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20.1.3.1
(06-23-2009)
Overview
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This Section of the Penalty IRM 20.1 discusses the estimated tax penalties for both individual (Internal Revenue Code (IRC)
section 6654) and corporate (IRC section 6655) taxpayers.
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Taxpayers are generally required to pay income tax as income is earned. This is accomplished via withholding from income,
or via estimated tax payments. Taxpayers who do not have sufficient amounts withheld, and who fail to make estimated tax payments
as required by law, generally are assessed a penalty for underpayment of estimated tax.
20.1.3.1.1
(06-23-2009)
Penalty Transaction Codes
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ES Penalty Transaction Codes are:
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TC 176 — Computer generated assessment of an ES penalty,
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TC 177 — Computer generated abatement of an ES penalty,
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TC 170 — Manual assessment of an ES penalty by IRS, or self-assessment via Form 2210, Form 2210-F, or Form 2220, as applicable.
Self-assessed ES penalty will have the same DLN as the TC 150 return.
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TC 171 — Manual abatement of an ES penalty by IRS.
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Manual assessments are determined by Area or Campus employees and are input through IDRS or pipeline processing. Employees
who cannot directly input the penalty assessment to IDRS need to follow functional guidelines to request the input of an assessment.
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Manual assessments can be posted alone or along with tax adjustments, credit transfers (doc code 24), or alongside payments
(doc code 17 and 18).
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Manual abatements can also be posted alone or along with tax adjustments or credit transfers (doc code 24 and 48).
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Computer generated assessments and abatements happen when an original return posts, or when timely estimated tax credits (including
withholding) are adjusted.
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A module is restricted from generating ES penalty adjustments if a previous manual IRS adjustment is posted in the module
(does not include self-assessment TC 170), or if the return in the module contained condition code "P"
(IMF), or either "A"
or "8"
(BMF).
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ES penalty must be manually addressed when —
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Adjusting timely estimated tax credits or withholding, and the module is restricted from generating ES penalty adjustments;
or when
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TC 150 posted in the module is not the taxpayer’s original return (i.e. SFR or 6020(b) return; mixed entity or mixed period
with wrong return posted first; adjustment is due to superseding return filed prior to return due date, including extensions);
or when
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TC 150 posted in the previous tax year’s module is not the taxpayer’s original return, and the required annual payment was
based on prior year’s tax.
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Manual penalty abatements (TC 171) require a penalty reason code (PRC) to be present in the fourth reason code position of
the ADJ54 adjustment input screen.
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Use PRC 045 if the original penalty was IRS assessed (TC 176), and the penalty is being adjusted because of either a superseding
return or because the taxpayer provided a Form 2210 or Form 2220 that shows a lower penalty (or no penalty) because the taxpayer
used a different method for computing the penalty (i.e. annualized income installment, adjusted seasonal, withholding reported
when actually withheld).
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Use PRC 044 if all or part of the penalty is abated because the taxpayer qualifies for a specific waiver listed in the Form
2210 or Form 2220 instructions, or if all or part of the penalty is abated because the penalty resulted from the taxpayer's
reliance on erroneous written IRS advice.
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Use PRC 016 if the original penalty was self-assessed (TC 170), and the penalty is being adjusted because the taxpayer or
IRS is providing a corrected computation, or because the taxpayer filed a superseding return.
20.1.3.1.1.1
(06-23-2009)
Computing the Penalty Using IDRS Command Code COMPA
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IDRS command code COMPA with definer "S"
(COMPAS) is available for computing the estimated tax penalty under both IRC sections 6654 and 6655. The basic command
code syntax information can be found in IRM 2.3.29, and in the Job Aid Book on SERP under the IRM Supplements Tab.
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There are two methods for computing the estimated tax penalty using command code COMPAS. Both methods should arrive at the
same penalty if the data is entered correctly.
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Payments and credits are applied under either method first to the earliest unpaid liability.
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Under the Cumulative Liability or Running Balance Method a running balance is computed beginning with the earliest payment
or liability date, and ending with the return due date. COMPAS is used to compute a penalty for each period during the running
balance where the balance is debit.
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Under the Separate Liability Method a separate running balance is computed for each liability beginning with the liability
with the earliest due date. The running balances are computed to the earlier of the return due date or the date the particular
liability is paid in full.
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For an example using both of the above referenced methods, See Exhibit 20.1.3-5.
20.1.3.1.1.2
(06-23-2009)
Return Posted to Wrong TIN or Period
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At times a tax return posts with transaction code 150 to the wrong TIN or tax period. This may happen as a result of taxpayer
error, service error, or (increasingly so) as a result of identity theft.
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Because the computer bases the estimated tax penalty on the tax shown on the return that posts with transaction code 150,
it is nearly always necessary to manually compute and adjust the estimated tax penalty when correcting an account where the wrong return posted
with TC 150. The only exception is the instance where the TC 150 reflects zero tax.
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If the correct return has been received, or has posted in the module with transaction code 976 or 977, follow mixed period
or mixed entity procedures as outlined in IRM 21. Manually compute and adjust the ES penalty based on the lesser of
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tax shown on the correct return, or
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tax as corrected on the correct return.
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If the correct return has not yet been filed, or if a return is not required, manually abate any existing ES penalty. Input
TC 170 for zero amount if there is no existing ES penalty. This will prevent the computer from assessing an ES penalty when
erroneously reported withholding and/or other credit amounts are removed from the module.
20.1.3.1.2
(06-23-2009)
Superseding Returns
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In most cases the estimated tax penalty is computed based on the tax shown on the taxpayer's original return. However, if
the taxpayer files a superseding return, the penalty is computed on the tax shown on that superseding return.
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A superseding return is defined as a return (including an amended return) that is filed after the original return, but on
or before the due date for filing, including extensions. Please note that the terms original and superseding apply to the
order in which the returns were filed, and not to the order in which they were processed.
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The estimated tax penalty MUST be manually computed and adjusted unless—
The manual adjustment requirement applies even if there is no penalty due, or if the penalty does not change. The manual adjustment
will prevent an incorrect computer generated adjustment if withholding or ES payments are changed.
20.1.3.1.3
(06-23-2009)
Requests for Waivers and Abatements — In General
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Waivers are sometimes granted by legislation, regulation, or administrative pronouncements to provide relief from estimated
tax penalties created by the retroactive application of a change in statute or Service position.
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If the taxpayer establishes that the waiver criteria are met, take the necessary action to suppress or adjust the penalty
as appropriate.
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When a determination is made to cancel an estimated tax penalty because the individual is entitled to a waiver, the appropriate
Penalty Reason Code must be entered either on the case file or the input document for entry to the Master File via the appropriate
data entry method.
20.1.3.1.3.1
(06-23-2009)
Estimated Tax Penalty and Reasonable Cause
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The penalty for underpayment of estimated tax cannot be removed or waived for reasonable cause alone.
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The penalty for underpayment of estimated tax generally is not waived as a result of disaster. However, in the case of a Federally
declared disaster area, "the Secretary may specify a period of up to 1 year that may be disregarded"
in determining whether or not estimated tax payments were paid on time. In these cases the IRS will issue a memo with
specific instructions regarding the payment of estimated tax in the affected area.
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Masterfile programming generally takes all special disaster area rules into consideration when computing the penalty for underpayment
of estimated tax. Even when the taxpayer’s books and records are kept within the disaster area, while the taxpayer’s official
address of record is not, manual adjustment of the penalty should not be required for taxpayers affected by a widespread disaster.
See IRM 20.1.3.1.3.2.1.
20.1.3.1.3.2
(06-23-2009)
Waivers
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The criteria for available waivers (if any), as well as instructions for requesting a waiver, are contained in the instructions
for the applicable penalty computation form (Form 2210, Form 2210-F, or Form 2220) for the given period.
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For specific waiver criteria please refer to the form specific instructions: IRC section 6654 for Form 2210 and Form 2210-F,
and IRC section 6655 for Form 2220.
20.1.3.1.3.2.1
(06-23-2009)
Federally Declared Disaster Area
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IRC section 7508A provides that the Secretary of the Treasury may specify a period of up to one year which may be disregarded
in determining whether a required action (such as paying estimated tax) was performed in a timely manner, IF the secretary
determines that the taxpayer was affected by a Federally declared disaster area.
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The determination made by the Secretary (or his delegate) of who was affected, and the period specified to be disregarded,
are published by public notices and news releases. The information can be found on IRS' web site using search key "disaster
tax relief"
. IRS employees can research this information on-line at http://www.icce.irs.gov/fema/ , and at http://serp.enterprise.irs.gov/databases/irm-sup.dr/disaster.dr/disaster-toc.htm .
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IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and
payment relief.
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The following taxpayers also qualify for penalty relief due to Federally declared disaster areas; however, they must call
the IRS disaster hotline at 1-866-562-5227 to request that relief:
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Taxpayers whose books, records, or responsible tax professional are located within a disaster area, while the taxpayer's business
(or residence in the case of individuals) is not.
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Relief workers affiliated with a recognized government or charitable organization assisting in the relief activities in a
covered disaster area.
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If a taxpayer claims that a penalty should not have been charged due to the disaster, follow the instructions below.
Note:
When applicable, the disaster period is excluded in the computation by setting the penalty rate between the disaster start
date and end date equal to zero.
20.1.3.1.3.3
(06-23-2009)
Bankruptcy
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IRC section 6658 prohibits the assertion of the estimated tax penalty on liabilities during the time the case is a pending
bankruptcy proceeding if:
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The tax was incurred by the bankruptcy estate and the failure occurred pursuant to an order of the court finding probable
lack of funds of the estate to pay administrative expenses; or
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The tax was incurred by the debtor before the earlier of the order for relief, or (in the case of an involuntary bankruptcy)
the appointment of a trustee, and
i. the bankruptcy petition was filed before the return due date (including extensions), or
ii. the date for making the addition to the tax occurs on or after the day on which the petition was filed.
20.1.3.1.3.4
(06-23-2009)
Request for Abatement Due to an Erroneous Refund of Estimated Tax Credits
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If the taxpayer claims that an overpayment (credit elect) was refunded in error or if an estimated tax payment was erroneously
refunded by the Service, the taxpayer may be entitled to have a portion of the penalty abated. Verify the taxpayer's statement
by requesting the prior year return and reviewing account information. See LEM 20.1.3.1.3.4 for more information.
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If the penalty was assessed under IRC section 6655, the penalty may not simply be abated. See IRM 20.1.3.3.2.
20.1.3.1.4
(06-23-2009)
Denying the Request for a Waiver
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If the waiver is denied, send an 854C letter using paragraph "V"
informing the taxpayer of the reason for denial and explaining his/her appeal rights. Input TC 290 for zero with blocking
series 98 (without the original return) or with blocking series 99 (with the original return). Also use Reason Code 065 when
denying an IMF penalty.
Note:
If the original return was electronically filed, do not use blocking series 98 unless the controlling DLN doc code is 47,
51 or 54. Instead, use blocking series 99 & attach the appropriate printed transcript (IMFOLR, BMFOLR, TRDBV, RTVUE or BRTVU),
or graphic print for modernized e-file returns.
20.1.3.1.5
(06-23-2009)
Appealing the Penalty
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For a complete discussion of penalty appeals, refer to IRM 20.1.1.
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