Part 20. Penalty and Interest All Official Use Only content has been replaced with ≡. * 20.1.1.1 Overview 20.1.1.1 (12-11-2009) 1. This section discusses the chapter format of the Penalty Handbook, IRM 20.1. It also includes the: Purpose of penalties, Managerial Approval of Penalties, Criteria for Penalty Relief, General Procedural Requirements, Methods of Appealing Penalties, and Master File Indicators 2. The Penalty Handbook serves as the foundation for addressing administration of penalties by various IRS functions. By providing one source of authority for the administration of penalties, the IRS greatly reduces inconsistencies regarding penalty application. Refer to IRM 9.1.3, Criminal Investigation - Criminal Statutory Provisions and Common Law, for Criminal Penalty provisions. 3. The Penalty Handbook provides guidance to all areas of the IRS for all Civil penalties imposed by the Internal Revenue Code (IRC). It sets forth general policy and procedural requirements for assessing and abating penalties, and it contains discussions on topics such as criteria for relief from the penalties. IRM 20.1 is the primary source of authority for the administration of penalties by the IRS. IRS functions may develop additional guidance or reference materials for their specific functional administrative needs. However, such reference material must receive approval from Servicewide Penalties prior to distribution and must remain consistent with: The policies and general procedural requirements set forth in this IRM, and The philosophy of the penalty policy statement. See Exhibit 20.1.1-1, Penalty Policy Statement 20–1 . 5. See Exhibit 20.1.1-7 for the Table of Abbreviations and Acronyms, and See Exhibit 20.1.1-8 for the Dictionary of Key Terms . 20.1.1.1.1 (02-22-2008) 1. In 1955, there were approximately 14 penalty provisions in the Internal Revenue Code. There are now more than ten times that number. With the increasing number of penalty provisions, the IRS recognized the need to develop a fair, consistent, and comprehensive approach to penalty administration. In November 1987, the Commissioner established a task force to study civil penalties, and in February 1989, the Commissioner’s Executive Task Force issued a "Report on Civil Tax Penalties. " The report established a philosophy concerning penalties, provided a statutory analysis of the three broad categories of penalties (filing of returns, payment of tax, accuracy of information), and made recommendations where warranted to resolve the inconsistencies. Those recommendations were, in part, that the IRS should: Develop and adopt a single penalty policy statement emphasizing that civil tax penalties exist for the purpose of encouraging voluntary compliance, Develop a single consolidated handbook on penalties for all employees. The handbook should be sufficiently detailed to serve as a practical everyday guide for most issues of penalty administration and provide clear guidance on computing penalties, Revise existing training programs to ensure consistent administration of penalties in all functions for the purpose of encouraging voluntary compliance, Examine its communications with taxpayers (including penalty notices and publications) to determine whether these communications do the best possible job of explaining why the penalty was imposed and how to avoid the penalty in the future, Finalize its review and analysis of the quality and clarity of machine-generated letters and notices used in various areas within the IRS, Consider ways to develop better information concerning the administration and effects of penalties, and Develop a Master File database to provide statistical information regarding the administration of penalties. That information would be continuously reviewed for the purpose of suggesting changes in compliance programs, educational programs, penalty design and penalty administration. 3. In keeping with the Commissioner’s Executive Task Force Report and Congressional recommendations, the consolidated penalty IRM was developed. 20.1.1.1.2 (12-11-2009) 1. This handbook is arranged in a user-friendly format. The chapters follow the logical sequence of events when working a penalty case. Appropriate headings are provided that describe the text that follows. The handbook is designed for use both as an everyday reference guide and as a training document. Figures and examples are included in the text where they are most useful. Figures that are referenced frequently throughout the text are included as chapter exhibits to conserve space. The handbook contains criteria, guidelines, and general procedural requirements for asserting, not asserting, and abating penalties. Chapters are included covering the penalty policy statement and philosophy, the application of reasonable cause, and the procedures for penalty appeals. The sections in IRM 20.1 are: 4. This IRM contains Exhibits to assist the user in researching penalty issues: See Exhibit 20.1.1-1, Penalty Policy Statement See Exhibit 20.1.1-2, Penalty Relief Application Chart See Exhibit 20.1.1-3, Penalty Reason Code Chart See Exhibit 20.1.1-4, Penalty Transaction Codes See Exhibit 20.1.1-5, Penalty Reference Numbers — 500 Series See Exhibit 20.1.1-6, Penalty Reference Numbers — 600 Series See Exhibit 20.1.1-7, Table of Abbreviations and Acronyms See Exhibit 20.1.1-8, Dictionary of Key Terms 20.1.1.1.2.1 (12-11-2009) 1. Servicewide Penalties has overall responsibility for coordinating and approving any update to IRM 20.1, Penalty Handbook. Servicewide Penalties' role is to ensure fairness and consistency in penalty administration. Employees should use Form 5391, System Change Request, to suggest technical corrections to IRM procedures and instructions. 20.1.1.1.3 (12-11-2009) 1. Overall responsibility for penalty programs is assigned to Servicewide Penalties. Servicewide Penalties is a matrix organization residing in Exam Policy (Small Business/Self Employed) Division. Servicewide Penalties is charged with coordinating policy and procedures concerning the administration of penalty programs, ensuring consistency with the penalty policy statement, reviewing and analyzing penalty information, researching penalty effectiveness on compliance trends, and determining appropriate action necessary to promote voluntary compliance. Every function in the IRS has a role in proper penalty administration. It is essential that each function conduct its operations with an emphasis on promoting voluntary compliance. Appropriate business reviews should be conducted to ensure consistency with the penalty policy statement and philosophy. Attention should be directed to the coordination of penalty programs between offices and functions to make sure that approaches are consistent and penalty information is used for identifying and responding to compliance problems. Managers should continuously review information for trends that may suggest changes in compliance programs, training courses, educational programs, penalty design, and penalty administration. Managers should institute, on an ongoing basis, a quality review system that evaluates the timely and correct disposition of penalty cases and encourages consistent administration of penalties. All employees should keep the following objectives in mind when handling each penalty case: Similar cases and similarly-situated taxpayers should be treated alike. Each taxpayer should have the opportunity to have their interests heard and considered. Strive to make a good decision in the first instance. A wrong decision, even though eventually corrected, has a negative impact on voluntary compliance. Provide adequate opportunity for incorrect decisions to be corrected. Treat each case in an impartial and honest way (i.e., approach the job, not from the government’s or the taxpayer’s perspective, but in the interest of fair and impartial enforcement of the tax laws). Use each penalty case as an opportunity to educate the taxpayer, help the taxpayer understand their legal obligations and rights, assist the taxpayer in understanding their appeal rights and, in all cases, observe the taxpayer’s procedural rights. Endeavor to promptly process and resolve each taxpayer’s case. Resolve each penalty case in a manner which promotes voluntary compliance. 20.1.1.1.4 (02-22-2008) 1. Service officials and managers must communicate security standards contained in the Manager’s Security Handbook ( IRM 1.4.6) to subordinate employees and establish methods to enforce them. Employees are responsible for taking required precautions to provide security for the documents, information, and property that they handle in performing official duties. Employees using IDRS should only access those accounts required to accomplish their official duties. Any unauthorized access or browsing of tax accounts by employees is prohibited by the IRS. IRM 10.8.1 provides the authority and standards for Information Technology security. 20.1.1.1.5 (12-11-2009) 1. While the IRS is always striving to improve its systems and provide better service, some taxpayers still have difficulty obtaining a solution to a problem or a timely and appropriate response to an inquiry. The purpose of TAS is to give taxpayers someone to speak for them within the IRS—an advocate. An advocate conducts an independent and impartial analysis of all information relevant to the taxpayer's problem. TAS guarantees that taxpayers will have someone to make sure their rights are protected, someone to turn to when the system is not responsive to their needs. TAS steps in and takes action on behalf of taxpayers when their complaints or inquiries meet TAS criteria. See IRM 13.1.1, Taxpayer Advocate Case Procedures, Legislative History and Organizational Structure. The purpose of the criteria is to ensure that problems and complaints that have not been handled properly through normal channels are included in TAS. See IRM 13.1.7, Taxpayer Advocate Case Procedures-TAS Case Criteria. 20.1.1.1.6 (12-11-2009) 1. Refer taxpayers to the Taxpayer Advocate Service (TAS) (see IRM Part 13, Taxpayer Advocate Service) when the contact meets TAS criteria (see IRM 13.1.7, TAS Case Criteria) and you can't resolve the taxpayer's issue the same day. The definition of "same day" is within 24 hours. "Same day" cases include cases you can completely resolve in 24 hours, as well as cases in which you have taken steps within 24 hours to begin resolving the taxpayer's issue. Do not refer these cases to TAS unless they meet TAS criteria and the taxpayer asks to be transferred to TAS. See IRM 13.1.7.4, Same Day Resolution by Operations . When referring cases to TAS, use Form 911, Request for Taxpayer Advocate Service Assistance (and Application for Taxpayer Assistance Order), and forward to TAS in accordance with your local procedures. 20.1.1.2 (02-22-2008) 1. Penalties exist to encourage voluntary compliance by supporting the standards of behavior required by the Internal Revenue Code. For most taxpayers, voluntary compliance consists of preparing an accurate return, filing it timely, and paying any tax due. Efforts made to fulfill these obligations constitute compliant behavior. Most penalties apply to behavior that fails to meet any or all of these obligations. The following factors support the public conviction that the tax system is fair and the penalty is in proportion to the severity of the noncompliance. Penalties encourage voluntary compliance by: Defining standards of compliant behavior, Defining consequences for noncompliance, and Providing monetary sanctions against taxpayers who do not meet the standard. 20.1.1.2.1 (02-22-2008) 1. Taxpayers in the United States assess their tax liabilities against themselves and pay them voluntarily. This system of self-assessment and payment is based on the principle of voluntary compliance. Voluntary compliance exists when taxpayers conform to the law without compulsion or threat. Compliant self-assessment requires a taxpayer to know the rules for filing returns and paying taxes. The IRS is responsible for providing information to taxpayers, which includes: Written materials that clearly explain the rules, and Forms that permit the self-computation of tax liability. 3. In addition to (2) above, the IRS must also provide a means to preserve and enhance our voluntary compliance by fairly, consistently, and accurately administering a system of penalties. Although penalties support and encourage voluntary compliance, they also serve to bring additional revenues into the Treasury and indirectly fund enforcement costs. However, these results are not reasons for creating or imposing penalties. Penalties advance the mission of the Service when they encourage voluntary compliance. The IRS has formalized this obligation to the public in its Mission Statement. Voluntary compliance is achieved when a taxpayer makes a good faith effort to meet the tax obligations defined by the Internal Revenue Code. Penalties support voluntary compliance by assuring compliant taxpayers that tax offenders are identified and penalized. The IRS has the obligation to advance the fairness and effectiveness of the tax system. Penalties should: Be severe enough to deter noncompliance, Encourage noncompliant taxpayers to comply, Be objectively proportioned to the offense, and Be used as an opportunity to educate taxpayers and encourage their future compliance. 9. IRS personnel may educate taxpayers and encourage their future compliance by: Discussing causes for the delinquency and listening to taxpayer’s reasons and concerns for noncompliance, Ensuring that taxpayers understand their filing and paying responsibilities, and Being alert to information received in discussions with taxpayers that indicate possible reasons for abatement of a penalty. 10. Penalties should relate to the standards of behavior they encourage. Penalties best aid voluntary compliance if they support belief in the fairness and effectiveness of the tax system. This belief encourages compliance in areas that cannot be reached through audits or other programs. The Service’s approach to penalties is embodied in Penalty Policy Statement 20-1. See Exhibit 20.1.1-1. 20.1.1.2.2 (02-22-2008) 1. The IRS’s approach to penalty administration must ensure: Consistency: The IRS should apply penalties equally in similar situations. Taxpayers base their perceptions about the fairness of the system on their own experience and the information they receive from the media and others. If the IRS does not administer penalties uniformly (guided by the applicable statutes, regulations, and procedures), overall confidence in the tax system is jeopardized. Accuracy: The IRS must arrive at the correct penalty decision. Accuracy is essential. Erroneous penalty assessments and incorrect calculations confuse taxpayers and misrepresent the overall competency of the IRS. Impartiality: IRS employees are responsible for administering the penalty statutes and regulations in an even-handed manner that is fair and impartial to both the government and the taxpayer. Representation: Taxpayers must be given the opportunity to have their interests heard and considered. Employees need to take an active and objective role in case resolution so that all factors are considered. 20.1.1.2.3 (12-11-2009) 1. IRC section 6751(b)(1)states, "In general, that no penalty under the Code shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate. " At this time, the Secretary has not designated any higher level official to approve initial determinations. Notwithstanding the exception noted in paragraph 3 below, this approval requirement will also apply to the imposition of any fraud penalty including fraudulent failure to file penalty under IRC section 6651(f). IRC section 6751(b)(2) provides an exception to the managerial approval requirement for penalties calculated through electronic means. This exception applies to the following penalties: IRC section 6651 (failure to file tax return or to pay tax), IRC section 6654 (failure by individual to pay estimated income tax), IRC section 6655 (failure by corporation to pay estimated income tax), and any other penalties automatically calculated through electronic means (see paragraph 5 below). For purposes of this section, the term "penalty" includes any addition to tax or any additional amount ( IRC section 6751(c)). "Penalty automatically calculated through electronic means " means something more than merely an electronic device to perform arithmetic functions to determine the amount of a penalty. Instead, the assessment of a penalty qualifies as one calculated through electronic means if the penalty is assessed free of any independent determination by an IRS employee as to whether the penalty should be imposed against a taxpayer. The managerial review and approval must be documented in writing and retained in the case file. The manager must indicate the decision reached, and sign and date the case history document. IRC section 6751(b) does not require the IRS to provide a taxpayer with a copy of the manager's written approval of penalties assessed against the taxpayer. However, the IRS may wish to provide the taxpayer with a courtesy copy of the document showing that a manager approved the penalties. Taxpayers are entitled to request these documents under the Freedom of Information Act. IRC section 6751(b) provides that the assessment of a penalty shall be "approved (in writing) by the immediate supervisor of the individual making the initial determination of such assessment." Generally, an immediate supervisor is the person who writes an employee's evaluation or approves the employee's leave. On-the-Job Instructors do not qualify as the "immediate supervisor" for the purpose of IRC section 6751(b). 20.1.1.2.3.1 (12-11-2009) 1. A tax examination change report (e.g. Form 4549, Income Tax Examination Change Report,) that includes penalties may be approved by a manager in writing after the report is presented to a taxpayer for signature. The report does not have to be reviewed by a manager prior to discussions with the taxpayer regarding the penalties. Nor does the report have to be reviewed before the taxpayer agrees to the penalties. However, the manager must perform a meaningful review of the employee's penalty determination prior to assessment. The manager should verify that the penalties were fairly imposed and accurately computed, that the employee did not improperly assert the penalties in the first instance as a bargaining chip, and that the employee's conclusions regarding "reasonable cause" (or the lack thereof) were proper. 20.1.1.2.3.2 (12-11-2009) 1. When the IRC section 6662 accuracy-related penalties for negligence and substantial understatement are assessed under the Automated Underreporter Program without an employee independently determining the appropriateness of the penalty, the penalty is one automatically calculated through electronic means and may be assessed without written managerial approval of the penalty. However, if a taxpayer responds either to the initial letter proposing a penalty or to the notice of deficiency that the program automatically issues, an IRS employee must consider the response. When considering the response, the employee must make an independent determination as to whether the response provides a basis upon which the taxpayer may avoid the penalty. Whether the employee decides to apply the penalty or not, the employee's independent determination of whether the penalty is appropriate means that the penalty is not automatically calculated through electronic means. Accordingly, IRC section 6751(b)(1) would require written managerial approval of an employee's determination to assert the penalty. 20.1.1.2.3.3 (12-11-2009) 1. IRC section 6751(b) applies, and managerial approval is required, when an IRS employee does not use IDRS Command Code (CC) FTDPN to determine whether the federal tax deposit (FTD) penalty applies (IRC section 6656). This determination is not free of any independent determination by an IRS employee as to whether the penalty should be imposed against a taxpayer. Managerial approval is not required when CC FTDPN is used to determine an FTD penalty. For example, managerial approval is not required if CC FTDPN was used to determine the penalty on the following types of cases: CP 194 (Potential FTD Penalty) CP 207 (Notice of Insufficient Deposit Information) CP 207L (Proposed FTD Penalty (>= $75,000), Request for Correct ROFT Information) CP 193 (Amended/Supplement Tax/Duplicate Filing Condition) Note: The FTDPN print-out becomes part of the case source document. 20.1.1.3 (02-22-2008) 1. Generally, relief from penalties falls into four separate categories: Reasonable Cause Statutory Exceptions Administrative Waivers Correction of Service Error 2. Appeals may recommend the abatement or non-assertion of a penalty based on these four criteria as well as "Hazards of Litigation." This chapter discusses each of these categories and the related criteria. In the interest of fairness, the IRS will consider requests for penalty relief received from third parties, including requests from representatives without an authorized power of attorney. While information may be accepted, NO taxpayer information may be discussed with a third party unless a valid power of attorney or other acceptable authorization is secured in writing from the taxpayer. See IRM 20.1.1.3.1#. If additional information is needed, contact the taxpayer or the taxpayers authorized representative. If the validity of the request is questionable, contact the taxpayer. In all cases involving third party requests for penalty relief, advise the taxpayer of the request and the action taken. Reminder: When penalty relief is warranted (including a determination not to assert a penalty that is otherwise warranted), a Penalty Reason Code (PRC) is required to indicate the reason a penalty is being removed or suppressed. See IRM 20.1.1.5.1, Master File Penalty Reason Codes. Also, See Exhibit 20.1.1-3, Penalty Reason Code Chart. 20.1.1.3.1 ≡ ≡ ≡ ≡ ≡ ≡ ≡ 1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ 2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ 3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ 4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ 20.1.1.3.2 (12-11-2009) 1. Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply with those obligations. In the interest of equitable treatment of the taxpayer and effective tax administration, the non-assertion or abatement of civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the IRC, Treasury Regulations (Treas. Regs.), Policy Statements, and IRM Part 20.1. Reasonable cause relief is not available for all penalties; however, other exceptions may apply. For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with a prescribed duty within the prescribed time, will be considered. If a reasonable cause provision applies only to a specific Code section, that reasonable cause provision will be discussed in the IRM 20.1 section relating to that specific IRC section. See Exhibit 20.1.1-2, Penalty Relief Application Chart. When considering the information provided in the following pages, remember that an acceptable explanation is not limited to those given in IRM 20.1, Penalty Handbook. Penalty relief may be warranted based on an "other acceptable explanation" , provided the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time. See IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence. 4. The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer’s failure to comply with the law was not due to willful neglect. See specific IRM 20.1 sections for the rules that apply to a specific IRC section. See IRM 20.1.1.1.2 , Organization of IRM 20.1. Taxpayers have reasonable cause when their conduct justifies the non-assertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified in the remainder of this subsection: What happened and when did it happen? During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law? How did the facts and circumstances result in the taxpayer not complying? How did the taxpayer handle the remainder of their affairs during this time? Once the facts and circumstances changed, what attempt did the taxpayer make to comply? 6. Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s noncompliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time. 20.1.1.3.2.1 (12-11-2009) 1. Any reason that establishes a taxpayer exercised ordinary business care and prudence but nevertheless failed to comply with the tax law may be considered for penalty relief. The following Treasury Regulations, under the Code of Federal Regulations (CFR), contain examples of circumstances that may be helpful in determining if a taxpayer has established reasonable cause: Accuracy-Related Penalty: Treas. Reg. 1.6664–4 Failure to Pay Penalty: Treas. Reg. 301.6651–1(c) Failure to File Penalty: Treas. Reg. 301.6651–1(c) Failure to Deposit Penalty: Treas. Reg. 301.6656–1 Information Returns Penalty: Treas. Reg. 301.6723–1A(d) and Treas. Reg. 301.6724–1 Preparer/Promoter Penalties: Treas. Reg. 1.6694–2(d) and Treas. Reg. 301.6707–1T. 3. The following Internal Revenue Service Policy Statements contain specific criteria that may affect the imposition of penalties (see IRM 1.2.1, Servicewide Policies and Authorities - Policies of the Internal Revenue Service): Policy Statement 2–4, Penalties and interest not asserted against Federal agencies ( IRM 1.2.20.1.2) Policy Statement 2–7, Reasonable cause for late filing of return or failure to deposit or pay tax when due ( IRM 1.2.12.1.2) Policy Statement 2–9, Timely mailed returns bearing foreign postmarks to be accepted ( IRM 1.2.12.1.3) Policy Statement 2–11, Certain unsigned returns will be accepted for processing ( IRM 1.2.12.1.5) 20.1.1.3.2.2 (02-22-2008) 1. Ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing that they exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless were unable to comply with the law. In determining if the taxpayer exercised ordinary business care and prudence, review available information including the following: Taxpayer’s Reason: The taxpayer’s reason should address the penalty imposed. To show reasonable cause, the dates and explanations should clearly correspond with events on which the penalties are based. If the dates and explanations do not correspond to the events on which the penalties are based, request additional information from the taxpayer that may clarify the explanation ( See IRM 20.1.1.3.2 , Reasonable Cause). Compliance History: Check the preceding tax years (at least three) for payment patterns and the taxpayer’s overall compliance history. The same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care. If this is the taxpayer’s first incident of noncompliant behavior, weigh this factor with other reasons the taxpayer gives for reasonable cause, since a first- time failure to comply does not by itself establish reasonable cause. Length of Time: Consider the length of time between the event cited as a reason for the noncompliance and subsequent compliance ( See IRM 20.1.1.3.2, Reasonable Cause). Consider: (1) when the act was required by law, (2) the period of time during which the taxpayer was unable to comply with the law due to circumstances beyond the taxpayer’s control, and (3) when the taxpayer complied with the law. Circumstances Beyond the Taxpayer’s Control: Consider whether or not the taxpayer could have anticipated the event that caused the noncompliance. Reasonable cause is generally established when the taxpayer exercises ordinary business care and prudence, but, due to circumstances beyond the taxpayer’s control, the taxpayer was unable to timely meet the tax obligation. The taxpayer’s obligation to meet the tax law requirements is ongoing. Ordinary business care and prudence requires that the taxpayer continue to attempt to meet the requirements, even though late. 20.1.1.3.2.2.1 (12-11-2009) 1. Death, serious illness, or unavoidable absence of the taxpayer may establish reasonable cause for filing, paying, or depositing late for the following: An individual: If there was a death, serious illness, or unavoidable absence of the taxpayer or a death or serious illness in the taxpayer’s immediate family (i.e. spouse, sibling, parents, grandparents, children). A corporation, estate, trust , etc.: If there was a death, serious illness, or other unavoidable absence of the taxpayer (person responsible), or a member of such taxpayer’s immediate family, and that taxpayer had sole authority to execute the return, make the deposit, or pay the tax. 2. If someone other than the taxpayer, or the person responsible, is authorized to meet the obligation, consider the reasons why that person did not meet the obligation when evaluating the request for relief. In the case of a business, if only one person was authorized, determine whether this was in keeping with ordinary business care and prudence. Information to consider when evaluating a request for penalty relief based on reasonable cause due to death, serious illness, or unavoidable absence includes, but is not limited to, the following: The relationship of the taxpayer to the other parties involved, The date of death, The dates, duration, and severity of illness, The dates and reasons for absence, How the event prevented compliance, If other business obligations were impaired, and If tax duties were attended to promptly when the illness passed, or within a reasonable period of time after a death or return from an unavoidable absence. 20.1.1.3.2.2.2 (12-11-2009) 1. Relief from a penalty may be requested if there was a failure to timely comply with a requirement to file a return or pay a tax as the result of a fire, casualty, natural disaster, or other disturbance. However, one of these circumstances by itself does not necessarily provide penalty relief. Penalty relief may be appropriate if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond the taxpayer’s control, they were unable to comply with the law. Factors to consider include: Timing Effect on the taxpayer’s business Steps taken to attempt to comply If the taxpayer complied when it became possible 4. The determination to grant relief from each penalty must be based on the facts and circumstances surrounding each individual case. Determine if the event resulted in a circumstance for which other penalty relief criteria may apply. For example, if the taxpayer was unable to access their records as the result of a fire, See IRM 20.1.1.3.2.2.3 , Unable to Obtain Records. If the taxpayer, or responsible party, was unable to comply because he or she was hospitalized as the result of an accident, See IRM 20.1.1.3.2.2.1 , Death, Serious Illness, or Unavoidable Absence . Determine if the taxpayer could not comply timely because the taxpayer was an "affected person" eligible for disaster relief as provided for in IRM 25.16.1.1, Disaster Assistance and Emergency Relief-Overview. Also See IRM 20.1.1.3.3.6, Official Disaster Area. 20.1.1.3.2.2.3 (12-11-2009) 1. Explanations relating to the inability to obtain the necessary records may constitute reasonable cause in some instances, but may not in others. Consider the facts and circumstances relevant to each case and evaluate the request for penalty relief. If the taxpayer was unable to obtain records necessary to comply with a tax obligation, the taxpayer may or may not be able to establish reasonable cause. Reasonable cause may be established if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond the taxpayer’s control, they were unable to comply. Information to consider when evaluating such a request includes, but is not limited to, an explanation as to: Why the records were needed to comply, Why the records were unavailable and what steps were taken to secure the records, When and how the taxpayer became aware that they did not have the necessary records, If other means were explored to secure needed information, Why the taxpayer did not estimate the information, If the taxpayer contacted the IRS for instructions on what to do about missing information, If the taxpayer promptly complied once the missing information was received, and Supporting documentation such as copies of letters written and responses received in an effort to get the needed information. 20.1.1.3.2.2.4 (12-11-2009) 1. The taxpayer may try to establish reasonable cause by claiming that a mistake was made. Generally, this is not in keeping with the ordinary business care and prudence standard and does not provide a basis for reasonable cause. However, the reason for the mistake may be a supporting factor if additional facts and circumstances support the determination that the taxpayer exercised ordinary business care and prudence but nevertheless was unable to comply within the prescribed time. Information to consider when evaluating a request for an abatement or non-assertion of a penalty based on a mistake or a claim of ignorance of the law includes, but is not limited to: When and how the taxpayer became aware of the mistake, The extent to which the taxpayer corrected the mistake, The relationship between the taxpayer and the subordinate (if the taxpayer delegated the duty), If the taxpayer took timely steps to correct the failure after it was discovered, and The supporting documentation. 20.1.1.3.2.2.5 (12-11-2009) 1. Each request for penalty relief should be reviewed thoroughly to determine the exact basis of the taxpayer's request. Is the taxpayer claiming they did not comply due to specific advice they received from someone, whether orally or in writing, or Is the taxpayer claiming they relied on someone else to comply on their behalf? 2. Certain sections of the Internal Revenue Code and Treasury Regulations provide relief from certain penalties based on erroneous advice. See IRM 20.1.1.3.3.4., Advice , to first determine if a Statutory Exception or Administrative Waiver applies. If the taxpayer states they relied on written or oral advice from the Service but do not qualify for relief in accordance with the criteria in IRM 20.1.1.3.3.4.1, Written Advice from the IRS, or IRM 20.1.1.3.3.4.2, Oral Advice from the IRS, refer to IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence, to determine if the taxpayer exercised ordinary business care and prudence in relying on the Service's advice. The taxpayer may try to establish reasonable cause by claiming they relied on another party to comply on their behalf or that another party provided erroneous advice. Generally, this is not a basis for reasonable cause, particularly for filing or paying obligations, since the taxpayer is responsible for meeting their tax obligations and that responsibility cannot be delegated. However, other factors to consider include: Was the taxpayer unable to comply because they did not have access to their own records? See IRM 20.1.1.3.2.2.3 , Unable to Obtain Records. Was the failure to comply due to a change in the tax law the taxpayer could not reasonably be expected to know? See IRM 20.1.1.3.2.2.6, Ignorance of the Law. 5. Consider all facts and circumstances presented by the taxpayer to determine if, despite the exercise of ordinary business care and prudence, the taxpayer nevertheless was unable to comply. 20.1.1.3.2.2.6 (02-22-2008) 1. In some instances taxpayers may not be aware of specific obligations to file and/or pay taxes. The ordinary business care and prudence standard requires that taxpayers make reasonable efforts to determine their tax obligations. Reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances. For example, consider: The taxpayer’s education, If the taxpayer has previously been subject to the tax, If the taxpayer has been penalized before, If there were recent changes in the tax forms or law which a taxpayer could not reasonably be expected to know, and The level of complexity of a tax or compliance issue. 3. Reasonable cause should never be presumed, even in cases where ignorance of the law is claimed. The taxpayer may have reasonable cause for noncompliance due to ignorance of the law if: A reasonable and good faith effort was made to comply with the law, or The taxpayer was unaware of a requirement and could not reasonably be expected to know of the requirement. 5. See IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence. 20.1.1.3.2.2.7 (02-22-2008) 1. The taxpayer may try to establish reasonable cause by claiming forgetfulness or an oversight by the taxpayer, or another party, caused the noncompliance. Generally, this is not in keeping with the ordinary business care and prudence standard and does not provide a basis for reasonable cause. If the taxpayer claims forgetfulness or an oversight by another party, consider the following: Relying on another person to perform a required act is generally not sufficient for establishing reasonable cause. It is the taxpayer’s responsibility to file a timely return and to make timely deposits or payments. This responsibility cannot be delegated. 2. See IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence. 20.1.1.3.3 (02-22-2008) 1. These two very separate categories are placed together because in many instances an Administrative Waiver is an extension of rules that were provided for by statute. 20.1.1.3.3.1 (12-11-2009) 1. Tax legislation may provide an exception to a penalty. Specific statutory exceptions can be found in either the penalty-related IRC section(s) or the accompanying regulation(s). For example: 2. Legislation with retroactive provisions may provide guidance on associated penalties. As a result of that retroactive provision, the IRS may issue a News Release or other guidance with instructions for the disposition of the related penalties. IRC section 6205 provides for an interest-free adjustment when an employer underreported and underpaid certain employment taxes if specific conditions are met by the employer to report the error and pay the tax due. However, IRC section 6205 and related Treasury Regulations are silent in regard to penalties. Consequently, IRS extended an Administrative Waiver to certain penalties. See IRM 20.1.1.3.3.2, Administrative Waivers. Effective Jan. 1, 2009, Treas. Reg. 31.6205–1 and Treas. Reg. 31.6302–1 have been amended for qualified interest-free adjustments. When all conditions have been met for an employer to qualify for an interest-free adjustment, "the amount timely paid will be deemed to have been timely deposited by the employer. " In other words, "tax deemed to have been timely deposited " is not subject to the Failure to Deposit (FTD), Failure to Pay (FTP), and Failure to File (FTF) penalties. See IRM 21.7.2.5, Adjusted Employer's Federal Tax Return or Claim for Refund, IRM 20.1.2, Failure to File/Failure to Pay Penalties, and IRM 20.1.4, Failure to Deposit Penalty, for required procedures and additional information. When all regulatory requirements have been met for the amount paid to be considered timely deposited by the employer, penalties should not be assessed. If penalties were assessed, the account must be carefully reviewed to determine if penalty relief is appropriate and, if so, the correct reason for relief. Did the taxpayer state s/he met all requirements for an interest-free adjustment? If the adjustment was input with TC 290, see IRM 21.7.2.5, Adjusted Employer's Federal Tax Return or Claim for Refund, to determine if reversal of the TC 290 and reassessment with TC 298 is appropriate. If so and manual penalty reversal is required (Master File will automatically reverse systemic penalty assessments), use Penalty Reason Code (PRC) 044. If the adjustment was input with TC 298, determine if IRS asserted the penalty(s) incorrectly. If so, refer to IRM 20.1.1.3.4, Correction of Service Error. If not, explain the reason for the penalty(s) to the taxpayer. If the taxpayer did not meet all requirements for an interest-free adjustment and established they were unable to comply timely due to reasonable cause (refer to IRM 20.1.1.3.2, Reasonable Cause), use the appropriate PRC for penalty abatement (refer to Exhibit 20.1.1–3, Penalty Reason Code Chart). 20.1.1.3.3.2 (12-11-2009) 1. The IRS may formally interpret or clarify a provision to provide administrative relief from a penalty that would otherwise be assessed. An administrative waiver may be addressed in either a Policy Statement, News Release, or other formal communication stating that the policy of the IRS is to provide relief from a penalty under specific conditions. An administrative waiver may be necessary when there is a delay by the IRS in: Printing or mailing of forms, Publishing guidance (e.g. writing of Regulations), or Other conditions. 3. An example of an administrative waiver is Notice 93–22, 1993-1 C.B. 305. This allowed individuals who requested an automatic four-month extension of time to file an income tax return, an extension of time without remitting the unpaid amount of any tax properly estimated to be due. See Treas. Reg. 1.6081–4. IRC section 6205 addresses the waiving of interest if a tax error is corrected by an employer during the same period in which it is ascertained, provided the payment of the tax assessment is made no later than the due date of the tax return period in which the error was discovered. The waiver applies if the taxpayer has not previously been informed that they underreported their employment taxes. IRS has established an Administrative Waiver to extend the provision of IRC section 6205 to certain penalties for which the code section is silent. While IRC section 6205 has not been updated to extend the provision to certain penalties, Treas. Reg. 31.6205–1 and Treas. Reg. 31.6302–1 have been amended to extend the provision to certain penalties for errors discovered on or after Jan. 1, 2009. See IRM 20.1.1.3.3.1, Statutory and Regulatory Exceptions, for penalty information related to interest-free adjustments for employment taxes for errors discovered on or after Jan. 1, 2009. For errors that are discovered prior to Jan. 1, 2009, the following action will be taken to meet the IRS’s responsibility to provide fair and consistent treatment to taxpayers: For an increase of tax that qualifies for an interest-free adjustment, the IRS will not assess Failure to File (TC 16X), Failure to Pay (TC 27X) or Failure to Deposit (TC 18X) penalties; provided the tax increase is paid by the due date of the tax period in which additional tax was ascertained. If there’s a previously assessed TC 16X, on the tax period, it may be necessary to restrict the Failure to File penalty by entering a TC 160 .00 on the adjustment. 2. The tax adjustment will be represented by a TC 298/308, with an interest computation date. If one of the previously identified penalties has been assessed and a request for abatement is received, the abatement will be done as an Administrative Waiver if the penalty is based on the TC 298/308 tax increase (provided the tax increase was paid by the due date of the tax period in which it was ascertained). 20.1.1.3.3.3 (12-11-2009) 1. An undue hardship may support the granting of an extension of time for paying a tax or deficiency (Form 1127, Application for Extension of Time for Payment of Tax). Treas. Reg. 1.6161–1(b), provides that an undue hardship must be more than an inconvenience to the taxpayer. The taxpayer must show that they would sustain a substantial financial loss if forced to pay a tax or deficiency on the due date. The extension of time to pay does not provide the taxpayer with an extension of time to file. Nor does the extension of time to pay relieve the taxpayer of any appropriate penalties (see IRM 20.1.2.1.9). Undue hardship generally does not affect a person’s ability to file and therefore would not provide a basis for penalty relief in a failure to file situation. However, each request must be considered on a case-by-case basis. Undue hardship may establish reasonable cause for failure to file on magnetic media, under Treas. Reg. 301.6724–1. See IRM 20.1.7, Information Return Penalties. Undue hardship may also support relief from the addition to tax for failure to pay tax if the explanation for the noncompliance supports such a determination. However, the mere inability to pay does not ordinarily provide the basis for granting penalty relief. Under Treas. Reg. 301.6651–1(c), the taxpayer must also show that they exercised ordinary business care and prudence in providing for the payment of the tax liability. The taxpayer may claim that enough funds were on hand, but as a result of unanticipated events, the taxpayer was unable to pay the taxes. Consider an individual taxpayer’s inability to pay a factor when considering penalty relief if the taxpayer shows that, had the payment been made on the payment due date, undue hardship (as defined in Treas. Reg. 1.6161–1(b)) would have resulted. In the case where a taxpayer files bankruptcy, consider inability to pay a factor if the insolvency occurred before the tax payment due date. 5. If a payroll was met, taxes were withheld and should be available for deposit. Employers must reserve money withheld from employees’ wages in trust until deposited. The employer should not use the money for any other purpose. Undue hardship does not support relief from the IRC section 6672, Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax (Trust Fund Recovery Program). Information to consider when evaluating a request for penalty relief includes, but is not limited to, the following: When did the taxpayer know they could not pay? Why was the taxpayer unable to pay? Did the taxpayer explore other means to secure the necessary funds? What did the taxpayer supply in the way of supporting documentation, such as copies of bank statements? Did the taxpayer pay when the funds became available? 7. See Exhibit 20.1.1-3, Penalty Reason Code Chart. 20.1.1.3.3.4 (12-11-2009) 1. This section discusses three basic types of advice that may qualify for Statutory, Regulatory, or Administrative penalty relief: Written advice provided by IRS Oral advice provided by IRS Advice provided by a tax professional 2. Information to consider when evaluating a request for abatement or non-assertion of a penalty due to reliance on advice includes, but is not limited to, the following: Was the advice in response to a specific request and was the advice received related to the facts contained in that request? Did the taxpayer reasonably rely on the advice? 3. The following instances address some situations where penalty relief may not be appropriate even though the taxpayer relied on written advice from the IRS regarding an item on a filed return: The taxpayer did not reasonably rely on the advice regarding an item included on a return if the advice was received after the date the return was filed; A taxpayer may be considered to have reasonably relied on advice received after the return was filed if they then filed an amended return that conformed with such written advice. 2. A taxpayer may not be considered to have reasonably relied on written advice unrelated to an item included on a return, such as advice on the payment of estimated taxes, if the advice is received after the estimated tax payment was due. 4. Did the taxpayer, or their authorized representative, provide the IRS or the tax professional with adequate and accurate information? The taxpayer is entitled to penalty relief for the period during which they relied on the advice. The period continues until the taxpayer is placed on notice that the advice is no longer correct or no longer represents the Service’s position. The taxpayer is placed on notice as the result of any of the following events that present a contrary position and occur after the issuance of the written advice: Written correspondence from the IRS that its advice is no longer correct or no longer represents the IRS’s position, Enactment of legislation or ratification of a tax treaty, A U.S. Supreme Court decision, The issuance of temporary or final regulations, or The publication of a revenue ruling, revenue procedure, or other statement in the Internal Revenue Bulletin. 7. Generally, Form 843, Claim for Refund and Request for Abatement, is required to be filed to request penalty abatement based on erroneous written advice by the IRS. However, if Form 843 is not filed and the information provided demonstrates that abatement of the penalty is warranted, the penalty should be abated, whether or not a Form 843 is provided. Information required to be provided includes: The taxpayer's written request for advice, The erroneous written advice furnished by the Service to the taxpayer and relied on by the taxpayer, and The report (if any) of tax adjustments that identifies the penalty or addition to tax and the item relating to the erroneous written advice. 20.1.1.3.3.4.1 (02-22-2008) 1. The IRS is required by IRC section 6404(f) and Treas. Reg. 301.6404–3 to abate any portion of any penalty attributable to erroneous written advice furnished by an officer or employee of the IRS acting in their official capacity. If the taxpayer does not meet the criteria for penalty relief under IRC section 6404(f), the taxpayer may qualify for other penalty relief. For instance, taxpayers who fail to meet all of the above criteria may still qualify for relief under reasonable cause if the IRS determines that the taxpayer exercised ordinary business care and prudence in relying on the IRS’s written advice. See IRM 20.1.1.3.2.2.5 - Erroneous Advice or Reliance . Requests that qualify for penalty relief based on erroneous written advice from the IRS under IRC section 6404(f) must be filed: Within the period allowed for collection of the penalty or addition to tax, or If the penalty or addition to tax has been paid, within the period allowed for claiming a credit or refund of such penalty or addition to tax. 20.1.1.3.3.4.2 (12-11-2009) 1. The IRS may provide penalty relief based on a taxpayer’s reliance on erroneous oral advice from the IRS. The IRS is required by IRC section 6404(f) and Treas. Reg. 301.6404–3 to abate any portion of any penalty attributable to erroneously written advice furnished by an employee acting in their official capacity. Administratively, the IRS has extended this relief to include erroneous oral advice when appropriate. In addition to considering the criteria provided in Treas. Reg. 301.6404–3 and IRM 20.1.1.3.3.4, Advice, and IRM 20.1.1.3.3.4.1, Written Advice From the IRS, consider the following: Did the taxpayer exercise ordinary business care and prudence in relying on that advice? Was there a clear relationship between the taxpayer’s situation, the advice provided, and the penalty assessed? What is the taxpayer’s prior tax history and prior experience with the tax requirements? Did the IRS provide correct information by other means (such as tax forms and publications)? What type of supporting documentation is available? 3. The following is supporting documentation: A notation of the taxpayer’s question to the IRS, Documentation regarding the advice provided by the IRS, Information regarding the office and method by which the advice was obtained, The date the advice was provided, and The name of the employee who provided the information. 20.1.1.3.3.4.3 (12-11-2009) 1. Reliance on the advice of a tax advisor generally relates to the reasonable cause exception in IRC section 6664(c) for the accuracy-related penalty under IRC section 6662 . See IRM 20.1.5, Return Related Penalties, and Treas. Reg. 1.6664–4(c). However, in very limited instances, reliance on the advice of a tax advisor may provide relief from other penalties when the tax advisor provides advice on a substantive tax issue. The employer researched all available IRS publications on the subject of contract labor, provided clear and convincing documentation as to the duties of the workers to the tax advisor, and requested an opinion from the tax advisor as to whether the workers were "contract labor" or "employees " . As a result, the tax advisor advised the employer that the workers were "contract labor" . However, the IRS later determined that the workers were "employees" and not " contract labor" . 3. Penalty relief based on reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated. The taxpayer’s responsibility to file, pay, or deposit taxes cannot be excused by reliance on the advice of a tax advisor. Because the IRC and Treasury Regulations sections that provide penalty relief criteria for erroneous advice from a tax advisor is generally limited to the accuracy-related penalty, penalty relief from other penalties must meet the reasonable cause standards. See IRM 20.1.1.3.2, Reasonable Cause. Next More Internal Revenue Manual
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