4.24.9. Excise Tax Penalties Guidance

(1) For compliance purposes, it is essential managers, senior management officials, excise examiners and personnel at CEAC understand and correctly follow the technical guidance and information processing steps and methods explained in this IRM section to ensure penalties specific to excise tax are administered fairly and consistently.

(1) The most significant penalties affecting excise taxes are listed in the table below and are authorized by the applicable Internal Revenue Code (IRC) Sections.

(1) Overall responsibility for penalty programs is assigned to OSP. OSP is charged with coordinating policy and procedures concerning the administration of penalty programs, ensuring consistency with the policy statement, reviewing and analyzing penalty information, researching penalty effectiveness on compliance trends and determining appropriate actions to promote voluntary compliance. Excise Tax Examination is responsible for developing additional guidance or reference materials for its specific functional administrative needs as they apply to penalties specific to excise tax. Such material must remain consistent with OSP policies and general procedural requirements.

(2) Director, Examination - Specialty Policy is responsible for Excise Tax Examination policy and procedures.

(3) Director, Examination - Specialty Examination is responsible for operational examination compliance activities.

(4) Chief, Estate & Gift/Excise Tax is responsible for ensuring the policies and procedures for penalties specific to excise tax are communicated to and carried out by excise examiners.

(1) Program Goals - The program goals provided in this IRM are designed to increase compliance with excise tax laws by applying the tax laws with integrity and fairness and to provide SB/SE taxpayers top quality post-filing services for excise taxes administered by SB/SE.

(2) Program Reports - Information reporting of program objectives are included on Program Manager Monthly Briefings provided to Director, Examination - Specialty Policy.

(3) Program Effectiveness - Program effectiveness is measured by the Exam Quality Review Staff, located in Field and Specialty Exam Quality (FSEQ). FSEQ supports the SB/SE Quality Improvement Program utilizing National Quality Review System (NQRS) to conduct independent case reviews from statistically valid samples of examination case work. National, area and territory trend analysis on the quality attributes are used to establish baselines to assess program performance, identify opportunities to improve work processes, analyze causes for failure, assess the feasibility of possible solutions and measure the success of quality improvement efforts.

(4) Annual Review - Program Manager - Excise Tax Policy is responsible for reviewing annually the information in this IRM to ensure accuracy and promote consistent tax administration.

(1) Acronyms and their associated words or phrase used throughout this IRM are listed in the table below.

(1) The IRMs listed below are the primary sources of information for excise examiners, excise managers and personnel at CEAC who work with penalties specific to excise returns, refunds, claims and other excise compliance activities. Together this material forms the responsibilities, operating rules and procedures for penalties.

1. IRM 20.1.1, Introduction and Penalty Relief - This section discusses the background and purpose of penalties, penalty relief guidelines and the general structure of IRM 20.1, Penalty Handbook.

2. IRM 20.1.2, Failure to File/Failure to Pay Penalties - This section contains policy and instructions with respect to penalties for Failure to File and Failure to Pay under IRC 6651.

3. IRM 20.1.3, Estimated Tax Penalties - This section provides policy and service-wide guidelines about the administration of penalties for the underpayment of estimated tax under IRC 6654 and IRC 6655.

4. IRM 20.1.4, Failure to Deposit Penalty - This section provides policy and other important information with respect to the penalty for Failure to Deposit under IRC 6656.

5. IRM 20.1.5, Return Related Penalties - This section outlines the policy and procedures surrounding return related penalties.

6. IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties - This section provides the policies for return preparers, promoters and material advisors.

7. IRM 20.1.7, Information Return Penalties - This section is for compliance functional employees responsible for working information return penalties.

8. IRM 20.1.9, International Penalties - This section is for compliance functional employees responsible for international penalties.

9. IRM 20.1.10, Miscellaneous Penalties - This section provides information about miscellaneous penalties.

10. IRM 20.1.11, Excise Tax and Estate and Gift Tax Penalties - This section provides policies and procedures for the application of excise tax and estate and gift tax penalties.

11. IRM 4.24.6, Technical Guidance and Information Processing for Excise Tax Examination Issues - This section provides the procedures for the preparation of excise tax workpapers.

12. IRM 4.24.10, Appeals Referral Procedures - This section provides information about the referral process for excise cases to Appeals, including whether excise tax penalties are in connection with unagreed tax adjustments or such penalties are the only items at issue.

13. IRM 4.24.20, Excise Tax Report Writing Guide - This section provides the procedures for the preparation of excise tax reports.

(2) The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR, see https://www.irs.gov/taxpayer-bill-of-rights

(1) The excise examiner's recommendation for assertion or non-assertion of the failure to file or pay penalty will accompany each delinquent return.

1. For reasonable cause criteria, refer to IRM 20.1.1.3.2, Reasonable Cause.

2. To determine whether reasonable cause relief can be considered for the penalty being considered, refer to IRM Exhibit 20.1.1-1, Penalty Relief—Application Chart, at http://irm.web.irs.gov/Part20/Chapter1/Section1/IRM20.1.1.aspx#20.1.1-1.

(2) These requirements preclude affording appeal rights prior to assessment of the penalties. In these cases, the taxpayer should be advised that an appeal may be initiated by filing Form 843, Claim for Refund and Request for Abatement, for the amount of penalties upon payment of the penalties.

(3) An excise examiner securing a delinquent return may examine the return to determine whether the tax reported is correct. Such examination should be made as soon as possible after the return is received, and to the extent deemed necessary.

(4) A "No-Change" report will be issued if the excise examiner determines that the tax is correctly reported. Refer to IRM 4.4.9.5.14.1, No Change to Original Return, for more information regarding no-change case processing.

(5) If the excise examiner finds that the tax is incorrect, an examination report will be prepared covering proposed changes to the tax reported on the return, and to the delinquency penalty, if applicable.

(6) If the additional tax is unagreed, normal appeal procedures apply.

(7) For more information, refer to IRM 4.4.9, AIMS Procedures and Processing Instructions, Delinquent and Substitute for Return Processing.

(8) For guidance on processing delinquent returns and substitutes for returns (SFRs) refer to Excise Tax Knowledge Base Home page for Closing an Examination located at https://portal.ds.irsnet.gov/sites/vl037/lists/book31/landingview.aspx.

(1) First indications of fraud serve as a sign that a taxpayer may have taken actions for the purpose(s) of deceit, subterfuge, camouflage, concealment, attempting to color or obscure events, or to make things seem other than they are. First indications alone do not establish fraud.

(2) First indications of fraud, also known as "badges of fraud," are mere suspicions of fraud. When discrepancies are identified, excise examiners must ask the taxpayer, the preparer, the representative, or any other involved party for explanations to resolve them. Questions should also be asked to determine the taxpayer’s intent. Examples of fraud indicators can be found in IRM 25.1.2.3, Indicators of Fraud.

(3) At the first indication of possible fraud, the excise examiner should review IRM 25.1.1, Fraud Handbook - Overview/Definitions. Investigative techniques can be found in IRM 25.1.2.4, Investigative Techniques.

(4) The excise examiner will use their judgment to determine audit techniques necessary to help resolve the badges of fraud. To be effective, examination techniques should be designed to disclose not only errors in accounting and application of law, but also irregularities, such as backdated or forged documents. It is not suggested that fraud exists in every assigned return or case, but excise examiners must be cognizant of the badges of fraud and address them in cases where they do exist.

(5) The excise examiner will document the first indications of fraud in the workpapers and discuss the case with their manager. If the manager concurs that there is a possibility of fraud, a conference (either in person or over the phone) will be held between the excise examiner, the group manager, and the Fraud Enforcement Advisor (FEA).

(6) The FEA serves as a resource person for compliance employees to assist in fraud investigations and offer advice on matters concerning tax fraud in all the business organizations.

(7) When the excise examiner, the excise examiner’s manager, and the FEA agree that there is a potential for fraud, the case controls must be updated to Status Code (SC) "17" (fraud development). This decision must be documented in the case file. Form 11661, Fraud Development Recommendation - Examination, is used to document FEA involvement as well as the decision to update the case to SC "17". See IRM 20.1.5.16.3, Penalty Referral.

(8) A plan of action should be developed to establish and document the affirmative acts or firm indications of fraud. Refer to IRM 25.1.1.4, Indicators of Fraud vs. Affirmative Acts of Fraud, for information on the minimum plan for case development. The excise examiner should continue the audit being alert for other badges of fraud and follow up on initial suspicions of fraud. See IRM 20.1.5.16.1, Indications of Fraud, for a list of common badges of fraud.

(1) Firm indications of fraud, or affirmative acts, establish that a taxpayer deliberately took actions with the purpose of deceit, subterfuge, camouflage, concealment, attempting to color or obscure events, or to make things seem other than what they are.

(2) Fraud may exist where a taxpayer willfully attempts to underreport taxes or does not pay taxes. For a taxpayer to be guilty of a crime in which willfulness is an element, that individual must have acted deliberately, knowingly, and with the specific intent to violate the law.

(3) A "firm indication" of fraud must be distinguished from a "first indication" of fraud. A firm indication of fraud is a factual determination that can only be made on a case-by-case basis. Discussions with the group manager and the FEA will help the excise examiner determine when they have firm indications of fraud warranting development for a civil fraud penalty or a referral to Criminal Investigation (CI) for criminal fraud development. However, under no circumstances shall excise examiners or managers obtain advice and/or direction from CI for a specific case that is under examination. In addition, if a referral is being considered, an excise examiner must not solicit an agreement or solicit and receive delinquent returns prior to the submission of a fraud referral.

(4) When the group manager, FEA, and the excise examiner agree firm indications of fraud are present, a decision must be made regarding whether the case will be referred for criminal prosecution or will be developed for the assertion of the penalty. Excise examiners are cautioned not to carry the investigation beyond the point where a valid indication of fraud is adequately supported by the workpapers.

(5) If the case does not meet the guidelines for a criminal referral, the excise examiner will document the reasons in the case file and proceed with development of the case and the civil fraud penalty. The excise examiner will continue to work with the FEA to ensure complete development of the facts to support assertion of the civil fraud penalty. See IRM 4.24.9.7.3, Criminal Fraud Procedures - General.

(6) If the case warrants a criminal referral, the excise examiner will prepare Form 2797, Referral Report of Potential Criminal Fraud Cases. See IRM 4.24.9.7.3.1, Criminal Fraud Referrals.

(1) Information about the source or details of evidence relating to a potential criminal case must be safeguarded and withheld to the extent necessary to avoid prejudice to a case. This general rule is applicable not only during the investigation of a case, but also in any action taken with respect to the civil portions of a case having open criminal aspects. When appropriate, excise examiners are expected to coordinate proposed disclosure of information through established channels.

(2) The following code sections are the most common used by excise examiners when developing criminal fraud cases:

1. IRC 7202, Willful failure to collect or pay over taxes

2. IRC 7203, Willful failure to file return, supply information, or pay tax

3. IRC 7206, Fraud and false statements

4. IRC 7212, Attempts to interfere with administration of internal revenue laws

5. IRC 7512, Separate accounting for certain collected taxes, etc

6. IRC 7215, Offenses with respect to collected taxes (Failure to collect and deposit in a special trust fund account) (IRC 7215 and IRC 7512(b))

(3) Full cooperation among all levels of operations in the IRS must be maintained to ensure that there is neither duplication in investigations nor unnecessary inconvenience to the public. The excise examiner will review IDRS to determine if any "-Z" freeze (Transaction Code (TC) 914) conditions exist and if other functions are assigned to the taxpayer case. CI or the FEA should be contacted prior to beginning case action whenever an un-reversed TC 914 (or other CI code) is present in any module.

(4) If an excise examiner learns that an assigned case involves a taxpayer who is the subject of a criminal investigation, all activity on the case will be immediately suspended. The excise examiner’s manager will consult with the Supervisory Special Agent in CI relative to the continuance of excise tax activity on the case. If agreement to either continue the suspension or to resume the excise tax activity on the case cannot be reached at the group or territory level, the issue will be decided at the area level. Where more than one area is involved, the Director of Field Operations having jurisdiction over the criminal investigation will resolve the question.

(5) In income, estate, and gift tax cases in which criminal prosecution has been recommended (except potential jeopardy cases), the Service generally does not authorize assessment of additional taxes and penalties during the time the recommendation for criminal prosecution is under consideration or during the period such cases may be awaiting trial or pending an appeal. The same procedure will be followed with respect to excise tax cases in which criminal prosecution has been recommended.

(6) Threat of criminal prosecution shall never be made in any case. If a question concerning civil action arises in a case with open criminal aspects, it will be resolved on the basis of whether the criminal case will be prejudiced by the proposed civil action. IRM 1.2.1.5.11, Policy Statement 4-26 (Formerly P-4-84), "Criminal and civil aspects in enforcement," provides that the consequences of civil enforcement actions on criminal investigations for the same taxable periods and same types of taxes must be carefully weighed. Any discussion or negotiation regarding settlement of civil enforcement actions must be guided by this policy and input from the FEA.

(1) An assertion of the civil fraud penalty may be made on the development of facts and circumstances of a civil examination or result from a completed criminal prosecution (case returned for civil resolution). See IRM 4.24.9.7.4.2, Civil Resolution of a Criminal Prosecution Case, for additional procedures.

(2) Assertion of the civil fraud penalty on a case does not require a referral to CI. Determination of the civil fraud penalty is the shared responsibility of the excise examiner, the group manager, and the FEA. See IRM 25.1.6.3, Procedures.

(3) Recommendations for imposing the civil fraud penalty must receive careful scrutiny to make certain that such penalties are asserted only in appropriate cases. The Service bears the burden of proving civil fraud by clear and convincing evidence in Tax Court. See IRC 7454, Burden of proof in fraud, foundation manager, and transferee cases.

(4) The following code sections are the most common used by excise tax examiners when developing civil fraud cases:

1. IRC 6663, Imposition of fraud penalty (civil fraud)

2. IRC 6651, Failure to file tax return or to pay tax (IRC 6651(f), Increase in penalty for fraudulent failure to file)

(5) IRM 25.1.1, Fraud Handbook - Overview/Definitions, notes several elements that may be indicative of fraud. Excise examiners should remain continually alert for these and other "badges of fraud."

(6) When the group manager, FEA, and excise examiner agree to pursue the civil fraud penalty on a civil examination, the case will remain in SC "17". If a decision is made that civil fraud is no longer applicable, the excise examiner will document this decision in the case file, update the case to SC "12", and complete the examination.

(7) The final examination report will reflect the civil fraud penalties applied to the appropriate adjustments. See IRM 4.24.9.7.4.1, Civil Fraud Penalty Rates.

(8) Cases returned from CI after criminal prosecution or discontinuance of the criminal investigation will be completed as a civil resolution by the referring examiner. See IRM 4.24.9.7.4.2, Civil Resolution of a Criminal Prosecution Case. However, if the excise examiner participated in the grand jury investigation and had access to grand jury information, the case cannot be assigned to the cooperating excise examiner. See IRM 25.1.5.6, Civil Case Resolution.

(1) While in SC "17" or SC "18", cycle time will be excluded from monthly "aging" reports to management. As AIMS and ERCS include data from all cases, a manual reconciliation to the aging reports will exclude SC "17" and "18" cases from both the overage category and the overage percentage.

(2) When closing a civil fraud case, the excise examiner will enter:

• "C" if the 75 percent fraud penalty was asserted under IRC 6663

• "F" if criminal prosecution has been successfully concluded, or

• "B" if both criminal and civil apply, on the appropriate line of Form 5344, Examination Closing Record. Refer to IRM 4.4.12.5.47, Item 38: Fraud.