IRS Assessment Procedures for Penalties Not Subject to Deficiency Procedures

20.1.9.2  (11-20-2007)
Assessment Procedures for Penalties Not Subject to Deficiency Procedures

  1. This section provides general procedures common to the penalties discussed in this section. Exceptions are noted in the discussion of the specific penalties.

  2. Generally, the penalties included in this section are asserted by international examiners, revenue agents, or tax compliance officers after inquiring about the event, information return or requesting the return from the taxpayer.

    Note:

    In certain situations, the examiner will make the determination that the return is required without first contacting the taxpayer with respect to an income tax examination.

  3. Examiners must perform appropriate research when addressing these penalties. Technical Advisors can provide additional information on specific provisions. The penalty amounts shown reflect current law. See Exhibit 20.1.9-1, Quick Reference Guide to International Penalties. For other detailed examination procedures on international penalties, refer to IRM 4.60.8, International Examination and Processing Procedures.

  4. Deficiency procedures under IRC section 6211 do not apply to penalties discussed in this section. These penalties are noted in Exhibit 20.1.9–4 for information purposes.

  5. U.S. and foreign taxpayers are subject to criminal penalties such as willful failure to file a return (IRC section 7203) and filing a false or fraudulent return (IRC section 7206 or 7207). If at any point these Code sections apply, examiners must discuss the situation with their managers and the fraud specialist before further contacting the taxpayer.

  6. Penalties are assessed on U.S. persons. See IRM 20.1.9.1.1.

  7. Requirement to File. The examiner must determine that the information return was required to be filed before referring to the information listed under the individual Code section and reference number. The following types of information support a presumptive requirement to file an international information return:

    1. Testimony of the taxpayer or other reliable persons.

    2. Late filed return.

    3. A filed return indicating that information returns are due for prior or subsequent periods or for related entities.

    4. A filed return that does not include all the required information or the required supporting information was not provided when requested.

    5. Information that the taxpayer has control over, is receiving benefits from, is receiving distributions or income from an account in the name of a foreign entity.

    6. Statement in the name of the foreign entity addressed to the taxpayer.

    7. Information received from promoter investigations that indicates the taxpayer owns or has control over a foreign entity, is controlled by a foreign entity, or meets another filing requirement.

  8. Fact of Filing. The examiner must determine that the information return (with complete and accurate information) has not been filed or was filed after the required date.

    1. Generally, the information returns or statements are required to be attached to the related income tax return and the due date is the same as the related income tax return including extensions. Specific exceptions are noted for each penalty separately.

    2. Some returns have dual filing requirements and the penalty can apply for failure to file either return.

    3. Examiners should focus on the requirement to attach the information return to the related income tax return when determining whether or not the required returns have been filed timely.

  9. Referral. Domestic examiners must make a referral on the Specialist Referral System for International Assistance when they are assigned a case which involves international information returns. The web site is http://srs.web.irs.gov/Default.asp. SBSE examiners have been delegated the authority to issue penalty letters when referrals are not accepted, and to make all other penalty determinations. See IRM 1.2.43, Delegations of Authority for the Examining Process. When the examiner secures a required return that was not originally filed, the examiner should attach the return and enter appropriate comments in the workpapers.

  10. Penalty Case Control. When an examiner determines that an information return is due, has not been filed, and that a penalty applies, the examiner should request approval for a penalty investigation from the manager, establish penalty case controls and prepare a penalty case file. The file must include the information that supports the requirement to file and establishes that the information return has not been filed.

  11. Request the Returns. Examiners should inform the taxpayer of the requirements to file the information returns and of the intent to assess the penalty for failure to comply. The initial penalty can be assessed without advanced notification. However, examiners should inform the taxpayer prior to assessing the penalty. Examiners must take steps to secure appropriate documentation to support the requirement to file the returns. This information may also be necessary for the related income tax examination.

  12. Notice Letter Provisions. Penalties under IRC sections 6038, 6038A, 6677 and 6679 have "notice letter" provisions, and a continuation penalty may apply. The provisions state that:

    1. If the required returns are not filed on or before the 90th day after the notice letter is issued, additional penalties of $10,000 per month (or fraction thereof) may be assessed.

    2. The penalty continues to be increased until the required information or information returns are filed or the maximum penalty is assessed.

    3. The maximum penalty amount for the continuation penalty is different for each Code section and is referenced in each penalty section.

  13. Notice Letters. Examiners must issue notice letters at the earliest date possible. The taxpayer must respond within 30 days after the date the letter was issued. Notice letters also provide an opportunity for the taxpayer to produce information to prove that the information return in question was not required to be filed. Notice letters are available on http://publish.no.irs.gov/catlg.html.

    Note:

    Use search feature to determine the appropriate Letter to be sent to the taxpayer. Be sure to select Letter for the product type.

    1. Notice letters are addressed to the U.S. person responsible for ensuring that the required returns are filed and include the name of the related foreign entity.

    2. Notice letters must be signed by an examination group manager in SBSE or an international examiner in LMSB.

    3. The notice letters instruct the taxpayer to mail the information returns to the address of the examiner issuing the letter.

    4. There is no provision in the Code or regulations for an extension of the 90-day period described in the notice letter. However, the running of the 90-day period may be suspended by other Code sections not specific to these penalties.

  14. Reminder Letters. In many situations, it is advisable to send a follow-up letter 45 days after the notice letter is issued if no response is received.

    1. If no response to the reminder letter is received, no additional letter is required prior to assessment of the penalty.

    2. If the notice letter was issued based on presumptive evidence, and the taxpayer did not provide evidence contrary to our information, assess the penalty.

  15. Secured Returns. When an examiner secures a delinquent information return and/or statement, determine if it provides all of the required information and is accurate. If the return is incomplete or inaccurate, the examiner must inform the taxpayer that the return is not considered filed until it is complete and correct. For complete and accurate returns, perform the following actions:

    STEP Action
    1. Date stamp and make 1 photocopy of the document.
    2. Associate the original with the related income tax return. Often, the received date of the information return affects the statute for assessment on the related income tax return. See IRC section 6501(c)(8).
    3. Place the photocopy in the penalty case file. The return received will be kept in the penalty case file and the related income tax file.

  16. Reasonable Cause. Examiners must consider any reason a taxpayer provides in conjunction with the guidelines, principles and evaluating factors relating to reasonable cause based on the facts and circumstances. Examiners should be mindful of the fact that, generally, these penalties apply to individuals who have business or investment activities in foreign countries, and, as such, general business care and prudence requires researching the filing and tax obligations of all jurisdictions. See Exhibit 20.1.9-5,IRM 20.1.1, IRC sections and Treas. Regs. relating to the specific penalty.

    1. Reasonable cause should not be considered until the taxpayer is in compliance with respective provision of the law.

    2. Reasonable cause does not apply to the initial penalty in some Code sections.

    3. Many of the penalty sections have specific provisions for reasonable cause.

    4. Examiners must issue a determination letter if the taxpayer requests reasonable cause consideration and it has been denied.

    5. Reasonable cause determinations can only be made by the unit that asserted the penalty (e.g., Campus cannot allow reasonable cause for a penalty asserted by LMSB or SBSE Examination).

  17. Compute the Penalties. After the examiner has determined that the penalty applies, the examiner must compute the amount of the penalty and prepare the assessment documents, Form 8278 and Form 886-A (required). The penalty amounts are discussed in the section for each penalty.

    1. Penalties will be computed until the date returns or the required information is received or until the maximum penalty amount is reached.

    2. For penalties without notice letter provisions or if no notice letter was issued: (i) Assess penalties promptly after receipt of the required returns or return information, or (ii) If no return is received, 90 days after the request for the return.

  18. Penalties with a Notice Letter Provision. Generally, the initial assessment(s) package should be prepared on or after the 125th day, but before the 150th day after the date that the notice letter was issued. The penalty would be for the initial penalty plus 2 months of the continuation penalty.

    Example:

    For one delinquent Form 5471 the first assessment of the penalty would be $30,000:

    Reference Number 623 $10,000
    Reference Number 619 $20,000

  19. The examiner must maintain a copy of the initial penalty case file for subsequent assessments if noncompliance continues.

    1. The second and subsequent (if applicable) assessments of the continuation penalty should be made after 215 days from the date of the notice letter, unless the maximum penalty amount has been reached.

    2. This penalty will be for 3 months: $30,000 for each required return.

      Example:

      For one Form 5471:

      1. Reference Number 623 $ 00.00
      2. Reference Number 619 $ 30,000
      This would be the maximum penalty for IRC section 6038 for one unfiled Form 5471.
      3. The process in "2" should be continued every 3 months until the maximum penalty is reached or until an administrative decision is made to suspend additional assessments.

  20. Approval. IRC section 6751 requires that managers approve the penalties prior to assertion. Managers must approve the ERCS case control, sign SBSE notice letters and approve the case prior to closing.

  21. Statute of Limitations. Assessable penalties that are not considered taxes have no statute of limitation for assessment. However, whenever possible, agents should make assessments within 3 years of the date that a complete and accurate information return was filed.

  22. Payment. To process payment:

    1. Use Form 3244 to process payments.

    2. Use Transaction Code (TC) 640 to indicate an advance payment.

    3. Use TC 670 for any payments received after assessment.

20.1.9.2.1  (11-20-2007)
Penalty Assessment – Form 8278, Computation and Assessment of Miscellaneous Penalties

  1. The examiner will enter the dollar amount of the penalty on Form 8278 and attach Form 886-A, Explanation of Items.

  2. Form 8278 is the assessment document for the Civil Penalty Module. The penalty assessment is posted to the module using the Reference Numbers (RNs) reflected on the Form 8278. The RNs included in section "C" of Form 8278 are the RNs referred to in Exhibit 20.1.9–3, Quick Guide for Reference Numbers to Process International Penalty Assessments.

    1. Include the "continuation penalty" (RN 619) on the same Form 8278 as the initial penalty amount. Subsequent assessments of the continuation penalty should include a zero assessment for the RN of the initial penalty.

    2. Prepare a separate Form 8278 for each tax year and Code section for which a penalty assessment is made.

    3. If a penalty investigation is started and the penalty is waived for reasonable cause or other reasons, appropriately document the workpapers.

  3. Attach Form 886-A to each Form 8278 and include the following information:

    1. Name and TIN of the U. S. person required to file the information return.

    2. Name and TIN of the entity for which the return was required to be filed (if applicable).

    3. Applicable Internal Revenue Code section.

    4. Computation of penalty.

    5. Date the notice letter (if applicable) was issued or returns requested.

    6. Any other significant correspondence.

    7. Date the information or information return was received.

    8. Discussion of facts and law as necessary, e.g., reasonable cause for not filing; information on ATAT involvement and the promotion; pattern of filing information returns; or other related tax violations (e.g., understatement of income tax related to the failure to file the information returns or failure to file FBAR returns.)

    Reminder:

    These penalties should not be entered on Forms 870, 4549, 4549-A, or any other examination report. For preparing the International Examiners, report refer to IRM 4.60.9.

  4. The taxpayer’s signature is not required with respect to these penalties. If the taxpayer agrees to the penalty assessment, note it in your workpapers and on Form 886-A.

20.1.9.2.2  (11-20-2007)
Penalty Case File Assembly and Procedures

  1. Examiners will establish a separate penalty case file for penalties that contains all relevant information and follow current procedures for case file assembly. The "penalty report" consists of Form 8278 and Form 886-A with explanation and computation.

    Note:

    Form 5344 is not used.

    1. Prepare a separate penalty case file with a separate Form 8278 when penalties will be assessed under more than one IRC section or for more than one tax year.

    2. Identify multiple assessments for the same taxpayer.

      Reminder:

      Assessable penalties are assessed on individual taxpayers even when a Married Filing Joint return is filed.

    3. Request a current IMFOL/BMFOL "I" for the TIN that the case is to be assessed on. If other civil penalties are on the module, request IMFOL/BMFOL "T" and analyze the accounts. Comment if the penalty is not a duplicate and should be assessed.

  2. Keep the penalty case file separate from any related income tax file(s). Identify related penalty case files as "related returns." Keep a copy of the following in the penalty case file:

    1. A copy of the information return (if secured – with stamped received date),

    2. Form(s) 8278 and Form 886-A with complete explanation of penalty adjustment, and

    3. Copies of any relevant documents from the related income tax case file.

  3. Include a copy of the following with your workpapers:

    1. The secured information return and/or statements (if filed).

    2. Page "one" of the income tax return with a comment that you inspected the return and the required form was not attached.

    3. Copy of the notice letter with certified mail receipt.

  4. Prepare the outside of the penalty case file as follows:

    1. Attach Form 3198 to the outside of the penalty case.

    2. The MFT is 55 for individuals or MFT 13 for entities.

    3. Indicate the Reference Number and penalty amounts outside the folder. For example, "Assess IRC section 6038 (or 6677, etc.) Civil Penalty indicated on Form 8278."

    4. Indicate if the case qualifies for post-assessment appeals and the taxpayer has made an appropriate request.

  5. For cases submitted to Appeals, be sure to:

    1. Attach Form 4665,

    2. Include taxpayer's written request for appeal of penalties, and

    3. For postassessment penalty appeals (see IRM 20.1.1.4.1.2), include proof that such assessment has been made by the Service.

20.1.9.2.3  (11-20-2007)
Claims or Penalty Abatement Requests

  1. In certain instances, taxpayers will ask for reconsideration of a penalty that has been assessed but not paid. The examiner will determine whether all the facts were considered when the penalty was assessed.

    Note:

    If, during a taxpayer contact, it appears there may be a hardship situation, or the taxpayer insists on being referred to the Taxpayer Advocate Service (TAS), or the contact meets TAS criteria, see IRM 21.1.3.18, TAS Guidelines for Referral, or IRM 13.1.7.2, TAS Criteria.

  2. In the case of Wheaton vs. USA, 95-12 U. S. Cas. P50, 526, the court held that after a penalty is assessed the taxpayer must make "…a 'plausible and believable' assertion that, viewing the facts and law most favorably to the government, the government is certain to fail on the merits of its case. In his affidavit, plaintiff simply denies control over the ten foreign corporations as that term is used in IRC section 6038. Although in theory this allegation may be plausible and believable, the Court does not deem it sufficient to shift the burden of proof to the government."

  3. Payment of claims on penalties or abatement of penalties must be approved by the organizational unit that assessed the penalties.

    1. Collection or Campus personnel do not have delegated authority to abate or decrease penalties in this chapter assessed by Examination (LMSB or SB/SE).

    2. Delinquent information returns received with a claim or abatement request must be referred to the Examination function that assessed the penalty. The referral package must include the assessment documents.


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