty under IRC 6651(a)(3) is the excess of amount ultimately determined to be the correct tax ($10,000) over the amount shown on the original return ($8,000).

(6) Remember certain refundable credits must be taken into consideration when determining tax shown and required to be shown on a return. See IRM 20.1.2.3.8.4.1 (2) and IRM 20.1.2.3.8.5.1 (2).

(1) The period subject to the penalty for filing late under IRC 6651(a)(1) begins on the day following the latest of the following dates:

• The normal return due date.

• The extended return due date in the case of an approved extension of time to file under IRC 6081 or related regulations. See IRM 20.1.2.2.3.1 and IRM 20.1.2.2.3.3.

• The disaster due date after application of periods to be disregarded under IRC 7508A. See IRM 20.1.2.2.2.2.

• The combat zone due date after application of periods to be disregarded under IRC 7508. See IRM 20.1.2.2.2.1.

(2) Each month subject to the penalty ends on the day of the month corresponding with the day of the month of the latest return due date as determined above, and each new month subject to the penalty shall begin the next day, with the following exceptions:

1. In the case where the day of the month of the due date is the last day of the month, each new month subject to penalty shall begin on the first day of the following month.

2. In the case of February, if the day of the month of the due date does not exist in February (i.e., if the day of the month is the 29th or the 30th), the new month subject to penalty shall begin on the first day of March.

(3) Because the penalty cannot exceed 25 percent, it is not charged for more than 5 months.

(1) The amount subject to the penalty is the tax required to be shown on the return, reduced by the following:

1. The amount paid on or before the date prescribed for payment of the tax without regard to any extensions of time to file or pay.

2. The amount of any credit against the tax that may be claimed on the return. See IRC 6651(b)(1).

(2) The amount subject to penalty is not reduced by any payment made after the payment due date, unless paid during a period to be disregarded in determining if the payment is late. See IRM 20.1.2.2.2

(1) IRC 6651(c)(1) provides the penalty for filing late under IRC 6651(a)(1) is to be reduced by the amount of any penalty for paying late imposed under IRC 6651(a)(2) for any month during which both penalties apply.

(2) The above reduction does not reduce the total penalty for filing late below the minimum penalty, if applicable. See IRM 20.1.2.3.7.4.

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(1) If the return is more than 60 days late, and the normal computed penalty is less than the amount listed in the table below, then a minimum penalty applies:

(2) If the total unpaid tax on the return due date (amount subject to IRC 6651(a)(1) - see IRM 20.1.2.3.7.2) is less than the amount in the table above, then penalty is the lesser amount.

(3) The minimum penalty applies only to income tax returns. It does not apply to employment tax, excise tax, gift tax, or estate tax returns. It also does not apply to individual income tax returns if the taxpayer was not required to file except to report the following:

• Self-employment tax;

• Uncollected social security tax;

• Employment tax (Schedule H); or

• Excise tax (Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, other than the 10 percent tax on early distributions from Part I of the form.)

(4) Abate any excessive minimum penalty amount using Transaction Code (TC) 161 with Penalty Reason Code (PRC) 045.

(1) IRC 6651(f) provides for an increase in the penalty rate for failure to file if the failure to file is fraudulent. The penalty rate is increased from 5 percent per month to 15 percent for each month or part of a month the return is late, and the maximum penalty is increased from 25 percent of the amount subject to IRC 6651(a)(1) (see IRM 20.1.2.3.7.2) to 75 percent of that amount.

(2) The fraudulent failure to file (FFTF) penalty is a counterpart of the civil fraud penalty under IRC 6663 and should be investigated and asserted in the same manner.

1. The burden of proof is on the government to establish FFTF.

2. The fraud components of the FFTF penalty and the civil fraud penalties are generally similar. The civil fraud penalty requires an underpayment attributable to the willful and knowing intent to defraud. The FFTF penalty requires all or part of the tax required to be shown on the return was unpaid on the due date for payment.

3. The intent element of the civil fraud and the FFTF penalties are the same.

4. The FFTF penalty is asserted on a case-by-case basis after considering all the facts and circumstances surrounding the failure to file. There must be clear and convincing evidence the failure to file was done with the intent to evade taxes.

(3) The following factors should be considered when developing a FFTF case:

1. The taxpayer refuses to, or is unable to, explain the failure to file;

2. The taxpayer’s statement does not agree with the facts of the case;

3. There is a history of failing to file or late filing, but an apparent ability to pay;

4. The taxpayer fails to reveal or tries to conceal assets;

5. The taxpayer pays personal and business expenses in cash when cash payments are not usual, or cashes rather than deposits business receipt checks and

6. The taxpayer is aware of the filing requirement.

(4) When a return was filed late due to fraud, and the return reflects a deficiency due to fraud, Area Counsel should be consulted in deciding whether to propose the civil fraud penalty under IRC 6663, or the fraudulent failure to file penalty under IRC 6651(f).

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(6) A criminal conviction under IRC 7203 does not prevent the taxpayer from disputing the FFTF penalty under IRC 6651(f); however, the taxpayer is collaterally estopped from challenging the regular FTF penalty under IRC 6651(a). Only a criminal conviction under IRC 7201 collaterally estops the taxpayer from disputing fraud penalties. See IRM 4.8.9.18.4, Civil Fraud Penalty, and IRM 4.8.9.18.5, Alternative to Civil Fraud Penalty, for the parallel consideration with respect to the civil fraud penalty under IRC 6663 and the criminal sanction with respect to tax evasion under IRC 7201. See also IRM 25.1.7.7, Civil Closure, on the same issue.

(1) For periods disregarded in determining the due date used for computing the penalty, see IRM 20.1.2.2.2, Disregarded Periods.

(2) For individuals and entities outside the United States, see IRM 20.1.2.2.3.3, Taxpayers Abroad.

(3) For return due dates (without regard to extensions), see Document 6209, Section 2, Part 3, Due Date of Returns.

(4) For explanatory language regarding the failure to file (FTF) penalty on a notice of deficiency, see IRM 4.8.9.18.2.4, Penalty Explanations.

(1) For each month of the period during which each failure to pay (FTP) penalty applies, the penalty is computed by multiplying the amount subject to the penalty by the penalty rate. The total penalty is the sum of the penalties for all months to which a failure to pay penalty applies.

(2) The basic penalty rate is generally ¹⁄₂ percent.

(3) For conditions under which the basic penalty rate is increased to 1 percent, see IRM 20.1.2.3.8.1.1.

(4) For conditions under which the basic penalty rate is decreased to ¹⁄₄ percent, see IRM 20.1.2.3.8.1.2.

(5) The penalty for each underlying tax assessment may not exceed 25 percent in the aggregate. Meaning each month the penalty rate is added to the sum of the penalty rates for all preceding months subject to that penalty. The penalty rate for any month cannot be greater than the rate needed for the aggregate rate to reach 25 percent.

(6) A separate penalty computation applies to tax shown on the return, and to each notice reflecting additional tax required to be shown on the return that was not included in a prior notice. This means the 25 percent aggregate maximum may be reached for tax shown on the return while the FTP penalty is still accruing for additional tax billed in a subsequent notice.

(7) When the 25 percent aggregate maximum has been reached for ALL tax assessed in a module, Master File generates Transaction Code (TC) 971 with Action Code (AC) 262. If the penalty is being manually computed and assessed, TC 971 with AC 262 may need to be manually input if the aggregate maximum has been reached for all assessed tax.

(1) IRS's computers determine "unpaid tax" by applying specific rules in the application of payments to unpaid liabilities. Manual penalty computations should follow the same rules.

(2) For the purpose of computing the penalties for failure to pay tax, payments credited against a tax return liability are applied as of their effective date.

(3) The following are considered payments for the purpose of this subsection:

• Estimated tax payments.

• Credit for withheld income tax.

• Credit for excess withheld social security tax.

• Regulated investment credit from Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains.

• Overpayments of other taxes or from other periods credited against this tax.

• Any other payments made by, or on behalf of, the taxpayer via cash, check, or money order.

(4) Each payment is applied individually to individual assessments that make up the overall liability until that payment is used up, or until the overall liability is paid. Payments are applied to assessments until the assessment is paid, in the following order of priority:

(5) The effect of refunds and offsets out of the module is to

1. Reduce any unused portion of any payment made before the date of the refund (but not below zero), or to

2. Reduce the amount of any payment made after the date of the refund (but not below zero). This applies only if the amount of the refund exceeded the available overpayment at the time of the refund, and if there is no intervening tax assessment.

(6) IRC 6601(e)(3) provides no additional interest is to be imposed beyond the date of any notice and demand for payment to the extent the amount shown in the notice is paid within 21 days after the date of the notice (10 business days, if the amount in the notice is $100,000 or more). Although there is no similar provision in the law governing the penalty for paying late, IRS also will not impose additional late payment penalty computed beyond the date of notice and demand to the extent the tax shown in the notice is paid within the given time frame. To accomplish this, IRS treats payments mailed within the given time frame as made on the date of the notice. See IRM 20.1.2.2.1, When Timely Mailing Equals Timely Filing or Paying.

(1) For the purpose of determining tax shown in a notice and demand for payment, tax abatements are applied to preceding tax assessments in "first in, first out" (FIFO) order.

(2) After all preceding assessments have been set to zero, any remaining abatement is applied to "tax shown on the return," which may end up being less than zero.

(1) IRC 6651(a)(2) provides for a penalty if the tax shown on any return is not paid by the due date for payment, unless the failure to pay is due to reasonable cause and not due to willful neglect.

(2) Reasonable cause is presumed for certain taxpayers with an extension of time to file if specific criteria are met. See IRM 20.1.2.2.3.1 (5). Also see IRM 20.1.1.3, Criteria for Relief From Penalties, for a discussion of penalty relief, and IRM 20.1.2.2.4.1, Penalty Abatements and Re-assessments, for an in-depth discussion of reasonable cause considerations relating to the failure to pay tax.

(3) This penalty applies to the following returns:

• Income tax returns

• Employment tax returns and other returns of withheld income tax

• Excise tax returns

• Gift tax returns

• Estate tax returns

• Partnership returns

(4) This penalty does not apply to the following:

• Information returns required under Chapter 61, Subchapter A, Part III

• Payments of estimated tax

(5) For each month or part of a month the tax remains unpaid, the penalty is generally ¹⁄₂ percent of the unpaid tax. However, the penalty rate may increase to 1 percent per month, or decrease to ¹⁄₄ percent per month. See IRM 20.1.2.3.8.1.1 and IRM 20.1.2.3.8.1.2.

(6) The penalty generally does not apply for any month during which a bankruptcy proceeding is pending against the taxpayer. See IRM 20.1.2.3.8.6.

(1) IRC 6651(a)(3) provides for a penalty if tax required to be shown on a return, but which was not shown, is not paid by the date stated in the notice and demand for payment. The penalty does not apply if the failure to pay is due to reasonable cause, and not due to willful neglect. See IRM 20.1.1.3, Criteria for Relief From Penalties, for a discussion of penalty relief. Also see IRM 20.1.2.2.4.1, Penalty Abatements and Re-assessments, for an in-depth discussion of reasonable cause considerations relating to the failure to pay tax.

(2) This section applies to additional amounts assessed as follows:

• A deficiency,

• An amendment to the original return, and

• A result of a correction of a mathematical error as defined under IRC 6213(b)(1).

(3) The date for payment stated in the notice is 21 calendar days following the date of the notice if the amount in the notice is less than $100,000. Otherwise the date is 10 business days after the date of the notice.

(4) The penalty does not apply if the failure to pay is due to reasonable cause and not due to willful neglect.

(5) For each month or part of a month during which the underlying tax remains unpaid, the penalty generally is ¹⁄₂ percent of the unpaid tax. However, the penalty rate may increase to 1 percent per month, or decrease to ¹⁄₄ percent per month. See IRM 20.1.2.3.8.1.1 and IRM 20.1.2.3.8.1.2.

(6) The penalty generally does not apply for any month during which a bankruptcy proceeding is pending against the taxpayer. See IRM 20.1.2.3.8.6.

(1) IRC 6658(a) prohibits the assertion of the late payment penalties while a bankruptcy proceeding is pending against the taxpayer if either of the following applies:

1. The tax was incurred by the bankruptcy estate and the failure to pay occurred pursuant to an order of the court finding probable lack of funds of the estate to pay administrative expenses; or

2. The tax was incurred by the debtor before the earlier of the order for relief, or (in the case of an involuntary bankruptcy) the appointment of a trustee, and either the bankruptcy petition was filed before the return due date (including extensions), or the penalty is for a penalty month that begins on or after the day on which the petition was filed.

(2) The prohibition in IRC 6658(a) shall not apply to any liability for an addition to the tax which arises for failure to pay or deposit a tax withheld or collected from others and required to be paid to the United States.

(3) In the case of tax incurred before the start of a bankruptcy proceeding, a penalty for failure to pay will not be asserted for any penalty month beginning during the period during which the bankruptcy proceeding is pending. See Rev. Rul. 2005-9, 2005-1 C.B. 470 for an explanation of when a bankruptcy case is considered "pending." IRS records the period during which a bankruptcy proceeding is pending through the use of Transactions Codes (TC) 520, 521, and 522:

1. TC 520 with Closing Codes 60 through 67, 83, and 85 through 89 indicate the date the bankruptcy court was petitioned.

2. TC 521 with the appropriate matching closing code indicates the date the bankruptcy was terminated.

3. The period between TC 520 and the matching TC 521 is recognized by IRS's computers as the period during which the bankruptcy was pending. When a matching TC 521 or TC 522 is not present, IRS's computers presume the bankruptcy is still pending.

4. TC 522 with the appropriate matching closing code indicates the bankruptcy was dismissed by the court. For the purpose of the penalty for filing late, the bankruptcy filing is disregarded if it was dismissed by the court. Therefore, IRS's computers disregard TC 520 when a matching TC 522 is posted in the module.

(1) The following four subsections demonstrate how the penalties under IRC 6651 are to be computed.

(2) IRM 20.1.2.3.8.7.1 shows how the penalty for failure to pay tax shown on the return is coordinated with the penalty for failure to file.

(3) IRM 20.1.2.3.8.7.2 shows how the penalty for failure to file attributable to a deficiency is computed for inclusion on the notice of deficiency.

(4) IRM 20.1.2.3.8.7.3 shows how the penalty for failure to pay tax upon notice and demand is computed. It also demonstrates how the increase in the penalty rate affects the penalty after issuance of a notice of intent to levy.

(5) IRM 20.1.2.3.8.7.4 shows when and how the minimum penalty for failure to file is computed.

(1) IDRS command code (CC) "COMPA" with definer "F" is available to compute the penalty for paying late.

(2) The penalties under IRC 6651(a)(2) and IRC 6651(a)(3) must be computed separately when both penalties apply.

(3) The following information must be gathered for input on IDRS:

1. In the case of failure to pay tax shown on the return, the payment due date.

2. In the case of failure to pay tax upon notice and demand, the date for payment stated in the notice.

3. The amount of unpaid tax on the applicable date above.

4. The dates of all payments against tax.

5. The unpaid tax balance after each payment.

6. The date(s) the penalty rate changed to 1 percent, if applicable. See IRM 20.1.2.3.8.1.1, 1 Percent Penalty Rate - IRC 6651(d).

7. The date(s) the penalty rate changed to ¹⁄₄ percent, if applicable. See IRM 20.1.2.3.8.1.2, ¹⁄₄ Percent Penalty Rate - IRC 6651(h).

8. The date(s) any installment agreement was terminated.

(4) On line one of the IDRS screen enter CC "COMPA" with definer "F" [COMPAF].

• If applicable, enter the date in f) or g) above (as applicable) beginning in position 14 of line one in MMDDYYYY format. If the date is from g) above, also enter a "&" in position 23 of line 1. The computer will use the ¹⁄₂ percent rate for computational lines prior to this date, and the applicable rate (¹⁄₄ percent or 1 percent) after this date.

• If the computation is a continuation of a previous "COMPAF" input screen, enter "CONT" in positions 8 through 11 of line 1. This will cause the computer to retain the aggregate percentage from the previous screen in its computation so the 25 percent aggregate maximum is not exceeded.

(5) On lines 2 through 22, enter the "from" date, a space, the "to" date, a space, and the unpaid tax on the "from" date.

• The first "from" date is the payment due date or the date for payment stated in the notice, which ever is applicable.

• The first "to" date is the first payment date after the due date or date for payment stated in the notice. In determining payment dates, consider the "timely mailing" rules. See IRM 20.1.2.2.1, When Timely Mailing Equals Timely Filing or Paying.

• The unpaid tax amount on each line is the amount of tax that remains unpaid as of the "from" date.

• Each subsequent "from" date is the "to" date from the previous line.

• Each subsequent "to" date is the effective date of the next payment, again taking the "timely mailing" rules into consideration with respect to any notice mailed prior to the date of payment.

(6) See IRM 2.3.29, Command Codes INTST, ICOMP, and COMPA, for more information about CC COMPA with definer "F."

(7) Also see ELMS Learning courses 17293 and 25232 for BMF, and 17206 and 11442 for IMF. (The first listed course is the prerequisite for the second listed course respectively for BMF and IMF.)

(1) An assessment of criminal restitution under IRC 6201(a)(4) does not constitute an assessment of an amount of tax required to be shown on a tax return specified in IRC 6651(a)(1). Therefore, the FTP penalty cannot be imposed on restitution-based assessments unless the Judgment & Commitment Order or related plea agreement specifically includes a FTP penalty. Restitution-based assessments against individuals are made on MFT 31. They are identified by Transaction Code (TC) 971 with action code 102 in the module. The assessment itself will have an adjustment reason code in the range of 141 through 146. The account or module to which the restitution-based assessment relates will be cross-referenced by a TC 971 with an action code in the range of 180 through 189. The FTP penalty can be imposed on the account or module to which the restitution-based assessment relates, if applicable, but even if it is, it cannot be imposed on the restitution-based assessment itself unless the Judgment & Commitment Order or related plea agreement specifically includes a FTP penalty.

(2) It is important to note again a district court may include a FTP penalty in the amount of restitution ordered. When the FTP penalty is included in the amount of restitution ordered, it should be assessed on the same tax module as the restitution-based assessment. It is important that penalties and interest included in the restitution order are assessed as such, and not included with the same transaction code as tax.

(3) The IRS may conduct a civil examination for the same tax period that has a restitution-based assessment or the taxpayer may file a delinquent return showing a tax liability for the same tax period a restitution-based assessment exists. This may result in an assessment of a civil tax liability in a different module or in the same module as the restitution-based assessment.

(4) To prevent double collection when the restitution-based assessment is not assessed in the same module as a related civil liability, any payment credited towards the restitution-based assessment module will be cross-referenced in the related civil tax liability module using a TC 766 with a credit reference number 337; and vice versa. (Cross-referenced restitution-based assessment payments on IMF will also carry adjustment reason code 150).

1. Payments and credits are only cross-referenced until the duplicative assessment and related penalties and interest are paid.

2. Cross-referencing of penalty payments assures the correct amount of penalty is collected.

(1) When additional amounts are assessed via a quick or prompt assessment, any accrued FTP penalty must be included. The accrued FTP penalty is entered on the applicable line of Form 2859, Request for Quick or Prompt Assessment, and is assessed with TC 270.

(2) Interest on the FTP penalty accrues beginning with notice and demand for payment of the penalty. Therefore, when demand for payment of the FTP penalty is made via the Form 3552, Prompt Assessment Billing Assembly, the amount and date of the demand must be recorded by assessing the penalty.

(3) If the FTP penalty is not to remain restricted after the assessment, the requestor (preparer of Form 2859, or other designee) must input TC 272 for zero amount after the assessment has posted.

(1) When deficiency procedures apply, IRS posts a "substitute for return" (SFR) Transaction Code (TC) 150 on the taxpayer's account to facilitate assessment of the deficiency.

1. For business returns (BMF) an SFR return can be identified by the presence of Computer Condition Code (CCC) 4 and zero tax with the TC 150.

2. For individual returns (IMF) an SFR return can be identified by zero tax posting with TC 150 with Doc Code 10 in the DLN.

(2) For business returns (BMF), for tax modules containing an SFR TC 150, IRS's computers are programmed to compute the penalty for failure to pay tax shown on a return (IRC 6651(a)(2)) using the sum of the first assessment in the module, plus any tax assessed subsequently with TC 290 with Priority Code 2, or with TC 300 with Priority Code 9.

(3) For individual returns (IMF), for tax modules containing an SFR TC 150, IRS's computers are programmed to compute the penalty for failure to pay tax shown on a return (IRC 6651(a)(2)) using the sum of all tax assessed with TC 290 with Priority Code 2, or with TC 300 with Priority Code 3 or 9.

(4) Also see IRM 20.1.2.3.8.3, Application of Tax Abatements.

(5) In two Tax Court cases in 2003, Cabirac v. Commissioner, 120 T.C. 63 (2003) and Spurlock v. Commissioner, T.C. Memo. 2003-124, the judge denied the IRS the assessment of the penalty under IRC 6651(a)(2), failure to pay tax shown on a return, because the requirements for a valid IRC 6020(b) return were not met. In conjunction with Chief Counsel, Form 13496, IRC 6020(b) Certification, was conceived to ensure the penalty under IRC 6651(a)(2) will be sustained in future court cases.

(6) Specific procedures must be followed when deficiency procedures apply for the assessment of tax under IRC 6020(b). The procedures must be followed to assure the assessment of the penalty under IRC 6651(a)(2) will be sustained in court if the assessment is challenged.

1. Complete Form 13496 with a live signature or a computer facsimile signature. Prepare and date the certification after the 30 day letter (or revised 30 day letter) so the date of the certification is identical to, or later than, the 30 day letter.

2. Attach the certification to Form 4549, Report of Income Tax Examination Changes. The date on the certification should be the same as, or later than, the date on the Form 4549. Also attach Form 886-A, Explanation of Items, as applicable.

3. Anyone authorized to prepare and issue reports of proposed tax adjustments is authorized to sign the certification. See Delegation Order. 5–2, IRM 1.2.44.3, Execute Returns.

4. Whenever the examiner (or a subsequent reviewer) revises a report of proposed adjustments (without regard to whether or not the revised report is re-issued to the taxpayer), a re-certification is required on a new Form 13496 dated on (or after) the same day as the revised report.

5. Form 13496 may not be prepared or dated after the date of the 90 day letter. Form 13496 is available on-line, in fillable format.

6. When the report of proposed adjustments involves more than one tax year, create a separate Form 13496 for each year and attach each one to a photocopy of the report for each year.

(1) When deficiency procedures do not apply, tax determined under IRC 6020(b) can be assessed in two ways:

1. An authorized IRS employee may execute (fill out and sign) the actual tax form and send it through pipeline processing for assessment (following their specific IRM instructions). The employee's signature on the return must be followed by the following statement: "This return was prepared and signed under authority of IRC 6020(b)."

2. Alternately, in lieu of signing the return with the accompanying statement, the agent may opt to complete and attach Form 13496 to the source document for assessment of tax under IRC 6020(b). In this case, all of the items described on Form 13496 under items 1 and 2 must be present as part of the source document.

(1) An audited partnership that fails to make a timely push-out election with respect to a final partnership adjustment will be assessed an imputed underpayment. Unless the partnership waives the restriction, the assessment may be made no earlier than 90 days after the date of Letter 5933, Letter 5933-A; or, if a petition is filed in court with respect to the final partnership adjustment, no earlier than the date on which the court’s decision becomes final.

(2) The imputed underpayment is assessed in the adjustment year.

(3) Under IRC 6233, if a partnership fails to pay an imputed underpayment by the date prescribed for payment, the partnership becomes subject to the penalty for failure to pay tax shown on a return IRC 6651(a)(2). For the purpose of computing this penalty the following rules apply:

1. The imputed underpayment is treated as an underpayment of tax for purposes of Part II of Subchapter A of Chapter 68 on the tax return of the partnership.

2. In the case of an imputed underpayment determined in an examination, the due date for payment is 21 calendar days following the date of the notice if the amount in the notice is less than $100,000. Otherwise the date is 10 business days after the date of the notice. This type of imputed underpayment assessment can be identified by reason code 187 posted with the assessment. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

3. In the case of an imputed underpayment determined in an administrative adjustment request, the due date for payment is the received date of the administrative adjustment request. This type of imputed underpayment assessment can be identified by reason code 185 posted with the assessment. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4. If a partnership is assessed an imputed underpayment and does not pay within 10 days of notice, the partners can be assessed directly under IRC 6232(f). In that case, each reporting year partner is liable for payment of that partner’s share of the partnership’s imputed liability, including tax, penalties, and interest. A partner’s share or each portion of the unpaid liability is determined by the partner’s share in the partnership. Penalties and interest are computed at the partnership level and assessed against each partner in accordance with their share in the partnership.

   Example: Granite and Sandstone are 50/50 partners in partnership Rock, which is assessed an imputed underpayment of $20,000 plus $2,000 in interest. Rock does not pay within 10 days of notice, and the partners are assessed under IRC 6232(f). Granite immediately pays his share of $11,000 (tax and interest). Sandstone pays nothing. 45 days after notice and demand $200 FTP penalty and $180 additional interest has accrued. Granite and Sandstone are each assessed $100 FTP penalty and $90 additional interest based on each partner’s share in the partnership, even though Granite had fully paid his original share of the liability.

5. Failure to pay an imputed underpayment.

6. Each partner’s share of a partnership’s unpaid liability must be computed and assessed manually. This cannot be automated.

7. FTP penalty is assessed manually with TC 270. Erroneous or excessive assessments are abated with TC 271.

(1) The following entities can be pass-through entities that are partners in a partnership

• An estate or trust (Form 1041) (other than a wholly-owned trust disregarded as separate from its owner for federal income tax purposes).

• A partnership (Form 1065).

• A subchapter S corporation (Form 1120S).

• A decendent’s estate

(2) When a pass-through partner entity receives a push-out statement (Form 8986) from an audited partnership, it is required to file Form 8985, Pass-Through Statement-Transmittal/Partnership Adjustment Tracking Report (Required Under Sections 6226 and 6227). It is also required to either calculate and pay an imputed underpayment based on the statement it received, OR it must issue push-out statements (Form 8986) to all its partners, beneficiaries, or shareholders.

(3) The due date for filing Form 8985 and issuing Form 8986 is the extended return due date of the audited partnership’s adjustment year return. The extended return due date for this purpose is determined without regard to the audited partnership’s filing requirement for the adjustment year, and without regard to the actual filing of an application for an extension of time to file by the audited partnership. See 26 CFR 301.6226-3(e)(3)(ii). Currently this means the due date for filing Form 8985 and for furnishing Forms 8986 is the 15th day of the 9th month following the end of the audited partnerships adjustment year.

(1) IRC 6031 requires a partnership to include in its return all of the information which "the Secretary may by forms and regulations prescribe." The penalty under IRC 6698 may be applied if any required information is missing.

(2) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡

(3) A penalty cannot be asserted under IRC 6698 for failure to attach required statements to Schedules K-1 sent to partners.

(1) IRC 6231(a)(1)(B) exempts certain small partnerships from the unified audit procedures contained in subchapter C of chapter 63 of the IRC. However, an exemption from the unified audit procedures is not an exemption from the requirement to file a timely and complete partnership return.

(2) Rev. Proc. 84−35 provides reasonable cause for filing a late or incomplete return will be presumed for certain small partnerships if certain criteria are met:

1. The partnership must consist of 10 or fewer partners. For the purpose of this requirement, a husband and wife (or their estate) filing a joint return is considered one partner.

2. Each partner is either an individual (excluding nonresident aliens), or the estate of a deceased partner.

3. Each partner's items of income, deductions, and credits are allocated in the same proportion as all other items of income, deductions, and credits.

4. Each partner reported the partner’s share of partnership income on the partner’s timely filed income tax return.

(3) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(4) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(5) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(6) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(7) When abating the penalty under the provisions of Rev. Proc. 84-35, advise the taxpayer the penalty will be reassessed if it is later determined any of the criteria outlined in Rev. Proc. 84-35 have not been met: Specifically, if it is found any partner was not a qualifying partner; or, if any partner filed late; or, if any partner failed to report their share of partnership income on their return, then the penalty will be reassessed.

(8) A request for penalty abatement under Rev. Proc. 84-35 must initially be denied if it appears the partnership is under an election to be subject to the unified audit procedures. See IRM 20.1.2.4.3.1.1, Form 8893 and 8894. A response to such a denial should not be treated as an appeal if the taxpayer provides additional information with respect to the election:

1. If the account reflects a processed election (Form 8893, Election of Partnership Level Tax Treatment, or similar statement) that has not been revoked, and the taxpayer claims the election was revoked, then the taxpayer must provide a copy of the IRS letter approving the revocation of the election.

2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(9) Partnerships that do not qualify for abatement of the penalty under Rev. Proc. 84-35 may still qualify for abatement of the penalty under normal reasonable cause criteria.

(1) Rev. Proc. 2003-84 allows certain partnerships investing in tax-exempt obligations to make an election that enables the partners to take into account monthly inclusions required under IRC 702 and IRC 707. Rev. Proc. 2003-84 also provides rules for partnership income tax reporting. Thus, a partnership having a monthly closing election in effect for the entire taxable year and meets the other requirements in section 8 of this revenue procedure, is not required to file a Form 1065 or issue Schedules K-1 (Form 1065).

(2) An eligible partnership makes a monthly closing election effective as provided under section 4.02 of this revenue procedure, and all partners must consent to this election.

(3) The monthly closing election is effective on the later of the following:

1. The start-up date of the partnership (as defined by section 4.05(1) of this revenue procedure), or

2. The first day of the month in which the provisions described in section 5.01 of this revenue procedure is first included in the entity’s governing documents.

(4) A partnership must file an abbreviated return (considered abbreviated because only certain information is required to be completed on the form) for the first taxable year during which the monthly closing election was in effect. The abbreviated return must be filed by the date the partnership’s return would ordinarily be due. The words "Filed in Accordance with Rev. Proc. 2003-84" must be typed or written across the top of the form. See Rev. Proc. 2003-84 for the specific information that must be supplied on the abbreviated return.

(5) If a late filing penalty was assessed because the required abbreviated return was late, and the partnership does not otherwise qualify for relief under any of the criteria in IRM 20.1.2.4.3, Penalty Relief, do not abate the penalty.

(6) If a missing information penalty was assessed, and the missing information was not required under Rev. Proc. 2003–84, abate the penalty.

(7) If a penalty for filing a late or incomplete return was assessed for any year following the first year, abate the penalty provided the taxpayer still qualifies for the elimination of the Form 1065 filing requirement under section 8.02 of Rev. Proc. 2003-84.

(8) A partnership that fails to satisfy all of the requirements of section 8.02 (1) of Rev. Proc. 2003–84 is required to file a complete (not abbreviated) Form 1065 and to issue Schedules K-1 (Form 1065) to its partners as required by IRC 6031(a). A partnership that fails to file a Form 1065 or to issue Schedules K-1 as required is subject to the applicable penalties under IRC 6698 and IRC 6722 for failure to file a partnership return and to furnish payee statements, as well as any other applicable penalties. Moreover, if a partnership is required to file a return under IRC 6031(a) but fails to do so, the period of limitations on assessment of tax attributable to partnership items remains open indefinitely under IRC 6229(a).

(9) See Rev. Proc. 2003-84, 2003-2 C.B. 1159 and IRM 21.7.4.4.2.12, Form 1065 Filed under Revenue Procedure 2003-84, for more information.

(1) IRC 6032 requires banks maintain a common trust fund (see IRC 584) to file annual information returns by April 15 following the end of the calendar year. No particular form is prescribed for making this return, but if Form 1065, U.S. Return of Partnership Income, is used, it should reflect all items of gross income and deductions of the fund, and identify all participants and their proportionate share.

(2) The penalty under IRC 6698 does not apply to returns required to be filed under IRC 6032. Therefore, filers who use Form 1065 to meet their filing requirement under IRC 6032 are not subject to the penalty for filing a late or incomplete return under IRC 6698.

(3) Forms 1065 submitted by common trust fund filers, and received after April 15, should have the failure to file (FTF) penalty suppressed by applying computer condition code (CCC) "R" during processing. If information or attachments to affected returns are missing, processing functions should not apply missing schedule codes to the return.

(4) When a Form 1065 filer requests abatement of either the penalty for filing late, or the missing information penalty, review the taxpayer's correspondence and case file for evidence the taxpayer filed Form 1065 to meet their filing requirement under IRC 6032. Check for the following:

1. A statement the taxpayer is a common trust fund under IRC 584.

2. A statement the taxpayer files Form 1065 to meet filing requirements under IRC 6032.

3. The entity portion of Form 1065 indicating the filer is a bank (or a group of two or more banks from the same affiliated group) acting as trustee, executor, administrator, guardian or custodian of accounts maintained on behalf of "fund participants."

(5) If the evidence shows Form 1065 was filed under IRC 6032, take the following actions as applicable:

1. Abate any late filing penalty using Penalty Reason Code (PRC) 045.

2. Abate any missing information penalty with PRC 045.

(1) Although a real estate mortgage investment conduit (REMIC) is treated as a partnership for the purpose of penalties related to filing, the return (Form 1066) can include tax imposed under Chapter 1 of Subtitle A. If tax is reported on Form 1066, U.S. Real Estate Investment Conduit (REMIC) Income Tax Return, the return is required to be filed both under IRC 6031 (relating to information returns required to be filed by partnerships), and under IRC 6012 (relating to income tax returns required to be filed by persons with income taxes under subtitle A). Therefore, when tax is reported on a late Form 1066, the return may be subject to both the penalty under IRC 6651(a)(1), and to the penalty under IRC 6698.

(2) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(3) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(4) Any TC 160 or TC 166 assessed against Form 1066 represents the failure-to-file penalty under IRC 6651. This penalty should be removed if the penalty under IRC 6698 is being imposed.

(5) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(6) Interest programming for Form 1066 (MFT 07) assumes any TC 16X on MFT 07 is a penalty assessed under IRC 6651(a)(1). Accordingly, it charges interest on TC 16X assessments beginning with the return due date on MFT 07. However, interest on the penalty under IRC 6698 does not begin until the date of notice and demand for payment of the penalty. Therefore, the TC 160 should not be used to assess the penalty under IRC 6698 against Form 1066 (MFT 07). See IRC 6601(e)(2)(A).

(1) The return of an electing large partnership (Form 1065-B, U.S. Return of Income for Electing Large Partnerships) can include tax imposed under Chapter 1 of Subtitle A. If tax is reported on Form 1065-B, the return is required to be filed both under IRC 6031 (relating to information returns required to be filed by partnerships), and under IRC 6012 (relating to income tax returns required to be filed by persons with income taxes under subtitle A). Therefore, when tax is reported on a late Form 1065-B, the return may be subject to both the penalty under IRC 6651(a)(1), and to the penalty under IRC 6698.

(2) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(3) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(4) These provisions only apply for partnership taxable years beginning prior to January 1, 2018 to which the partnership procedures of sections 6221-6234, as enacted by the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), apply for the taxable year.

(1) IRS programming was changed through a Unified Work Request to meet the requirements of IRC 6751(a)(1).

(2) Penalties will now be assessed with a PRN and IRN. When the adjustment posts, it will show as a TC 240 based on the PRN used. The PRN and IRN are input so penalty information will pass to the notices.

(3) Assessment of the penalty under IRC 6698 does not follow deficiency procedures, and the taxpayer does not have any pre-assessment appeal rights. However, examiners must make every effort to obtain sufficient information to determine if the penalty applies, or if the taxpayer's failure to comply was due to reasonable cause.

(4) Compute the penalty using the IRC6698and6699PenaltyComputationTool.xlsm (sharepoint.com)

(5) Once the penalty amount is figured, follow local procedures.

(6) PRNs 722 and 723 can only be assessed when TC 290 or TC 300 is $0.00.

(7) If removing a penalty and assessing another penalty, two separate adjustments need to be done. Input the penalty being removed first, then input the penalty being assessed with a cycle delay of one cycle.

(1) IRC 6037 requires a S corporation to include in its return all of the information which "the Secretary may by forms and regulations prescribe." The penalty under IRC 6699 may be applied if any required information is missing.

(2) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡

(3) A penalty cannot be asserted under IRC 6699 for failure to attach required statements to Schedules K-1 sent to shareholders.

(1) When a corporation ceases to be a small business corporation because it no longer qualifies, the "S" corporation election is terminated, and the corporation is required to file two short year returns for the termination year:

1. The portion of the year ending before the effective date of the termination is treated as a short taxable year of a S corporation.

2. The portion of the year beginning on the effective date of the termination is treated as a short taxable year of a C corporation.

3. For the termination year, the due date of the return for the short taxable year of the S corporation is the same as the due date of the return for the short taxable year of the C corporation, including extensions. See IRC 1362(e)(6)(B).

(2) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

• ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

• ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡"≡ ≡ ≡ ≡"

• ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

• ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(3) Follow the instructions in the table below for ALL short termination year S corporation returns:

(1) IRS programming was changed through a Unified Work Request to meet the requirements of IRC 6751(a)(1).

(2) Penalties will now be assessed with a PRN and IRN. When the adjustment posts, it will show as a TC 240 based on the PRN used. The PRN and IRN are input so penalty information will pass to the notices.

(3) Assessment of the penalty under IRC 6699 does not follow deficiency procedures, and the taxpayer does not have any pre-assessment appeal rights. However, examiners must make every effort to obtain sufficient information to determine if the penalty applies, or if the taxpayer's failure to comply was due to reasonable cause.

(4) Compute the penalty using the Penalty Computation Tool.

(5) Once the penalty amount is figured, follow local procedures.

(6) PRNs 722 and 723 can only be assessed when TC 290 or TC 300 is $0.00.

(7) If removing a penalty and assessing another penalty, two separate adjustments need to be done. Input the penalty being removed first, then input the penalty being assessed with a cycle delay of one cycle.