4.25.8. Delinquent Returns and SFR Procedures

(1) In addition to the standard closing documents and procedures, special procedures referenced in this section are required for closing delinquent returns where there is no change to the tax due and/or to the unified credit as originally filed. The return is being accepted as filed.

(2) Prepare a Report of Examination Changes (Report) using the Estate and Gift Notebook showing no change to tax and no change to unified credit. Use the amounts from the delinquent return as the starting figures on the Report.

(3) Complete Form 5344 paying close attention to the following:

• Enter TC 300 with 0 at Item 12.

• Enter TC 160 with 0 or the amount of penalties that apply at Item 12. There must be a TC 160 entry.

• Enter disposal code 01 at Item 13.

• Enter a "T" at Item 37 for the first delinquent return secured and "R" for all others.

• Enter an amount at Item 414 to reflect the balance due or the refund amount excluding penalty per the delinquent return, if any.

(4) Include a copy of the delinquent return. Notate in red at the top of the copy "Copy of Return".

(5) Include all workpapers as described in IRM 4.25.1.9, Estate and Gift Tax Program Exam Process and Documentation.

(6) Include a copy of Form 5345-D.

(7) Form 3198, Special Handling Notice for Examination Case Processing, should reflect:

• "Secured Delinquent Return, No Change" in the Special Features section.

• Notate whether penalties apply. Include the code section if penalties are being assessed. If no penalties are to be assessed, write "DO NOT ASSESS PENALTIES" in the special features section.

(8) The administrative staff will update the case to status 51 in ERCS.

(9) Cases will be efaxed with Form 3210 to CCP. See Estate and Gift Knowledge Management, EG Contacts for the current efax number and mailing address for any paper case files.

(1) In addition to the standard closing documents and procedures, the special procedures in this section are required for closing delinquent returns where there have been adjustments made to the delinquent return but the tax due does not change. The adjustments include any adjustments to the unified credit as originally filed.

(2) Prepare a Report of Examination Changes (Report) using the Estate and Gift Notebook. Use the amounts from the delinquent return as the starting figures.

(3) Complete Form 5344 paying close attention to the following:

• Enter TC 300 at Item 12 using only the increase or decrease of the amount processed on the delinquent return.

• Enter TC 160 with 0 or the amount of penalties that apply at Item 12. There must be a TC 160 entry.

• Enter disposal code 01 at Item 13.

• Enter a "T" at Item 37 for the first delinquent return secured and "R" for all others.

• Enter an amount at Item 414 to reflect the balance due or the refund amount excluding penalty per the delinquent return. Do not include the audit adjustment amount at Item 414.

• Enter an amount at Item 422 if the unified credit amount used on the delinquent gift tax return has changed and no tax is reflected on Form 709, United States Gift (and Generation - Skipping Transfer) Tax Return.

(4) Include a copy of the delinquent return. Notate in red at the top of the copy "Copy of Return".

(5) Include all workpapers as described in IRM 4.25.1.9 .

(6) Include a copy of Form 5345-D.

(7) Form 3198 should reflect:

• "Secured Delinquent Return, Additional Adjustments" in the Special Features section.

• Notate whether penalties apply. Include the code section if penalties are being assessed. If no penalties are to be assessed, write "DO NOT ASSESS PENALTIES" in the special features section.

(8) The administrative staff will update the case to status 51 in ERCS.

(9) Cases will be efaxed with Form 3210 to CCP. See Estate and Gift Knowledge Management, EG Contacts for the current efax number and mailing address for any paper files.

(1) In addition to the standard closing documents and procedures, the special procedures in this section are required for closing delinquent returns where there is a change to the tax due and/or to the unified credit as shown on the original delinquent return and the taxpayer agrees.

(2) Prepare a Report of Examination Changes (Report) using the Estate and Gift Notebook. Use the amounts from the delinquent return as the starting figures on the Report.

(3) Complete Form 5344 paying close attention to the following:

• Enter TC 300 at Item 12 using only the increase or decrease of the amount processed on the delinquent return.

• Enter TC 160 with 0 or the amount of penalties that apply at Item 12. There must be a TC 160 entry.

• Enter disposal code 03 at Item 13. Enter a "T" at Item 37 for the first delinquent return secured and "R" for all others.

• Enter an amount at Item 414 to reflect the balance due or the refund amount excluding penalty per the delinquent return. DO NOT include the audit adjustment amount at Item 414.

• Enter an amount at Item 422 if the unified credit amount used on the delinquent gift tax return has changed and no tax is reflected on Form 709.

(4) Include a copy of the delinquent return. Notate in red at the top of the copy "Copy of Return".

(5) Include all workpapers using as described in IRM 4.25.1.9.

(6) Include a copy of Form 5345-D.

(7) Form 3198 should reflect:

• "Secured Delinquent Return, Additional Adjustments" in the Special Features section.

• Notate whether penalties apply. Include the code section if penalties are being assessed. If no penalties are to be assessed, write "DO NOT ASSESS PENALTIES" in the special features section.

(8) Form 890, Waiver of Restrictions on Assessments and Collection of Deficiency and Acceptance of Overassessments - Estate, Gift, and Generation-Skipping Transfer Tax, signed by the taxpayer.

(9) The administrative staff will update the case to status 51 in ERCS.

(10) The administrative staff will enter additional assessment under "Deficiency" on ERCS.

(11) Cases will be efaxed with Form 3210 to CCP. See Estate and Gift Knowledge Management, EG Contacts for the current efax number and mailing address for any paper files.

(1) The special procedures in this section are required for closing delinquent returns where there is a change to the tax due and/or where a change has been made to the unified credit that was shown on the original delinquent return and the taxpayer does not agree.

(2) Follow regular procedures for issuance of a 30 day or 90 day Letter to the taxpayer. Based on the type of Letter issued and the response from the taxpayer, use the procedures below to close the case from the group. See IRM 4.25.10.7.3, 30-Day Letter Procedures, IRM 4.25.10.7.4, Statutory Notice of Deficiency Procedures and IRM 4.25.10.7.2, Unagreed No Change with Adjustment Gift Tax Period - IRC 7477 Procedures.

(3) Prepare a Report of Examination Changes (Report) using the Estate and Gift Notebook. Use the amounts from the delinquent return as the starting figures on the Report.

(4) Complete Form 5344 paying close attention to the following:

• Enter TC 300 at Item 12 using only the increase or decrease of the amount processed on the delinquent return.

• Enter TC 160 with 0 or the amount of penalties that apply at Item 12. There must be a TC 160 entry.

• Enter the appropriate disposal code based on 30 day or 90 day Letter procedures for regular examinations.

• Enter a "T" at Item 37 for the first delinquent return secured and "R" for all others.

• Enter an amount at Item 414 to reflect the balance due or the refund amount excluding penalty per the delinquent return. DO NOT include the audit adjustment amount at Item 414.

• Enter an amount at Item 422 if the unified credit amount used on the delinquent gift tax return has changed and no tax is reflected on Form 709.

(5) Include a copy of the delinquent return. Notate in red at the top of the copy "Copy of Return".

(6) Include all workpapers as described in IRM 4.25.1.9.

(7) Include a copy of Form 5345-D.

(8) Form 3198 should reflect:

• "Secured Delinquent Return, Additional Adjustments" in the Special Features section and instructions to forward the case to Technical Services Knowledge Management.

• "Unagreed Case" in the Forward to Technical Services section.

• Notate whether penalties apply. Include the code section if penalties are being assessed. If no penalties are to be assessed, write "DO NOT ASSESS PENALTIES" in the special features section.

(9) The administrative staff will update the case to status 21 in ERCS.

(10) The administrative staff will enter any additional assessment under "Deficiency" on ERCS.

(11) Cases will be forwarded with Form 3210 to Technical Services Knowledge Management.

(1) In certain situations, the filing of an amended return to correct a delinquent return requires special attention. When possible, the taxpayer should be instructed to file directly with the examiner.

(2) If a taxpayer filed a delinquent return with an examiner, then wants to file an amended return for the same tax period, the examiner should hold the amended return until the TC 150 posts on the delinquent return. After the TC 150 posts, the examiner may consider any changes reflected in the amended return and make the necessary adjustments.

(3) If a taxpayer files an amended return with the campus, then TC 97X will be posted. This reflects the receipt of the return and generates an "-A" freeze on the account.

(1) In addition to the standard closing documents and procedures, the special procedures in this section should be followed for closing substitute for returns where there is a Report with adjustments shown that is prepared by an examiner and signed by the taxpayer, but no tax is due. This includes cases where an adjustment to unified credit is the only change.

(2) Complete Form 5344 as follows:

• Write in the top margin using red ink, "Original Return – SFR"

• Enter TC 160 with 0 or the amount of penalties that apply at Item 12. There must be a TC 160 entry

• Enter disposal code 01 at Item 13

• Do not complete Item 34

• Do not complete Item 414

• Enter an amount at Item 422 if the unified credit amount used on the delinquent gift tax return has changed and no tax is reflected on Form 709

(3) Include a transcript in the case file showing a posted TC 150SFR.

(4) Include all workpapers as described in IRM 4.25.1.9.

(5) Include a copy of Form 5345-D.

(6) Complete Form 3198 to reflect the following:

• Check the appropriate box for "SFR case" in the Special Features section.

• Identify the Report signed by the taxpayer as the original return.

• Notate whether penalties apply. Include the code section if penalties are being assessed. If no penalties are to be assessed, write "DO NOT ASSESS PENALTIES" in the special features section.

(7) The administrative staff will update the case to status 51 in ERCS.

(8) Cases will be efaxed with Form 3210 to CCP. See Estate and Gift Knowledge Management, EG Contacts for the current efax number and mailing address for any paper case files.

(1) In addition to the standard closing documents and procedures, the special procedures in this section should be followed for closing substitute for returns where there is a Report with adjustments showing tax due that is prepared by an examiner and signed by the taxpayer.

(2) Complete Form 5344 paying close attention to the following:

• Write in the top margin using red ink, "Original Return – SFR".

• Enter TC 160 with 0 or the amount of penalties that apply at Item 12. There must be a TC 160 entry.

• Enter disposal code 03 at Item 13.

• Do not complete Item 34.

• Do not complete Item 414.

(3) Include a transcript in the case file showing a posted TC 150SFR.

(4) Include a copy of Form 5345-D.

(5) On Form 3198 reflect the following in the comments section:

• Check the appropriate box for "SFR case" in the Special Features section.

• Write "Report signed by the taxpayer is the agreement" in the Special Features section.

• Notate whether penalties apply. Include the code section if penalties are being assessed. If no penalties are to be assessed, write "DO NOT ASSESS PENALTIES" in the special features section. See IRM 20.1.2.3.10, Substitute for Return - IRC 6651(g).

(6) All SFRs having tax adjustments that follow deficiency procedures with the failure to pay (FTP) penalty applied under IRC 6651(g) must have a Form 13496, IRC Section 6020(b) Certification, completed. See IRM 20.1.2, Penalty - Failure to File/Failure to Pay Penalties, and IRM 20.1.2.3 for more information.

(7) The administrative staff will update the case to status 51 in ERCS.

(8) Cases will be efaxed with Form 3210 CCP. See Estate and Gift Knowledge Management, EG Contacts for the current efax number and mailing address for any paper case files.

(1) The special procedures in this section should be followed when closing substitute for returns where a Report was prepared by an examiner but NOT signed by the taxpayer. This section applies whether or not the Report shows tax due.

(2) Follow regular procedures for issuance of a 30 day or 90 day Letter to the taxpayer. Based on the type of letter issued and the response from the taxpayer, use the procedures below to close the case from the group. See IRM 4.25.10.7.2, IRC 7477 Procedures for No Change with Adjustment Gift Tax Cases, IRM 4.25.10.7.3, 30-Day Letter Procedures, and IRM 4.25.10.7.4, Statutory Notice of Deficiency Procedures.

(3) Include a Report using zero as the starting figures.

(4) All SFRs having tax adjustments that follow deficiency procedures with the failure to pay (FTP) penalty applied under IRC 6651(g) must have a Form 13496, IRC Section 6020(b) Certification, completed. See IRM 20.1.2, Penalty - Failure to File/Failure to Pay Penalties, for more information.

(5) Complete Form 5344 as follows:

• In the top margin, write in red ink "Original Return – SFR".

• Enter the applicable disposal code at Item 12.

• Enter TC 160 with 0 or the amount of penalties that apply at Item 12. There must be a TC 160 entry.

• Do not complete Items 34 or 414.

• Enter an amount at Item 422 if any unified credit amount is used on the Report and no tax is reflected on Form 709.

(6) Include a transcript in the case file showing a posted TC 150SFR.

(7) Include a copy of Form 5345-D, as described at IRM 4.25.8.5.1, Establishing Entity and Controls for SFRs.

(8) On Form 3198 reflect the following:

• Check the appropriate box for "SFR case" in the Special Features section.

• Check the appropriate box for Unagreed Case in the Forward to Technical Services section.

• Notate whether penalties apply. Include the code section if penalties are being assessed. If no penalties are to be assessed, write "DO NOT ASSESS PENALTIES" in the special features section.

(9) The administrative staff will update the case to status 21 in ERCS.

(10) The administrative staff will input the appropriate disposal code.

(11) Cases will be forwarded with Form 3210 to Technical Services. The addresses for local Technical Services Offices may be found on the Technical Services Knowledge Management.

(1) The special procedures in this section should be followed when closing substitute for returns where the taxpayer signs the waiver agreeing with the recommended Substitute for Return (SFR) tax adjustment, but does not agree with the proposed penalty or addition to tax assessment.

(2) IRC 6651(g) provides that a "return" that the Secretary prepares under IRC 6020(b) functions as a return filed by the taxpayer for purposes of determining the failure-to-pay addition to tax under IRC 6651(a)(2) (i.e., Failure to Pay penalty). All SFRs with tax adjustments must provide a sufficient basis on which the FTP penalty is based. The SFR and FTP penalty must also be subscribed in accordance with IRC 6020(b) to fulfill the burden of production requirements of IRC 7491(c). To satisfy these requirements, at the conclusion of an SFR examination the examiner must prepare and sign Form 13496, IRC Section 6020(b) Certification. Prepare and date the certification (Form 13496) after the 30-day letter (or revised 30-day letter), report summarizing exam changes, or equivalent report of adjustments so that the date of the certification is identical to, or later than, the 30-day letter, report of exam changes or equivalent report of adjustments.

(3) The Form 13496 certifies that the SFR report and signed waiver agreeing to the tax assessment shall be treated as the return filed by the taxpayer for purposes of determining the amount of the additions to tax under paragraphs (2) and (3) of IRC 6651(a).

(4) Failure to provide sufficient basis for the penalty, or prepare Form 13496 may result in the IRS's inability to impose the failure to pay penalty. See Cabirac v. Commissioner, 120 T.C. 163 (2003), aff’d in an unpublished opinion, No. 03-3157 (3d Cir. Feb 10, 2004); Rhodes v. Commissioner, T.C. Memo 2003-133; Spurlock v. Commissioner, T.C. Memo 2003-124. See IRM 20.1.2.3.10.1, Processing When Deficiency Procedures Apply.

(5) The receipt of the taxpayer’s signed waiver, agreeing to the entire tax adjustment results in the resolution of the tax at issue. Since the United States Tax Court is a court of limited jurisdiction, the court may exercise jurisdiction only to the extent expressly provided by Congress. See IRC 7442. IRC 6213 confers jurisdiction on the Tax Court to redetermine deficiencies in income, estate, gift, and certain excise taxes. The provision which confers jurisdiction on the court to review an addition to tax for late filing is IRC 6665. If no part of the determined addition-to-tax or penalty is attributable to a tax deficiency, the Tax Court no longer has jurisdiction to decide the merits of the addition-to-tax or penalty. See Forgey v. Commissioner, 115 TC 142 (2000). A statutory notice of deficiency cannot be issued for the addition-to-tax or penalty. The case will be closed as an agreed case, with all penalty assessment information recorded on the Form 3198 and Form 5344. See IRM 4.25.10, Case Closing Procedures. The taxpayer may appeal the penalty after assessment.

(6) After determining that the taxpayer agrees with the tax assessment, but does not agree with the penalty determination, the examiner should prepare three copies of the Letter 950-S, 30-Day Letter for SFR with Agreed Tax and Unagreed Penalty, letter package to provide notice to the taxpayer that they have post assessment appeal rights. Each of the completed documents in the Letter 950-S package items (a) through (d), should be uploaded to IMS prior to closure. The Letter 950-S package must contain the following documents:

1. Letter 950-S

2. Examination Report using zero as the starting figures. The Report should fully explain the factual and legal justification for the recommended penalty assessment

3. Signed Agreement Form 890

4. Form 13496, IRC Section 6020(b) Certification, (Form 13496 should not be provided to the taxpayer or the taxpayer’s representative)

5. Pub 4576, Orientation to Penalty Appeals Process

6. Envelope with taxpayer’s address

7. Self-addressed envelope

(7) After issuing the Letter 950-S package to the taxpayer, the examiner may close the tax assessment case to CCP using standard partially agreed case closing procedures. See IRM 4.25.10.8, Estate and Gift Tax Examination, Case Closing Procedures, Partially Agreed, Partially Unagreed Case.

(8) The examiner should wait to close the electronic IMS penalty case file until the expiration of the unagreed penalty protest period established in the Letter 950-S. The examiner should document the protest period deadline, and any extensions in the IMS penalty case using the Case Level Activity Record in IMS.

1. If the taxpayer does not submit a protest by the response deadline the examiner should synchronize and close the electronic case on IMS.

2. If the Taxpayer submits a protest within the required response timeframe the examiner should close the unagreed penalty case issues to appeals for determination. See IRM 4.25.10.8.2, Closure of the Unagreed Portion.