8.22.8. Liability Issues and Relief from Liability

(1) The IRS Restructuring and Reform Act of 1998 (RRA 98) created Collection Due Process (CDP) appeal rights and with them, the ability for taxpayers to contest their liability under certain circumstances.

(1) Internal Revenue Code (IRC) sections 6320 & 6330 and Treas. Regs. 301.6320-1 and 301.6330-1 are the primary sources of authority, in addition to applicable Internal Revenue Manual (IRM) sections. Further, the Taxpayer Bill of Rights detailed in IRC 7803(a)(3) applies to Appeals employees’ interactions with taxpayers.

(1) The Policy analyst shown on the Product Catalog page as the originator is the assigned author of this IRM.

(1) PPQ&A provides trend and data analyses and detailed summary reports for Appeals.

(1) See IRM Exhibit 8.22.4-3, Common Terms and Acronyms Used in Collection Due Process, for such common terms and their definitions.

(1) Use the table below to determine whether a liability should be referred for consideration:

(2) Referring a liability issue for Exam AO consideration requires ATM approval. After securing approval, request a separate WUNO for the liability issue by providing Account and Processing Support (APS) with the:

1. Case Summary Card noted "Please create a [case type] WUNO with feature code = [see table above] and Notes - XREF (WUNO of the related CDP)"

2. Date you determined the issue was raised. APS uses this date for the REQAPPL.

(3) Generate Form 30/40 for the new WUNO and forward it to the ATM with the:

• Administrative file including the reason(s) the TP alleges the liability should be changed

• Taxpayer documentation

• Case Activity Record

• Case Summary Card

(4) The ATM uses local procedures to determine the Exam AO group that will work the issue, notes the assignment on Form 30/40, and forwards the case to APS.

(5) If the outcome of the liability issue could significantly affect the CDP hearing, suspend the CDP using CARATS codes SU/PI. If the CDP is suspended, update the status code to either:

• E/AP: Inactive, waiting another AO (same office)

• E/APO: Inactive, waiting another AO (outside office)

(6) The Exam AO ATM assigns the new WUNO upon receipt.

(7) The Exam AO considers the issue with the goal of finishing within 120 days of receipt. The Collection AO may contact the Exam AO for a status report after 90 days. After 120 days, the Collection AO may ask their ATM to contact the Exam AO ATM.

(8) The Exam AO must input MS, not AC/FR, when submitting the case to the ATM.

(9) The Exam AO submits the following forms to their ATM for approval when finished with their determination:

• Form 30-40 Transfer Form

• Form 5402

• Form 3210

• Form 3870, if the Exam AO determines that an adjustment to the liability is warranted

• ACM as an attachment to the CAR so the decision can be incorporated into the CDP decision and attachment

(10) The agreed/unagreed closing code generally used for the liability issue will be used on Form 5402. Form 5402 is signed by the Exam AO ATM but no ACAP date is applied. The ATM sends the case to APS for reassignment back to the originator.

(11) At the conclusion of the CDP, the substance of the precluded issue is not discussed in the attachment to the determination or decision letter.

(1) If a taxpayer disputes the liability on a self-filed return, provide a deadline of at least 21 calendar days to file an amended return with you. If the taxpayer already filed the amended return, secure a copy.

(2) An amended return filed in a CDP includes new information that Exam has not had an opportunity to consider. The amended return must be considered first by the appropriate Service Center.

(3) Monitor IDRS for TC 971 codes that reflect receipt and disposition of the amended return.

(4) If the amended return is not accepted in full, open a separate WUNO for an AO to consider the liability.

(5) If the taxpayer fails to amend the return after disputing the liability, note in the attachment to the determination or decision letter that the taxpayer was given an opportunity to raise the liability but failed to do so.

(6) Determine if it is appropriate to suspend the CDP hearing on a case-by-case basis. Suspend the case at management’s discretion if the amended return will affect resolution of the CDP. If the item(s) being amended have no bearing on a collection alternative or other subjects at issue, then it is not necessary to suspend the CDP hearing.

(1) If the taxpayer disputes an ASFR/SFR liability, give the taxpayer 21 calendar days to file a return with you to replace the IRS-prepared return. Attempt to secure all unfiled returns for processing, including non-CDP ASFR/SFR liabilities.

(2) If the taxpayer fails to file a valid return, note in the attachment to the determination or decision letter that the taxpayer was given an opportunity to raise the liability issue but failed to do so.

(3) On receipt of a valid return from the taxpayer:

1. Date stamp it with the Appeals "received date"

2. Complete the ASFR/SFR Cover Sheet found in APGolf under CDP

3. Prepare Form 3210 with your phone number and a statement in the "Remarks" section that Appeals is sending the return(s) for expedite processing

4. Mail the return, ASFR/SFR Cover Sheet and Form 3210 to the ASFR Recon Team:
   
   Internal Revenue Service
   ASFR Operation Stop 654
   1040 Waverly Avenue
   Holtsville, NY 11742-9013
   
   

(4) The ASFR Recon Team:

1. ESTABs the original ASFR/SFR if necessary.

2. Processes the return and makes adjustments to the account.

(5) Monitor IDRS for the adjustment. If the adjustment fails to post within 90 days from the mailing of your request to ASFR Recon Team, request a status update from the ASFR Contact found on the Appeals CDP webpage under "Resources." To avoid prohibited ex parte communications, limit your inquiry to timeliness and processing issues.

(6) If a liability remains after the taxpayer's return is adjusted, address any other issues in the CDP hearing.

(7) The table below summarizes whether an ASFR/SFR liability is considered in or outside of CDP:

(1) Taxpayers may raise 6020(b) liability in a CDP hearing if they did not receive Letter 1085, 30 Day Letter Proposed IRC 6020(B) Assessment or Letter 1616, 30 Day Letter, Proposed IRC 6020(b) Assessment Partnership Return, or otherwise have an opportunity to contest the tax liability. These letters are not sent by certified mail:

• Ask the taxpayer if they received Letter 1085 or Letter 1616. The taxpayer’s assertions regarding receipt may determine whether liability may be raised.

• Check ACDS to see if the taxpayer requested an Appeals hearing in response to either letter.

• Check ICS to see if the taxpayer acknowledged receipt of the letter to the revenue officer.

(2) Once you confirm whether the taxpayer received Letter 1085 or Letter 1616, see the table below:

(1) Collection transmits the original Form 8857 accompanying a CDP request to CCISO within 10 business days of receipt and provides a copy to Appeals with the CDP referral. If you receive a Form 8857 which Collection did not send to CCISO or which was filed with Appeals after a CDP hearing request:

1. Date stamp it or ensure it was date stamped by Collection

2. Request input of feature codes SD and DP to the CDP WUNO if the CDP is filed by RS only or if the CDP request is jointly filed. Do not enter SD on the NRS account.

3. Send it on Form 3210 marked "EXPEDITE - CDP CASE" for a preliminary CCISO determination within 10 business days of receipt to:

IRS-Cincinnati Centralized Innocent Spouse Operation

Attn: CDP Coordinator, Stop 840 F

7940 Kentucky Dr

Florence, KY 41042

Note: You may fax or EEFax Form 8857 to CCISO at 855-233-8558 if there are no supporting documents, e.g. no return file. The request must be marked "Expedite-CDP case."

4. Include the return file if it is already in your possession. Otherwise, CCISO requests the return file.

(2) Notify the taxpayer by phone or letter that CCISO will investigate the IS claim, contact both the requesting spouse (RS) and non-requesting spouse (NRS), and share its preliminary determination. If the IS claim is not resolved in CCISO, the claim is returned to Appeals for a final determination in CDP.

(3) CCISO inputs TC 971 AC 65 on receipt of the request. Verify CCISO input TC 971 AC 65 and then:

1. Suspend the CDP in ACDS with SU/PI using the date Form 8857 was sent to CCISO. Update the status code to E/OTH.

2. Monitor the case via command code ISTSR. The status of the case is reflected in ISTSR with the Stage Tracking Indicators found in IRM Exhibit 2.3.77-3, Stage Data.

(4) If the CDP hearing request was joint, the hearing may proceed for the NRS. However, the final determination may not be made until the IS claim has been considered. The collection potential from the RS may affect the viability of a proposed collection alternative.

(5) If you discover an IS claim is pending in CCISO, the IS claim must be considered in CDP even if the taxpayer’s request for CDP made no mention of the IS issue.

(1) If the RS submitted a processable claim, CCISO makes a preliminary determination and sends notification to each spouse.

(2) CCISO sends the preliminary determination letter to:

1. Advise the RS and NRS of their right to request a hearing. The NRS has appeal rights in the case of a full or partial allowance for the RS.

2. Provide a Form 12509, Innocent Spouse Statement of Disagreement, to both spouses for their completion and return within 30 days

   Note: Because the preliminary determination letter is sent to the taxpayers, there are no prohibited ex parte communications between CCISO and Appeals.

(3) Chief Counsel recommended Appeals include an explanation of Tax Court rights with every IS determination, even if CCISO determined relief should be fully allowed or the case is agreed. As a result, CCISO:

• Does not issue a final determination letter on fully allowed CDP/ IS cases

• Does not adjust accounts based on its preliminary determination

• Sends all administrative files to the Cincinnati Campus Appeals office

(4) If CCISO inadvertently issued a final determination letter, suspend the CDP hearing using CARATS code SU/PI until after the expiration of the period for the taxpayer to petition for a judicial review of the IS determination. If the taxpayer:

1. Petitions: the CDP remains in suspense until the Tax Court decision becomes final.

2. Does not petition: Send the administrative file on Form 3210 to Cincinnati Campus APS, who will establish and assign an INNSP WUNO to an AO.

(1) Following receipt of the administrative IS file from CCISO, Cincinnati Campus APS will:

• Card a separate INNSP WUNO

• Cross reference the INNSP WUNO to the CDP WUNO

• Add a feature code "DP" to the INNSP WUNO

• Forward the INNSP case to an Appeals Team Manager (ATM) for assignment to an Exam AO

(2) The Exam AO works the IS claim following IRM 25.15.12, Relief from Joint and Several Liability, Appeals Procedures. When finished, the Exam AO will:

• Prepare Form 5402, Appeals Transmittal and Case Memo, with instructions to APS regarding all required account adjustments and Innocent Spouse Tracking System (ISTS) updates. The Exam AO will use closing code 03 (for agreed) or 05 (for unagreed) on Form 5402.

  Note: The Exam AO ATM does not input an ACAP date for the INNSP WUNO since it will be closed with the CDP by the Collection AO.

• Include instructions on the Form 5402 for APS to request that CCISO mirror the accounts, if the Exam AO fully allows a claim that was previously denied in full

• Prepare an ACM as an attachment to the CAR so the decision can be incorporated into the CDP decision and attachment

• Attempt to secure the RS agreement on Form 870-IS on all agreed cases for which partial or full relief is granted

• Use CARATS action code MS, not AC/FR, when transferring the INNSP case to the Collection AO

• Prepare Form 30/40 to transfer the INNSP case through APS to the Collection AO

(3) The Collection AO will, upon receipt of the INNSP case:

• Input CARATS action code SU/TO to the CDP WUNO, using the date of receipt as the action date

• Issue a substantive contact letter to the taxpayer(s) within 30 days of receipt of the INNSP case

(1) CCISO mirrors accounts when its preliminary determination is to allow relief in full.

(2) The CSEDs of the spouses generally differ at the conclusion of the CDP hearing because:

• The 6015(e)(2) statute suspension applies only to the RS

• If the determination is unagreed and the CDP hearing was joint, the RS receives a CDP determination letter that provides 90 days to petition Tax Court for a review of the IS relief determination. The NRS receives a determination letter which provides 30 days to petition.

(3) When an account needs mirroring, you must request APS update ACDS to ensure it reflects the same information as IDRS. The following updates are needed if the mirroring occurs after the date Collection or Appeals received Form 8857:

(1) A CDP request can be withdrawn up to the point the determination letter is issued. If a CDP/EH is withdrawn and...

• CCISO has the claim: Deliver or fax a copy of Form 12256 to CCISO within two business days. Remind CCISO to make the final determination on the claim. CCISO will not return the IS file to Appeals and no IS WUNO is established.

• The Exam AO has the claim and has not made a decision: Deliver or fax a copy of Form 12256 to the Exam AO within two business days. Advise the Exam AO to remove the "DP" feature code and to make the final determination, closing the case following normal IS procedures. Take the CDP case out of suspense using CARATS codes SU/TO and close the CDP, using closing code 16.

• The Exam AO returned a recommendation on the claim: Close the CDP case as a withdrawal and close the IS case by issuing the letters below:

(1) Taxpayers may raise TFRP liability in CDP if they did not have a prior opportunity to dispute the liability. Examples of a prior opportunity include the taxpayer:

• Receiving Letter 1153

• Filing Form 843 Claim for Refund and Appeals issued a determination

• Receiving a notice of claim disallowance letter offering an opportunity to dispute the disallowance in Appeals

• Having a hearing with Appeals about the TFRP liability, Appeals issued a liability determination and the taxpayer meaningfully participated

• Filing a complaint or suit and the court decided the TFRP liability

• Receiving a prior CDP lien or levy hearing notice for the same tax and taxable period

• Challenging the TFRP liability in bankruptcy

(2) To determine if the taxpayer received Letter 1153:

1. Ask if they received Letter 1153

2. Review the corporate ICS history for documentation of personal delivery of Letter 1153

3. If receipt is not confirmed, generate the "TP disputes TFRP civil penalty" form in APGolf to request a copy of the Letter 1153 and proof of receipt from Advisory. Ask them to check Automated Trust Fund Recovery (ATFR) program for documentation of personal delivery

4. Fax the completed form to the appropriate Advisory Group ATFR Control Point Monitoring (CPM). A list of the fax numbers based on Area can be found here or at the Appeals website under TFRP.

5. Advisory sends the entire TFRP file if proof of receipt cannot be determined

   Note: Return TFRP files promptly to Advisory at the conclusion of the case as they may be needed for a taxpayer's Form 843,

(3) If the taxpayer states a hearing was requested in response to Letter 1153, research ACDS to find the related case. If there is no record of a prior TFRP hearing for the subject periods, ask for proof of the timely request. If the taxpayer provides evidence of a timely filed protest that was not considered by Appeals, then the taxpayer must be allowed to raise TFRP liability in CDP.

(4) If liability can be considered, see:

• IRM 5.7.3, Establishing Responsibility and Willfulness for the Trust Fund Recovery Penalty (TFRP), for a discussion of willfulness and responsibility

• IRM 8.25.2.6.3, Hazards of Litigation Settlements, for a discussion of hazards

(1) Under IRC 6673(a)(1), the Tax Court may impose a penalty of up to $25,000 against a taxpayer for:

• Making frivolous arguments before the court

• Filing a petition for delay

• Unreasonably failing to pursue administrative remedies

(2) If the Tax Court imposes an IRC 6673 penalty, the IRS assesses and collects it in the same manner as a tax. A notice of a right to a hearing must be given to the taxpayer when the IRS intends to collect the penalty.

(3) If a taxpayer disputes an IRC 6673 liability:

1. Obtain a copy of the Tax Court decision or order imposing the penalty from the US Tax Court home page at http://www.ustaxcourt.gov/.

2. Confirm the penalty was properly assessed by reviewing IDRS

(4) The penalty cannot be compromised under doubt as to liability as Treas. Reg. 301.7122-1(b)(1) states that doubt as to liability does not exist where a liability is established by a court decision or judgment.

(5) Counsel generally recommends against compromise of the IRC 6673 penalty under doubt as to collectibility or effective tax administration grounds. The penalty is an important tool used by the Tax Court to deter frivolous litigation. However, compromise on doubt as to collectibility grounds may be appropriate if the taxpayer abandons frivolous arguments and comes into tax compliance.

(1) IRC 6700(c) provides a penalty for promoting abusive tax shelters.

(2) IRC 6701 provides a penalty for aiding and abetting understatement of tax liability.

(3) A notice and demand letter is automatically generated upon assessment of these penalties:

• IMF: penalty is MFT 55 and CP 15 is issued

• BMF: penalty is MFT 13 and CP 215 is issued

(4) Notice and demand CP 15 and CP 215 provide specific procedures for requesting abatement and obtaining judicial review under IRC 6703(c). To contest the penalties and obtain a levy prohibition, the taxpayer must pay at least 15% of the penalty and file a claim for a refund within 30 days of the date of issuance of notice and demand. The taxpayer may then file a refund suit within 30 days after the claim is denied or within 30 days after the expiration of 6 months after the date the claim was filed.

(5) These penalties may be raised in CDP because notices CP 15 and CP 215 are not a prior opportunity. See IRM 8.22.8.3(9)(g) above.

(6) If the taxpayer disputes the liability, refer the liability issue to an Exam AO per IRM 8.22.8.5.1, Referring a Liability Issue.

(7) If you determine the taxpayer timely took the actions in IRC 6703(c) to obtain judicial review, this subsection provides the Service may not levy to collect the penalty until the final resolution of the proceeding the taxpayer initiated. If the CDP hearing involves a proposed levy and the taxpayer timely followed the procedures in IRC 6703(c), the CDP notice is valid. However, do not sustain the proposed levy unless there has been a final resolution. Place the case in suspense pending the outcome of the litigation. See IRC 6703(c)(2).

(8) If you determine that the taxpayer paid 15% of the penalty but the taxpayer denies a claim was filed after 15% was paid, check Pacer to verify the taxpayer did not file a suit. If the taxpayer filed suit, see paragraph (7) above.

(1) IRC 6702(a),IRC 6702(b), and IRC 6682 penalties do not generate a notice giving the taxpayer administrative appeal rights. Therefore, these penalties may be raised in CDP.

(2) IRC 6682 allows the assessment of a $500 civil penalty for furnishing a false Form W-4 if:

1. The statement made on the form results in less withholding than would have been if the form had been correctly completed, and

2. There was no reasonable basis for such a statement

(3) IRC 6682 penalties are assessed using MFT 55 for the calendar year for which the false Form W-4 was signed.

• Multiple penalties may be assessed on a given module, one for each false Form W-4

• TC 240 with Reference Code 616 identifies a questionable W-4 penalty

• IRC 6682 authorizes abating the penalty if there was a reasonable basis for the taxpayer’s Form W-4 when it was submitted. See IRM 5.19.11.11.3, Civil Penalty Abatements

(4) IRC 6702(a) imposes a $5,000 civil penalty against any person who files a return (not limited to income tax returns), if the purported return does not contain information on which the substantial correctness of the self-assessed determination of tax may be judged or contains information that on its face indicates that the self-assessment is substantially incorrect and:

1. The return is based on a frivolous position as identified underIRC 6702(c) listing of frivolous positions

2. The return is filed by a taxpayer with the desire to delay or impede the administration of Federal tax laws

3. Is identified on TXMOD by TC 240 with reference code 666

(5) IRC 6702(b) imposes a $5,000 civil penalty against any person who submits a specified frivolous submission. A specified submission contains a position which the IRS has identified as frivolous under IRC 6702(c) or if the specified submission reflects a desire to delay or impede the administration of Federal tax laws. See Notice 2010-33. A specified frivolous submission may be identified by TC 240 with reference code 543.

(6) There is no legal basis for abatement of IRC 6702 penalties due to reasonable cause. However, IRC 6702(d) provides the Service may reduce a IRC 6702 penalty if it "determines that such reduction would promote compliance with and administration of the Federal tax laws."

(7) Eligibility criteria for a one-time reduction of an unpaid IRC 6702 penalty liability are found in sections 4 and 5 of Rev. Proc. 2012-43 and further described in IRM 20.1.10.13.3,IRC 6702(d) Reduction of Frivolous Submission IRC 6702 Penalties. Eligibility for penalty reduction is fact-driven and not discretionary. The process starts with a taxpayer making an application for reduction of IRC 6702 penalties on Form 14402 and generally requires a minimal payment of $250. See Rev. Proc. 2012-43 for the specific requirements.

(8) If you receive Form 14402:

1. Process any payment with a TC 670 and a secondary TC 570

2. Forward Form 14402 with a photocopy of the payment to the Frivolous Filer Unit, Ogden Campus, Stop 4390 on Form 3210

3. Write in the remarks section of Form 3210 that the 6702(d) issue was raised in Appeals in a CDP hearing. Request that a copy of the letter responding to the taxpayer be returned to you.

(9) In response, Ogden will:

• Adjust the penalty if the taxpayer is eligible

• Return a preliminary decision that the taxpayer's request is denied if the facts don't support reduction

(10) If the taxpayer's request for penalty reduction was denied, the issue need not be referred to an Appeals Officer since the decision is fact-driven and not discretionary. Review Ogden's decision to confirm the facts were properly applied as per Rev. Proc. 2012-43. Discuss the penalty determination in your closing letter.

(11) A taxpayer may challenge an IRC 6682 or IRC 6702 penalty on the grounds that required approval was not obtained in accordance with IRC 6751(b)(1), which states that no penalty shall be assessed unless it is approved in writing by the immediate supervisor of the individual who made the initial determination to assert the penalty. A challenge based on IRC 6751(b)(1) is a challenge to whether procedural requirements for the making of the assessment were satisfied. As such, it is a verification issue under IRC 6330(c)(1), not a liability challenge under IRC 6330(c)(2)(B). For guidance of IRC 6751(b)(1) compliance of IRC 6702 penalties, see IRM 8.22.5.4.2.1.4, Frivolous Return/Submission.

(1) IRC 6707provides a penalty for the failure to furnish information regarding a reportable transaction. IRC 6707A provides a penalty for the failure to include on any return or statement any information required to be disclosed under IRC 6011 regarding a reportable transaction.

(2) A taxpayer may dispute a IRC 6707and IRC 6707A penalty in CDP if the taxpayer did not have a prior opportunity to do so. If ACDS confirms Appeals conducted a prior IRC 6707 or IRC 6707A hearing for the same tax period, the taxpayer had a prior opportunity.

(3) Appeals has no authority to rescind IRC 6707 or IRC 6707A on the grounds specified in IRC 6707(c) and 6707A(d) in CDP. When the taxpayer is permitted to raise the liability, Appeals may determine that the penalty does not apply or may propose a settlement based on hazards of litigation. Appeals may consider whether:

• The transaction involved is a reportable transaction other than a listed transaction

• The transaction involved is a listed transaction

• The person is subject to and complied with the reporting requirements of IRC 6011

• The applicable statute of limitations bars assessment of the penalty

(4) The “Small Business Jobs Act of 2010” amended the IRC 6707A penalty calculation retroactively for penalties assessed after December 31, 2006. The Abusive Transactions Unit in Ogden reviewed the calculation of the IRC 6707A penalty and made adjustments where appropriate. A taxpayer who can't raise liability in a CDP hearing because of prior opportunity is still able to contest the amount of the recalculation, except where the penalty has been recalculated to the minimum amount allowed under SBJA 2010, which is $10,000 for businesses and $5,000 for individuals.

(5) IRC 6707 and IRC 6707A penalties are Appeals Coordinated Issues. When the taxpayer is able to raise liability as a CDP issue, a new WUNO is created for this liability issue as per IRM 8.22.8.5.1, Referring a Liability Issue. The Exam AO obtains the concurrence of Technical Specialist for 6707/ 6707A penalties before returning the case to the Collection AO. Technical Specialists are found at http://appeals.web.irs.gov/TG_locator/application/query.asp.

(1) Taxpayers may raise reasonable cause penalty abatement in a CDP hearing if they did not have a prior opportunity to do so. The table below gives examples of when penalty appeal (PENAP) is an issue in CDP:

(2) To raise PENAP in CDP, the taxpayer must provide a written statement identifying the:

• Tax period(s)

• Type of tax

• Specific penalties disputed

• Grounds for reasonable cause abatement

(3) If the taxpayer's CDP request includes a general statement about penalties, e.g. “penalties should be abated,” ask for specific information in support of the dispute as described above. If the taxpayer fails to provide the requested information, note in the attachment to the determination or decision letter that penalty abatement was not considered because the taxpayer declined to provide requested information.

(4) For a discussion of reasonable cause criteria, see:

• IRM 20.1.1.3.2, Reasonable Cause

• IRM 8.11.1.2.7.1, Reasonable Cause

(5) When PENAP is a CDP issue, a separate PENAP WUNO is not created. The PENAP is addressed in the determination or decision letter attachment.

(6) When PENAP is precluded from CDP, it may be considered outside of CDP. To do so:

1. Obtain ATM approval

2. Request APS card-in as a separate PENAP WUNO

3. May be assigned to another Appeals employee at ATM discretion

4. Send the appropriate penalty appeal closing letter before issuing the CDP Notice of Determination

5. In the CDP determination or decision attachment, explain that while the taxpayer raised penalty appeal, the issue was precluded and penalty liability was considered in a separate Penalty hearing

(7) Prepare one of the forms below for APS to input your decision regarding each of the disputed penalties and tax period(s):

• Form 5402 when penalty was considered outside of CDP under a separate PENAP WUNO

• Form 3870 when penalty was considered in CDP

(8) Use blocking series 96X (penalty abatement refusal) for the TC 290 (-0-) transaction. This prevents a later abatement of a penalty sustained by Appeals.

(1) Collection identified these cases by writing "Son of BOSS non-participant" on the CDP referral Form.

(2) Based on the referral, APS identifies these cases on ACDS with “SOB” in Location Field 8 and “Son of BOSS Tax Shelter” in the Notes field.

(3) An additional way to identify SOB cases is to ask the taxpayer for an explanation of liabilities that exceed $1,000,000.

(4) If you discover a CDP case involving a SOB liability that is not identified as SOB in ACDS, request that APS input "SOB" to Loc field 8 and "Son of BOSS" Tax Shelter in the Notes field.

(1) When a taxpayer seeks to challenge a SOB liability in a CDP, determine if the liability challenge is precluded:

• IRM 8.22.8.3, When Liability is Raised, and

• IRM 8.22.8.13, TEFRA Partnerships

(2) Once you’ve confirmed the SOB liability may be challenged, follow the Step Table below:

(3) APS creates and returns the new WUNO within three work days of the request.

(1) The Collection AO's ATM arranges for the assignment of the Type "I", "ABINT" or "PENAP" case to an Exam AO according to local procedures.

(2) SOB transactions are an Appeals Coordinated Issue requiring the review and concurrence of Technical Specialist in the decision. The Exam AO considering the SOB liability issue:

• Makes a referral to the SOB Technical Specialist

• Consults with the Technical Specialist throughout the consideration

• Obtains the concurrence of the Technical Specialist prior to discussing the settlement of tax, penalty and/or interest with the taxpayer

(3) Once the SOB issue is concluded, the Exam AO submits the following to their ATM for approval:

• Form 30-40 transfer form

• Form 5402

• Form 3210

• Any adjustment documents, if applicable

• An ACM as an attachment to the CAR so the decision can be incorporated into the CDP decision and attachment

(4) Upon receipt of the decision from the Exam AO, the Collection AO schedules the CDP hearing to consider any other relevant CDP issues the taxpayer raised. The Exam AO's decision concerning the underlying liability is adopted in the CDP determination or decision letter.

(5) A request for spousal relief from a SOB assessment is considered under CDP following IRM 8.22.8.8.1, Processing an Innocent Spouse Claim-Form 8857.

(1) The Chief, Appeals has sole approval authority on the settlement of the SOB liability when the liability is not precluded from CDP. The closure-ready administrative file for a SOB case, where any part of the liability is at issue, whether the liability has been changed or not, must be forwarded for approval to Chief, Appeals. Decisions in IS cases where the taxpayer seeks relief from a SOB liability also require Chief, Appeals approval.

(2) If there is a significant issue not addressed in the ACM which requires explanation, the ATM prepares a briefing paper to explain the basis for Appeals recommended settlement. The ATM sends the following documents to the Area Director to coordinate with the Senior Operations Advisor for the Director, Specialized Examination Programs & Referrals, to obtain the approval of Chief, Appeals:

• 5402

• Appeals Case Memorandum and Closing Letter

• Case Activity Record

• Briefing Paper, if applicable

• Original case file or a complete copy of the case file

(3) These documents are forwarded for review with no fewer than 30 days remaining before any court-mandated response date if the case is docketed and has been remanded for a supplemental notice of determination.

(4) The case is returned to the originating ATM and the Collection AO closes the CDP on receipt of Form 5402 and the closing letter, signed by Chief, Appeals, using general CDP closing procedures.

(5) Review and approval of Chief, Appeals is not required when:

• The SOB liability was precluded under IRC 6330(c)(2)(B)

• The underlying liability of tax, penalty and interest in a SOB case was not at issue

• The taxpayer withdraws a CDP hearing request

  Example: The taxpayer submitted a Doubt as to Collectibility (DATC) Offer in Compromise. Since collectibility and not liability is at issue, approval of Chief, Appeals is not required.

(6) After approval, the ATM provides a copy of Form 5402 and the ACM to the Area Director.

(1) For guidance concerning claims for penalty abatement from non-participants, where the resulting balance due is based on an audit or an amended return filed by the taxpayer, see IRM 8.22.8.13, TEFRA Partnership. Appeals considers requests for abatement of the asserted penalty because "the taxpayer filed a qualified amended return under Treas. Reg. 1.6664-2(c)(3)(i)(A) before being contacted by the Service."

(2) Contact the Appeals Technical Specialist for SOB with questions concerning Appeals SOB procedures.

(1) If liability is disputed on the basis that the taxpayer’s signature was forged, or the return was signed under duress, determine if the taxpayer is alleging an identity theft issue or a spousal defense.

(2) If the taxpayer claims not to have filed the return, and does not know who signed it, or does know who signed the return but that person is not the taxpayer’s spouse, follow ID theft procedures in IRM 8.6.5.6.

(3) If the taxpayer claims not to be liable because a spouse forged his/her signature or was forced to sign under duress, then follow Innocent Spouse procedures in IRM 8.22.8.8.

(1) A non-CDP tax period may be considered if it does not involve an evaluation of the merits of the liability. The availability of an overpayment from a non-CDP period as a source of payment of the unpaid tax for the CDP period may be raised as a relevant issue under IRC 6330(c)(2)(A).

(2) Appeals must consider the following non-CDP overpayments if raised by the taxpayer because they are relevant to the collection of the CDP period:

• Whether the Service correctly rejected the taxpayer's claim for refund for a non-CDP period because the claim was made after the expiration of the period of limitation in IRC 6511 or, if a timely claim was made because the time period for filing a refund suit has expired (IRC 6514).

• The availability of an overpayment from a non-CDP period when transcripts show an overpayment is available for offset to the CDP period

• Whether an overpayment was properly applied to a non-CDP period instead of a CDP period

(3) Consideration of these relevant issues relating to non-CDP periods are not liability issues and therefore may not be precluded under IRC 6330(c)(2)(B). However, if the issue has been previously considered by Appeals or a court, IRC 6330(c)(4) preclusion may apply.

(1) Appeals must consider the availability of an adjustment (as opposed to an overpayment), such as a net operating loss and credit carryovers arising with respect to non-CDP periods, if such adjustment impacts the determination of the reportable tax due for the tax period that is the subject of the CDP hearing