8.11.1. Return Related Penalties in Appeals

(1) This IRM adheres to Penalty Policy Statement P-20-1, which addresses fair and equitable implementation and application of penalty provisions, and requires all IRS functions to develop procedures that promote:

• Consistency in the application of penalties compared to similar cases;

• Unbiased analysis of the facts in each case; and

• The proper application of the law to the facts of the case.

(2) As stated in IRC 7803(e)(3), the Appeals mission is to resolve Federal tax controversies without litigation on a basis that is fair and impartial to both the Government and the taxpayer, promotes a consistent application and interpretation of, and voluntary compliance with, the Federal tax laws, and enhances public confidence in the integrity and efficiency of the IRS. Appeals accomplishes its mission by considering protested and Tax Court cases and negotiating settlements in a manner which ensures Appeals employees act in accord with the Taxpayer Bill of Rights (TBOR) in every interaction with taxpayers.

(1) See IRC Subtitle F, Chapter 68, which contains most of the civil penalty provisions.

(2) IRM 1.2.1.12.1, Policy Statement 20-1 (formerly P-1-18), Penalties are used to enhance voluntary compliance, sets forth the IRS’ position regarding penalties.

(3) IRM 20.1, Penalty Handbook, provides servicewide instructions for working penalty cases.

(1) The Director, C&OS is the executive responsible for Appeals’ policy and procedural guidance.

(2) The Director, PPQ&A is responsible for program oversight.

(3) 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 8.1.1-1, Common Terms Used in Appeals, for common terms and definitions used in IRM Part 8. Terms listed in that exhibit are not included in this section.

(2) The table below lists commonly used acronyms and their definitions:

(1) This IRM is the primary source of guidance on this program.

(2) This IRM is supplemented by the information in IRM 20.1, Penalty Handbook, and its sections.

(3) In accordance with IRM 25.30.2.3, Statement of Commitment, Appeals will work collaboratively with the Taxpayer Advocate Service (TAS) to enhance the taxpayer experience. For more information, see IRM 25.30.2, Service Level Agreement between the IRS Independent Office of Appeals and the Taxpayer Advocate Service.

(4) 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 www.irs.gov//taxpayer-bill-of-rights.

(1) The examiner's immediate supervisor (or designated higher level official) generally must approve, in writing, an examiner’s initial penalty determination per IRC 6751(b).

(2) See IRM 20.1.5.2.3, Supervisory Approval of Penalties - IRC 6751 Procedural Requirements, and IRM 20.1.1.2.3, Approval Prerequisite to Penalty Assessments, for more information, including exceptions to the supervisory-approval requirement.

(1) Several types of proposed or assessed penalties can be protested to Appeals. Below are some examples (not all-inclusive):

(2) The following additional rules apply to additions to tax:

(1) ATEs consider settlements of appeals of assessed penalties for less than the full amount assessed. Delegation Order 8-8 (Rev. 1) delegates the authority to settle cases to Appeals Team Managers (ATMs) and Appeals Team Case Leaders as to their respective cases. See IRM 1.2.2.9.8, Delegation Order 8-8 (Rev. 1) (formerly DO-66, Rev. 15), Authority of Appeals in Protested and Tax Court Cases.

(2) The ATM will sign the Form 5402, Appeals Transmittal and Case Memo.

(1) Instructions for carding penalty cases are located in IRM 8.20.5.32.1, Civil Penalty (MFT 13 & 55) Case Carding.

(1) The ATM will assign the penalty case to an ATE based upon the complexity of the penalty issue.

(2) The ATM or designated official will assign the case to an ATE on the Appeals Centralized Database System (ACDS).

(1) Upon receipt of the case, the ATE follows the procedures in IRM 8.2.1.4, Receipt of New Assignment by an Appeals Technical Employee (ATE). These procedures include, but are not limited to, the following:

• Complete the statute verification and contact the taxpayer or authorized representative within 45 calendar days. With respect to statute verification, refer to IRM 8.21.3, Appeals Technical Employees Statute Responsibility.

  Note: ATMs will be reasonable in extending the contact time frame if circumstances (e.g., leave, workload, case complexity or other priorities) prevent the ATE from meeting it. If the ATM extends this time frame, the ATE will document this decision and the agreed upon time frame in CARATS on ACDS. But the statute verification time frame shall not be extended beyond 45 days. If the contact time frame is extended beyond 75 days, then the ATM will contact the taxpayer/representative by correspondence, providing a status of the case and to whom the case is assigned.

• Verify that the case file is complete and all file data is present per IRM 20.1.1.3.5.1(4), Subsequent Requests for Penalty Relief. See IRM 8.2.1.5, Returning a Case to Examination - ATE, for grounds for returning a case to Examination.

(2) Validate the Case Summary Card (CSC) information and make updates, if necessary.

(3) If a subsequent correction is needed to ACDS, take the following actions:

• Change the data fields by using the "Validations" tab on the bottom tool bar of the Case Activity Record.

• All other changes not available in the Validations tab must be submitted to APS through the Appeals Shared Programs Hub for corrections.

(4) There are several TYPE codes used on ACDS to identify the type of penalty case, including:

(1) ATEs will resolve the cases as expeditiously as possible.

(2) Appeals will not concede penalty issues to obtain a concession on other issues in the case. Penalties should sometimes be settled, but the settlement must be based on reasonable cause, facts and the law, taxpayer circumstances and compliance history, and hazards of litigation.

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

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

(5) Appeals holds conferences to resolve issues in dispute. PENAP conferences are usually held by telephone or correspondence. If the taxpayer or representative requests an in-person conference, follow the procedures in:

1. IRM 8.6.1.5.1, Conference Practice,

2. IRM 8.6.1.5.5, Virtual Service Delivery (VSD).

(1) This subsection discusses the general process used by the ATE to close penalty cases.

(2) Use ACDS 2.0 to generate all forms and letters.

(3) Prepare the ACM to outline the facts and circumstances supporting sustention or abatement of the penalty. This could include, but is not limited to:

• Documenting taxpayer's filing history

• Citing case law

• Discussing hazards of litigation

(4) Use the ACDS customized Form 5402:

• Show the affected tax periods included in the case

• Route the case to the APS per Direct Ship instructions in ACDS at ACAP

• List penalty transaction codes

• Provide a source document to adjust the taxpayer’s account based on the case determination

• Include special instructions related to processing the case

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

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

Note: See the discussion of APS’s closing procedures and explanation of the closing codes and blocking series in IRM 8.20.7.16, Civil Penalty MFT 13 (BMF) MFT 55 (IMF) Closing Procedures.

(5) Prepare the applicable ACDS closing letter.

(1) APS’s closing procedures have been moved to IRM 8.20.7.16, Civil Penalty MFT 13 (BMF) MFT 55 (IMF) Closing Procedures.

(1) Since penalties may impact many IRC filing, paying and reporting requirements, many major tax acts contain revisions to the penalty sections in Chapter 68 of the IRC. See IRM 20.1, Penalty Handbook, for any statutory changes that may affect the penalty at issue.

(1) Generally, the statute of limitations for the return related penalties listed above that use ACDS TYPE Code "I" is the same as the statute of limitations for underpayments of the tax required to be reported on the income tax return. For information on the statute of limitations for IRC 6676 penalty cases, see IRM 8.11.1.3.7, IRC 6676.

(1) For penalty relief on the above applicable penalties, see IRM 20.1.5.7, Penalty Relief.

(2) With respect to the IRC 6676 penalty, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) provides that any excessive amount which is attributable to any transaction described in IRC 6662(b)(6) will not be treated as due to reasonable cause.

(1) Stacking of the IRC 6662, IRC 6663, IRC 6662A, and IRC 6676 penalties is not permitted.

(2) The maximum amount of the IRC 6662 penalty imposed on a portion of an underpayment of tax is 20 percent (or 40 percent in certain circumstances) of that portion of underpayment (even if that portion of the underpayment is attributable to more than one type of misconduct proscribed under IRC 6662). See IRM 20.1.5.17.3, Coordination with Other Penalties. The 30 percent penalty only applies in an IRC 6662A penalty.

(1) For common features of both penalties, see IRM 20.1.5.3.2, Common Features of Accuracy-Related and Civil Fraud Penalties.

(2) For allocation of both penalties, see IRM 20.1.5.3.3, Allocation of an Underpayment.

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

(2) The following table provides actions which may be required based on the statute of limitations and the case resolution:

(3) Return a case to the Compliance office when it appears important new information or evidence was purposely withheld from the Compliance Officer, or where information requires extensive verification and consideration by the area office. For more information, see IRM 8.2.1.5, Returning a Case to Examination - ATE, and IRM 8.6.1.7.5, Taxpayer Provides New Information.

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

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

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

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

(1) As background, the Small Business and Work Opportunity Tax Act of 2007 (SBWOTA), enacted on May 25, 2007, added IRC 6676, Erroneous Claim for Refund or Credit penalty. This section was subsequently amended by the PATH Act, which was enacted on December 18, 2015. The PATH Act amended IRC 6676 by changing the reasonable basis exception to a reasonable cause exception. As amended, the IRC 6676 penalty may be imposed on a taxpayer who files an erroneous claim for refund or credit with respect to income tax that is excessive and for which there is no reasonable cause for the claimed tax treatment.

(2) For claims filed before December 18, 2015, an IRC 6676 penalty may be imposed on a taxpayer who files an erroneous claim for refund or credit with respect to income tax that is excessive and for which there is no reasonable basis for the claimed tax treatment. See IRM 20.1.5.18, IRC 6676, Erroneous Claim for Refund or Credit Penalty.

(3) ACDS TYPE Code "6676" is used to control an IRC 6676 penalty case on ACDS.

(4) The IRC 6676 penalty is generally not subject to deficiency procedures. Therefore, the penalty should generally not be included on the examination report (30-day letter) or statutory notice of deficiency relating to the disallowed claim for refund or credit return or the filed income tax return. However, when an excessive amount of a refund claim is attributable to a disallowed refundable credit, the excessive amount is part of a deficiency and the IRC 6676 penalty, on the excessive amount, is subject to deficiency procedures. In all cases where the excessive amount is not part of a deficiency, the IRC 6676 penalty is assessable without following deficiency procedures. For more information about deficiency procedures and the IRC 6676 penalty, see IRM 20.1.5.18.4, Case Procedures WITH Deficiency Procedures.

(5) IRC 6676 cases are generally subject to pre-assessment and appeal rights procedures.

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

(2) See IRM 20.1.3.3.2, Adjustments after Penalty Assessment; IRM 8.17.7.8, Estimated Tax Penalties, IRC 6654 and IRC 6655; IRC 6654, Failure by Individual to Pay Estimated Income Tax; and IRC 6655, Failure by Corporation to Pay Estimated Income Tax.

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

(4) To adjust a computer-generated IMF estimated tax penalty, follow the instructions outlined in IRM 8.20.7, Closing Procedures, for entering adjustments to estimated tax penalty amounts on Form 5403.