4.24.16. Excise Fuel Compliance Report Writing, Case Processing and Appeals Procedures

(1) The Omnibus Budget Reconciliation Act of 1993 became effective on January 1, 1994. The federal excise tax imposed by IRC 4081 no longer applied to removals of diesel fuel that are indelibly dyed (or dyed and marked) in accordance with IRS regulations. The Fuel Compliance Program rolled out in June of 1994. Its primary goal was to ensure that all dyed fuel leaving the terminal rack was dyed within the prescribed concentration levels, as well as ensuring that dyed fuel was not being utilized in diesel powered vehicles registered or required to be registered by the State.

(2) The dyed fuel rules also apply to kerosene and the Leaking Underground Storage Tank (LUST) tax still applies to most (otherwise) nontaxable uses of diesel fuel and kerosene.

(1) IRC 4083(d) and Treas. Reg. 48.4083-1(a) authorizes officials of the Internal Revenue Service, upon presenting appropriate credentials and a written notice to the owner, operator, or agent in charge, to enter any place and to conduct inspections in accordance with paragraphs (a) through (c) of Treas. Reg. 48.4083-1. IRS officials are authorized to inspect, examine, and/or search:

• Equipment used or capable of being used for the production, storage, or transportation of fuel, fuel dyes, or fuel markers.

• Equipment used to determine the amount or composition of taxable fuel.

• Equipment used for the dyeing or marking of fuel.

• Containers used or capable of being used for the production, storage or transportation of fuel, fuel dyes, or fuel markers.

• Books and records kept to determine excise tax liability under IRC 4081.

• Propulsion tanks of vehicles and trains.

• Fuel cargo storage tanks of vehicles, trains, and marine vessels.

(2) Employees are authorized to take and remove samples in quantities that are reasonably necessary to determine the composition of the fuel. See Treas. Reg. 48.4083-1(c)(3).

(1) Director, Specialty - Examination Policy, is responsible for the procedures and policies in this section.

(2) Program Manager, Excise Tax Policy, is responsible for ensuring that the procedures are accurate and updated regularly, as needed.

(3) Chief, Estate & Gift/Excise Tax Exam, is responsible for ensuring the procedures within this section are adhered to.

(4) Territory Managers, Excise Tax Examination, are responsible for ensuring that the GMs are aware and adhere to the procedures in this section.

(5) GMs, Excise Tax Examination, are responsible for ensuring their employees adhere to the procedures in this section.

(6) FCO and FCA groups are responsible for following all procedures in this section.

(1) Program Goals - The goal of this section is to provide guidance pertaining to report writing, case processing and Appeals procedures.

(2) Program Reports - The effectiveness of employees following the procedures outlined in this section is evaluated with the use of the following tools:

• Issue Management System (IMS) reports

• Fiscal year plan monitoring reports

• Examination Returns Control System (ERCS) reports

• IMS Team Website

(3) Program Effectiveness - The effectiveness of this program is measured by revenue protected. IRS employees being vigilant and visible in all geographic regions, promotes voluntary taxpayer compliance.

(4) Annual Review - The following reviews are conducted annually:

• Program Manager, Excise Tax Policy, conducts program reviews

• Chief, Estate & Gift/Excise Tax Exam, conducts territory operational reviews

• Territory Managers, Excise Tax Examination, conduct group operational reviews

(1) Definitions of all acronyms used throughout this section are depicted in the following table:

(1) In addition to this section, the following sections provide additional guidance, as it pertains to fuel compliance activities:

(1) A state penalty does not automatically result in a federal penalty assessment. Information received from a state is considered along with all the other facts and circumstances. Each case is evaluated to determine if a federal penalty is warranted. Employees must carefully consider factors that affect the validity of the sample (i.e., contamination of the sample) and the protection of the taxpayer’s rights. Employees may need to contact the taxpayer and obtain additional samples to determine if a federal penalty is warranted.

(2) WSD is to establish all state penalty cases on IMS and ERCS.

1. Employees who receive samples from state officers must document receipt of the samples and upload the state narratives in IMS. Employees may only accept fuel samples from states with whom the IRS has entered a fuel sampling, information-sharing agreement.

2. Tracking code 9529, State Fuel Usage Sample Penalties, must be used for all state-initiated cases input into IMS. Tracking code 9529 supersedes use of the other tracking codes listed in the tracking code table in IRM 4.24.16.2.3, Penalty Case Processing Procedures.

3. If employees pursue a penalty for a federal violation, processing the federal case should not be delayed pending the outcome of the state case nor for any appeals related to that state case. The federal penalty case should be fully developed and stand on its own merits.

4. If employees do not pursue a penalty for a federal violation, employees must input the explanation in IMS, but will treat the inspection as a no adverse action case. Employees must follow the procedures for closing the case as a no adverse action case.

(1) When creating a "no adverse action" case (also referred to as a "no-change" case) in IMS, use uniform issue list (UIL) code 04081.00-00, Gasoline and Diesel Fuel.

(2) For non-terminal inspections that do not result in adverse action, employees should issue Letter 3143, Non-violation Results of Inspection, and close the case in IMS by the end of the next business day after the inspection has been input in IMS and the determination is made. If the taxpayer identification number (TIN) is not known, employees may provide Letter 3143 to the taxpayer without a TIN, if the letter is issued at the inspection site on the date of the inspection. If a penalty will not be pursued the cycle type must be updated to EX-CMP if the input was initially EX-Federal or EX-State.

(3) For terminal inspections, employees should issue Letter 3144, Fuel Compliance Program Inspection Results, and close the case in IMS by the end of the next business day after the inspection is input in IMS and the determination is made.

(1) Within four days of finding a potential penalty, employees must notify their GM and create a case (with all necessary workpapers) in IMS.

(2) If multiple penalties (e.g., IRC 6715(a)(1) and IRC 6717) are assessed on the same taxpayer, employees must create one IMS case file, and include multiple penalties as separate entities within that one IMS case file and all appropriate closing forms (see below, IRM 4.24.16.2.4, Case Closing Procedures for Penalty Proposals).

(3) Select the appropriate tracking code when creating the case. The chart below provides the applicable fuel tracking codes and corresponding penalty code sections.

(4) Select the appropriate UIL code when creating the case. The chart below provides the applicable UIL codes and corresponding penalty code sections.

(5) Once the lab results are received, employees must complete Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users, in IMS and submits the form electronically to the GM for approval. Form 5345-D is used to establish the penalty case on ERCS. See IRM 4.24.16.2.4.1, Instructions for Completing Form 5345-D for Penalty Proposals.

(6) When preparing the penalty package, employees must research the Integrated Data Retrieval System (IDRS) to determine if any violations were assessed previously against the taxpayer. Employee must record the dates, IRC sections and total number of prior penalties for each IRC section in the IMS case file.

(7) Employees must review the following IDRS command codes for taxpayers with Employee Identification Numbers (EINs):

• SUMRY

• TXMODA

• BMFOLI

• BMFOLT

(8) Employees must review the following IDRS command codes for taxpayers with Social Security Numbers (SSNs):

• SUMRY

• TXMODA

• IMFOLI

• IMFOLT

(9) When determining the penalty assessment amount and whether there are any limitations of the taxpayer’s appeal rights, employees must review carefully the IDRS transcripts for a transaction code (TC) 240, Assessment of Miscellaneous Civil Penalty, and a TC 290, Additional Tax Assessment, with the applicable penalty reference code (e.g., 656). If the assessment amounts shown in IDRS is zero, then IRC 6715(b)(2) and IRC 6715(e) do not apply.

(10) The GM reviews the case in IMS prior to approving the penalty proposal.

(11) The GM notifies employees via secure e-mail or by telephone that the penalty proposal is either approved or not approved. This action is recorded in IMS within the Case Level Activities tab by the GM.

(12) After approval from the GM, employees must issue Letter 3145, 30-Day Letter for Fuel Related Proposed Penalties, and the penalty package to the taxpayer within 5 business days. See IRM 4.24.16.2.5, Inspections Resulting in a Potential IRC 6715 Violation, through IRM 4.24.16.2.8, Inspections Resulting in a Potential IRC 6720A Violation, for guidance on what items are included in the penalty package.

(13) The GM, after approving the proposed penalty, directs the group administrative assistant to establish the case on ERCS and to place the case in ERCS status 12 within two business days.

(14) Employees must mail the case file to the GM at the same time the 30-day letter and the penalty package are issued.

(15) Once the 30-day letter has been issued, the case remains in the employee’s open case inventory on IMS until the GM notifies them of the DC to enter into IMS. Following input of the appropriate DC into IMS, the case must be closed and synchronized within 5 business days.

(1) Employees must complete the following forms for every penalty case:

• Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users

• Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties

• Form 3198, Special Handling Notice for Examination Case Processing

(2) Employees must complete Form 2363, Master File Entity Change, when an account needs to be established on Master File or when changes to the entity record are required (i.e., the taxpayer's name and/or address has changed). Employees must forward Form 2363 via secure e-mail to the group administrative assistant for processing. The group administrative assistant must forward the completed form to the Ogden Submission Processing (OSP) group either by fax at 1-855-214-7520 or by mailing the form to: Ogden Submission Processing, 1973 Rulon White Blvd, Ogden UT, 84404 Mail Stop 6273 via Form 3210, Document Transmittal. The group administrative assistant annotates the fax cover sheet or Form 3210 with required actions (i.e., TC and purpose selected by the employee on the completed Form 2363). The group administrative assistant annotates the date the form was either faxed or mailed to OSP on Form 3198, in the section directly below the "Taxpayer Name and Address" section, and on the copy of Form 2363.

(1) Employees must issue, or hand deliverForm 886-A, Explanation of Items, at the time of the inspection or by the next business day after a potential IRC 6715, Dyed Fuel Sold For Use Or Used In Taxable Use, Etc., violation is found.

(2) The penalty package for IRC 6715 dyed fuel violation is the written notification informing the taxpayer of the proposed penalty. Employees must issue the penalty package within 5 business days after the GM notifies them of the approved penalty assessment.

(3) The penalty package for IRC 6715 penalties includes:

1. Letter 3145, 30-Day Letter for Fuel Related Proposed Penalties

2. Form 12010, Report of Proposed Penalty - IRC 6715, (2 copies)

3. Form 12009, Request for an Informal Conference and Appeal Review, (2 copies)

4. Notice 1215, What to Do if You Disagree with the Fuel Penalty

5. Publication 1, Your Rights as a Taxpayer

6. Notice 1416, State Penalty Notice, if applicable

(4) Employees must conduct a follow-up inspection within 60 days of the issuance of the penalty package to verify whether the taxpayer is complying with the law and that the violations previously cited are not recurring. The follow-up inspection is a separate inspection, and a violation found during that follow-up inspection is treated as subsequent penalty for purposes of IRC 6715(b)(2).

(1) The penalty package for IRC 6715A, Tampering With Or Failing To Maintain Security Requirements For Mechanical Dye Injection Systems, violation is the written notification informing the taxpayer of the proposed penalty. Employees must issue the penalty package within 5 business days after the employee’s GM notifies the employee of the approved penalty assessment.

(2) The penalty package for IRC 6715A penalties includes the following:

1. Letter 3145, 30-Day Letter for Fuel Related Proposed Penalties

2. Form 12012, Report of Proposed Penalty - IRC 6715A, (2 copies)

3. Form 12009, Request for an Informal Conference and Appeals Review, (2 copies)

4. Notice 1215, What to do if You Disagree with the Penalty

5. Publication 1, Your Rights as a Taxpayer

(3) Employees must conduct a follow-up inspection within 60 days of the issuance of the penalty package to verify whether the taxpayer is complying with the law and that the violations previously cited are not recurring. The follow-up inspection is a separate inspection, and employees should create a separate case file in IMS for each inspection.

(1) The penalty package for an IRC 6717, Refusal Of Entry, violation is the written notification informing the taxpayer of the proposed refusal penalty. Employees must issue the penalty package within 5 business days after the GM notifies the employee of the approved penalty assessment.

(2) The penalty package for IRC 6717 penalties includes the following:

1. Letter 3057, Refusal Letter Under IRC 4083(d)

2. Form 12011, Report of Proposed Penalty - IRC 6717, (2 copies)

3. Form 12009, Request for an Informal Conference and Appeals Review, (2 copies)

4. Notice 1215, What to do if You Disagree with the Penalty

5. Publication 1, Your Rights as a Taxpayer

(1) The penalty package for an IRC 6720A, Penalty With Respect To Certain Adulterated Fuels, violation is the written notification informing the taxpayer of the proposed adulterated fuel penalty. Employees must issue the penalty package immediately after the GM notifies the employee of the approved penalty assessment.

(2) The penalty package for IRC 6720A includes:

1. Letter 3145, 30-Day Letter for Fuel Related Proposed Penalties

2. Form 12013, Report of Proposed Penalty - IRC 6720A, (2 copies)

3. Form 12009, Request for an Informal Conference and Appeals Review, (2 copies)

4. Notice 1215, What to do if You Disagree with the Penalty

5. Publication 1, Your Rights as a Taxpayer

(3) Employees must conduct a follow-up inspection within 60 days of the issuance of the penalty package to verify whether the taxpayer is complying with the law and that the violations previously cited are not recurring. The follow-up inspection is a separate inspection, and employees should create a separate case file in IMS for each inspection.

(1) Employees must follow the procedures outlined in this section for all penalty inspection case files.

(2) Proper assembly of a case file minimizes delays, administrative problems, and procedural errors.

(1) All proposed penalty case files are processed through CCP, including cases that result in a penalty assessment and cases in which the GM determines that a penalty does not apply (no-change).

(2) CCP:

1. Receives all penalty case files (forwarded via Form 3210).

2. Processes all closed penalty case files and updates to status 90 on ERCS. If issues arise regarding ERCS/Audit Information Management System (AIMS), the group secretaries should contact their local ERCS/AIMS analyst for resolution.

(1) The GM is responsible for the following case actions:

1. Review all proposed penalty cases in IMS

2. If agreeing with the proposed penalty, approve Form 5345-D and notify the employee that the penalty is approved

3. Establish all penalty proposals on ERCS and update to status 12 within two (2) business days after determining to pursue a penalty

4. Monitor the expiration of the "30-day" statutory period for penalty cases

5. Record the appropriate penalty amount on Form 8278 prior to sending the penalty case file to CCP, if a penalty applies

6. If the penalty is not approved or will not be applied, Form 3198 will be updated to reflect DC 02 (no-change) and the case will be updated to DC 02, prior to closing

7. Update the case to status 51 and close to CCP, after the "30-day" statutory period expires if the taxpayer has not responded to the notice

8. Record in IMS all contacts with the taxpayer and results of the case review. The actions taken by the GM must be recorded in IMS within the Case Level Activities tab.

(2) If, because of the managerial conference or other reason, the GM determines not to assert a penalty, the GM will enter "zero" dollar amounts on Form 8278 and Form 3198. The electronic versions of Form 8278 and Form 3198, included in the IMS case file, must be updated to reflect changes made to these forms.

(3) Once the disposition of the case is determined (i.e., no-change, penalty assessed or case being forwarded to Appeals), the GM must notify the employee to enter one of the following DCs in IMS and close the case in IMS.

• DC 02 - No adverse action (no-change)

• DC 12 - Proposed penalty will be closed to CCP and assessed

• DC 07 - Unagreed to Appeals

  Note: The GM must update both the electronic and paper copy versions of Form 3198 with the appropriate DC after the employee has updated the file in IMS.

(4) For a case forwarded to Appeals, the GM must follow IRM 4.24.16.3.1, Appeals Case Routing Procedures for Penalty Cases.

(5) Once the disposition of the case has been determined and all required actions taken, the GM must set the Manager Concurrence to "Yes" in IMS for all cases that are established on ERCS, regardless of how the case closed.

(1) The GM must notify the employee to enter DC 07 in IMS, once it is determined that the case will be forwarded to Appeals. Once the DC is entered, the case must be closed and synchronized on IMS.

(2) Appeals has specially trained appeals officers (AOs) who handle excise tax and dyed diesel penalty cases referred to Appeals. Procedures and information on dyed fuel penalties being referred to appeals can be found in IRM 8.7.10.13, Dyed Diesel Fuel Penalty Cases.

(3) Appealed cases will be closed on ERCS to Tech Services. The case must be updated to status 21 and DC 07. In addition, the appropriate tech services code (TSC) must be entered for the Technical Services group in your area.

(4) Appealed cases will be mailed to the appropriate Tech Services address based on the TSC code.

(5) Employees must complete Form 3198, Special Handling Notice for Examination Case Processing, as follows:

1. In the Forward to Technical Services section, the boxes Unagreed to Appeals and Other must be checked.

2. In the space next to Other, insert Forward to APS Carding Team (non-collection cases). Unagreed Excise case please assign to Appeals Officer trained in Excise and insert the proper address for case routing.

3. In an unnamed section below the "Other" section, check the box for "Forward to Tech Services - Update to Status 21." Enter the "Date Closed to Manager" and "Manager Name."

(6) Form 3210 should include a statement that the case should be carded in and assigned to an Appeals Officer trained in Excise.

(7) Tech Services will send the case to the Appeals Account and Processing Support (APS) office based upon the state the taxpayer resides in.

(8) Cases must include the following:

1. Complete inspection file with statements regarding all facts made by the employee, taxpayer, and GM

2. Relevant workpapers indicating fuel tank measurement procedures, location of additional dyed fuel tanks, and confirmation of responsible party

3. Computation of the penalty

4. Results of the EFL testing

5. Record of all taxpayer contacts, including results of the informal appeal with the GM

   Note: The GM must ensure Form 12009, Request for an Informal Conference and Appeals Review, is completed including the bottom portion (i.e., Date of Taxpayer Request for Appeals Review and Supervisor Date and Initial).

6. Prior inspections, both violation and non-violation, if available

(1) APS will take all closing actions after a decision is reached by the Appeals Officer.

(2) IMS will generate an e-mail notification to the SB/SE Centralized Feedback mailbox. SB/SE will retrieve a copy of Form 5402 and Appeals Case Memorandum (ACM) from IMS.

(3) Excise Tax Policy will monitor the Excise mailbox for all settlements of dyed fuel cases.

(4) Excise Tax Policy will upload ACMs sent directly to the Excise mailbox into the IMS case file and will provide copies of the ACM to the Chief, Estate & Gift/Excise Exam for dissemination to the territories/groups.