The Internal Revenue Service has a responsibility to collect the proper amount of tax revenue in the most efficient manner. Penalties provide the IRS with an important tool to achieve that goal because they enhance voluntary compliance by taxpayers. See IRM 1.2.1.12.1, Policy Statement 20-1 (Formerly P-1-18).

Authority for the administration of return-related penalties are found in the Internal Revenue Code (IRC), IRC 6662, IRC 6662A, IRC 6663, IRC 6676, and corresponding Treasury Regulations.

The Director of Business Support, within SBSE Operations Support, is the director responsible for the servicewide civil penalty program.

Overall responsibility for civil penalty programs is assigned to OSP. OSP is charged with coordinating policy and procedures concerning the administration of civil penalty programs, ensuring consistency with the penalty policy statement, reviewing and analyzing penalty information, and determining appropriate action necessary to promote voluntary compliance.

Each IRS organization is responsible for establishing an internal process for managing their procedures based upon these servicewide policies and may develop additional guidance or reference materials for their specific functional administrative needs. However, such reference material must receive approval from OSP prior to distribution and must remain consistent with the policies and general procedural requirements set forth in Policy Statement 20-1 (Formerly P-1-18) in IRM 1.2.1.12.1, and other guidance relating to civil penalties.

All employees should keep the following objectives in mind when handling each penalty case:

The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3) , Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR, see https://www.irs.gov/taxpayer-bill-of-rights.

Every function in the IRS has a role in proper penalty administration. It is essential that each function conducts its operations with an emphasis on promoting voluntary compliance. Appropriate reviews should be conducted to ensure consistency with the penalty policy statement (Policy Statement 20-1) and philosophy.

To promote the goal of consistency and fairness, OSP will review semi-annually a sample of penalty assessments provided by SB/SE Research. See IRM 20.3.1, Civil Penalty Accuracy Review Process. The report of findings is shared with the Director, Business Support, the CFO, and other leadership as needed. The completed report is uploaded to an enterprise shared folder. Reports may be prepared when a significant issue develops, such as a correction to programming that affects many taxpayers.

The table below list acronyms used in this IRM and their definitions.

LB&I examiners must consider the accuracy-related penalty during their examinations. Examiners are required to consider and then, if appropriate, develop the accuracy-related penalty in all cases in which there is an underpayment of tax attributable to a listed transaction.

If an underpayment of tax is attributable to a taxpayer’s participation in a listed transaction, the examiner must develop the accuracy-related penalty issues and prepare a written report supporting the recommendation to impose or not to impose the penalty.

When an examiner identifies a new potentially abusive tax shelter transaction or promoter information, the examiner must contact LB&I field counsel as well as the Office of Tax Shelter Analysis (OTSA).

SB/SE examiners should follow procedures outlined in IRM 20.1.5.2.3 regarding supervisory approval for imposing penalties in a tax shelter case involving a listed transaction.

Examiners should send promoter information to the Lead Development Center (LDC) and also involve the employee designated by their business unit responsible for coordinating and assisting in the identification of abusive tax shelters. See IRM 4.32.2, Abusive Transactions, for additional guidance.

IRC 6751(a), Computation of Penalty Included in Notice, requires that each penalty notice include the name of the penalty, the Code section under which the penalty is imposed, and a computation of the penalty.

IRC 6751(b)(1), Approval of Assessment, provides in general that no penalty under the IRC 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. See IRM 20.1.1.2.3, Approval Prerequisite to Penalty Assessments.

The written approval should be obtained in a timely manner. See IRM 20.1.1.2.3.1, Timing of Supervisory Approval, for policy related to the timing of supervisory approval.

Exceptions to these procedural requirements are found in IRC 6751(b)(2) that include the following:

Any function not listed in IRM 20.1.5.2.3.1 that has examiners asserting penalties, must obtain written supervisory approval as required by IRC 6751(b). This written approval must be timely, and retained in the case file.

Any penalties automatically calculated through electronic means are excluded from IRC 6751(b)(1) requirement.

The IRS also requires supervisory approval of the non-assertion of penalties when there is a substantial understatement of tax under IRC 6662(d), Substantial Understatement of Income Tax.

IRS Notice 2015-30 provides penalty relief for the 2014 taxable year for the accuracy-related penalty under IRC 6662 for taxpayers who received a Form 1095-A, Health Insurance Marketplace Statement, that was delayed or that the taxpayer believes to be incorrect and who timely filed their 2014 income tax return, including extensions.

The Notice relief provisions do not apply to 2014 income tax returns that are late-filed.

Generally, the IRS will not impose the accuracy-related penalty under IRC 6662 for the 2014 taxable year on any portion of an underpayment resulting from the receipt of an incorrect or delayed Form 1095-A.

To be eligible for penalty relief, taxpayers who were not enrolled in a qualifying plan during 2014, erroneously received a Form 1095-A, and used it to claim a premium tax credit must amend their 2014 income tax return by April 15, 2016 to reflect that they were not eligible to claim the premium tax credit and must pay any additional tax liability due.

If an IRC 6662 penalty was imposed for the 2014 taxable year on examination on an underpayment resulting from Form 1095-A, the taxpayer was enrolled in a qualifying plan during 2014, and the taxpayer notifies the IRS, in accordance with Notice 2015-30 that the Form 1095-A was incorrect or delayed, the IRC 6662 penalty will be waived or abated on the portion of the underpayment resulting from Form 1095-A. If the taxpayer was not enrolled in a qualifying plan during 2014, the taxpayer must also appropriately amend his or her 2014 income tax return by April 15, 2016 and pay any additional tax due before the IRC 6662 penalty will be waived or abated on the portion of the underpayment resulting from an erroneous Form 1095-A.

Amount of Tax Imposed: This is the amount of tax imposed on the taxpayer under subtitle A for the taxable year, determined without regard to certain withheld taxes, payments of tax or estimated tax, any credit resulting from a termination or jeopardy assessment, and any tax the taxpayer is not required to assess on the return. Refer to 26 CFR 1.6664-2(b) for a detailed definition.

Centralized Partnership Audit Regime: Examination subject to the Bipartisan Budget Act of 2015 (BBA).

Economic Substance Doctrine: The economic substance doctrine is defined as the common law doctrine under which income tax benefits with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose. Some courts have required a lack of economic substance or business purpose, while others have required the absence of both. Section 1409 of the Health Care and Education Reconciliation Act of 2010 added IRC 7701(o), Clarification of Economic Substance Doctrine to the Code to provide clarification of the economic substance doctrine. That section applies to transactions entered into after March 30, 2010. IRC 7701(o) (1) provides that a transaction is treated as having economic substance only if the transaction changes the taxpayer’s economic position in a meaningful way apart from federal income tax effects and the taxpayer has a substantial purpose for entering into the transaction apart from federal income tax effects. See IRC 7701(o) for additional rules and applicability.

Listed Transaction: A listed transaction is a reportable transaction, which is the same as, or substantially similar to, a transaction specifically identified by the IRS as a tax avoidance transaction for purposes of IRC 6011, General Requirement of Return, Statement, or List. See IRC 6707A(c)(2), Listed Transactions, and 26 CFR 1.6011-4(b)(2).

Partnership Adjustment: Any adjustment to a partnership-related item as defined in IRC 6241.

Push-out Election: A partnership making an election under the alternative to the payment of the imputed underpayment under IRC 6226 is not liable for the imputed underpayment to which the election applies. The election must be made within 45 days of the notice of final partnership adjustment.

Qualified Amended Return: 26 CFR 1.6664-2(c)(3) provides that a qualified amended return is an amended return, or a timely request for administrative adjustment under IRC 6227, Administrative Adjustment Requests, filed after the due date of the return (determined with regard to extensions), and before the earliest of :

Reasonable Basis: Reasonable basis is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper. See 26 CFR 1.6662-3(b)(3).

Rebate: A rebate is the amount of an abatement, credit, refund, or other repayment made on the basis that the tax imposed was less than the excess of the sum of the following:

Reportable Transaction: Any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under IRC 6011, such transaction is of a type that the IRS determines as having a potential for tax avoidance or evasion. See IRC 6707A(c)(1), Reportable Transaction, and 26 CFR 1.6011-4(b)(1).

Reportable Transaction Understatement: The reportable transaction understatement is the sum of the following:

Reviewed Year: The partnership taxable year to which a partnership adjustment relates.

Reviewed Year Partner: Any person who held an interest in a partnership at any time during the reviewed year.

Underpayment: Refer to 26 CFR 1.6664-2(a) for a detailed description. An underpayment is defined as the amount by which any tax imposed exceeds the excess of the following:

The accuracy-related and civil fraud penalties apply only if a return is filed.

The accuracy-related and civil fraud penalties generally do not apply in the case of a return prepared by the IRS under IRC 6020(b), Returns Prepared for or Executed by Secretary. However, the accuracy-related and fraud penalties can be asserted on a secured delinquent return such as an original return obtained after the taxpayer is contacted by the IRS.

The accuracy-related and civil fraud penalty issues are developed separately from the tax law issues that gave rise to the tax understatement. Penalty issues require review and supervisory approval prior to being asserted.

Generally, requests for penalty abatements should be addressed by the office that initially conducted the examination. See IRM 20.1.5.4.2 and IRM 20.1.5.7. Also see IRM 20.1.1.3.5.2, Taxpayer Entitled to Relief.

Claims for refund on assessed accuracy-related and civil fraud penalties are handled like other claims.

Uniform Definition of Underpayment:IRC 6664(a), Underpayment, provides a common definition of underpayment. See IRM 20.1.5.3.1 for underpayment calculation. The accuracy-related and civil fraud penalties are calculated only on the underpayment (or portion of the underpayment) of tax attributable to the misconduct or fraud.

Coordination of Accuracy-Related and Civil Fraud Penalties: The accuracy-related and civil fraud penalties cannot be asserted on the same portion of the same underpayment, except as an alternative penalty position. However, the accuracy-related penalty and the civil fraud penalty may be asserted on the same return when civil fraud applies to one portion of the underpayment and the accuracy-related penalty applies to another portion of the underpayment.

Coordination of the Accuracy-Related Penalty Attributable to a Reportable Transaction Understatement and the Civil Fraud Penalty: The accuracy-related penalty attributable to a reportable transaction understatement and the civil fraud penalty cannot be asserted on the same portion of the same understatement (a reportable transaction understatement is treated as an underpayment for purposes of determining the fraud penalty). However, the accuracy-related penalty attributable to a reportable transaction understatement and the civil fraud penalty may be asserted on the same return when civil fraud applies to one portion of the underpayment and the accuracy-related penalty attributable to a reportable transaction understatement applies to another portion. See IRC 6662A(e).

Interest: Under IRC 6601(e)(2)(B), Interest on Penalties, Additional Amounts, or Additions to the Tax, interest on civil fraud and accuracy-related penalties is imposed from the due date of the return, including extensions, until the module is fully paid. Per IRC 6601(e)(3), Payments Made Within Specified Period After Notice and Demand, if the payment is received on or before 21 calendar days after notice and demand (10 business days if the amount for which the notice and demand equals or exceeds $100,000), interest stops on the amount paid as of the date of the notice and demand. See IRM 20.2.7, Interest, Abatement and Suspension of Debit Interest, for other periods of interest suspension.

Deficiency Procedures Apply: Follow the guidelines for Examination 30-day letter procedures and statutory notice of deficiency procedures for the accuracy-related and civil fraud penalties because those penalties are subject to deficiency procedures. In addition, erroneous claim penalties (see IRM 20.1.5.18) under IRC 6676 will follow deficiency procedure guidelines when an excessive amount of a refund is attributable to a disallowed refundable credit. See IRM 20.1.5.18.

Coordination of Accuracy-Related and Civil Fraud Penalties with Penalties Under IRC 6676, Erroneous Claim for Refund or Credit: Accuracy-related and civil fraud penalties apply to an underpayment. For downward adjustments on original returns that are not subject to an accuracy-related or fraud penalty because of the lack of an underpayment, consideration should be given to the application of IRC 6676. The IRC 6676 penalty should be considered on the excessive amount that is not subject to IRC 6662 or IRC 6663. Under these circumstances, the penalty is subject to deficiency procedures because the penalty is dependent upon the existence of a deficiency. See IRM 20.1.5.18.

An allocation is necessary when both the accuracy-related and the civil fraud penalties apply. For example, when there are three return adjustments, and one penalty applies to just one of the three, apply the penalty rate times the amount of that adjustment's underpayment. This is the amount of the penalty.

In computing the portions of an underpayment subject to penalties imposed under IRC 6662 and IRC 6663, adjustments to a return are considered made in the order as follows:

See IRM 20.1.5.17.3 for an example of a calculation involving IRC 6662(d), IRC 6663, and IRC 6662A.

Any income tax withholding, estimated tax payments, or other payment made before a return was filed that was not claimed on the return or previously allowed as a credit against the tax liability for the taxable year is allocated as follows:

The amount of an underpayment subject to IRC 6662 or IRC 6663 will not be reduced by any carryback of a loss, deduction, or credit to that year.

If an underpayment in a loss year is subject to IRC 6662 or IRC 6663 and that loss is carried back to an earlier year or carried forward to a later year, any underpayment resulting from the disallowance of the loss in the earlier or later year will also be subject to IRC 6662 or IRC 6663. See 26 CFR 1.6662-3(d), 26 CFR 1.6662-4(c) and 26 CFR 1.6662-5(c).

When the penalty assertion requires a dollar threshold (e.g., $5,000 for substantial understatements and valuation misstatements), this threshold must be met for each year in which the penalty will be asserted (including a carryback or carryover year).

For special rules regarding carrybacks and carryovers in the area of transfer pricing, see 26 CFR 1.6662-6(e).

In the case of carrybacks and carryovers, adequate disclosure is made on the return for the taxable year in which the carryback or carryover originates. See IRM 20.1.5.8.2.1 for more information relating to adequate disclosure.

The 2-year ban under IRC 32(k)(1)(B)(ii) applies when it is determined that a taxpayer recklessly or intentionally disregarded the EITC rules when claiming the EITC. For taxable years beginning after December 31, 2015, the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) expanded the 2-year ban rule to the CTC/ACTC under IRC 24(g)(1)(B)(ii), and the AOTC under IRC 25A(b)(4)(A)(ii)(II).

The 10-year ban under IRC 32(k)(1)(B)(i) applies when it is determined that a taxpayer fraudulently claimed the EITC. For taxable years beginning after December 31, 2015, the PATH Act expanded the 10-year ban rule to apply to the CTC/ACTC under IRC 24(g)(1)(B)(i), and AOTC under IRC 25A(b)(4)(A)(ii)(I). The 2 or 10 year ban do not apply to the Lifetime Learning Credit under IRC 25A(c), or the Tuition and Fees deduction under IRC 222.

The 2 or 10 year ban can be asserted along with the accuracy-related penalty or any other penalty imposed under present law. The law does not require that an accuracy-related penalty be asserted in order to impose the EITC, CTC/ACTC or AOTC 2 or 10 year ban.

The 10-year ban for fraudulently claiming the EITC, CTC/ACTC, or AOTC, essentially follows criteria for assertion of civil fraud under IRC 6663. See IRM 20.1.5.16.2.

The assertion of the 10-year ban is independent of whether the taxpayer’s reporting results in an "underpayment," per IRC 6664, on which the civil fraud penalty is based. The 10-year ban falls under a different Internal Revenue Code section and should, nonetheless, be considered for assertion.

For information on EITC procedures see IRM 4.19.14, Liability Determination, EITC Revenue Protection Strategy.

A partner, S corporation, shareholder, beneficiary of an estate or trust, owner of a foreign trust, or residual interest holder in a real estate mortgage investment conduit (REMIC) generally must report items consistent with the way they were reported on Schedule K-1, Schedule Q, or a foreign trust statement.

Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), is used to notify the IRS of any inconsistency between the tax treatment of an item by an impacted person and the way the pass-through entity treated and reported such item.

Form 8082 is also used to notify the IRS if an impacted person did not receive a Schedule K-1, Schedule Q, or foreign trust statement.

If the Form 8082 is not filed as required, the taxpayer may be subject to the accuracy-related penalty under IRC 6662 or the fraud penalty under IRC 6663.

See IRC 6227 (prior to the enactment of BBA) and IRM 4.31.4, TEFRA Administrative Adjustment Request (AAR), for additional information. Also see IRM 4.31.9, Centralized Partnership Audit Regime (BBA) Field Examination Procedures.

The Automated Underreporter (AUR) program matches information returns against individual income tax returns to verify that income is reported and deductions taken correctly.

AUR computer-generated notices are for Individual Master File (IMF). If the accuracy-related penalty is applicable, the AUR system generates the appropriate penalty paragraph for CP 2501, Initial Inquiry Letter, or the CP 2000, Notice of Proposed Adjustment. In the absence of a taxpayer response to the letter or notice, the penalty determination will be made on the basis of return information and the significance of the amounts omitted.

On AUR cases involving certain taxpayer contacts, the assertion of the accuracy-related penalty requires written supervisory approval. See IRM 20.1.5.2.3.

Notices and reports will fully identify the names, IRC sections, and the computation of the penalty amounts being asserted.

All penalty determinations involving a reasonable cause exception will be documented in the workpapers. This will be done by identification on the AUR system and will remain with the case file.

In unagreed cases, the IRS will provide the taxpayer or representative with a complete explanation of the penalty.

See IRM 4.19.3.18.5, Accuracy-Related Penalty Due to Substantial Understatement of Tax, for penalties related to AUR cases.

The examiner will compute the accuracy-related penalty for CCP.

The amount of the IRC 6662 penalty is 20 percent of the portion of the underpayment resulting from the misconduct. The penalty rate increases to 40 percent in certain circumstances involving gross valuation misstatements, nondisclosed noneconomic substance transactions, and undisclosed foreign financial asset understatements.

The amount of the IRC 6663 penalty is 75 percent of the underpayment due to fraud. See IRM 20.1.5.16.5.

The amount of the IRC 6662A penalty is 20 percent of the reportable transaction understatement. The penalty rate increases to 30 percent of the reportable transaction understatement where the transaction was not properly disclosed. See IRM 20.1.5.17.4.

The amount of the IRC 6676 penalty is 20 percent of the "excessive amount." See IRM 20.1.5.18.

Stacking of IRC 6662, IRC 6663, IRC 6662A, and IRC 6676 penalties is not permitted. The maximum amount of the IRC 6662 penalty imposed on a portion of an underpayment of tax is 20 percent (or 40 percent in certain circumstances) of that portion of the underpayment, even if that portion of the underpayment is attributable to more than one type of misconduct under IRC 6662.

For assessment of accuracy-related penalties, erroneous claim for credits penalties, and fraud penalties, compute the penalty amount and enter it and the penalty reference number (PRN) on Form 5344, Examination Closing Record, Form 5403, Appeals Closing Record, or Form 5599, TE/GE Examined Closing Record.

Using the appropriate closing record, enter the PRN listed below to assess the following components of the accuracy-related penalty:

Use PRN 681 and the computed penalty amount to assess a reportable transaction understatement penalty under IRC 6662A. See IRM 20.1.5.17.4.

TC 240 will automatically post to the Master File (MF) account that relates to the assessment of an accuracy-related penalty.

MF will systemically compute interest on an accuracy-related penalty from the due date or extended due date of the return (whichever is later) to the earlier of the following:

When abating an assessed IRC 6662 penalty, use the PRN corresponding to the original assessment. To abate an assessed IRC 6662A penalty, use PRN 681. TC 241 will automatically post to the MF account that relates to an abatement of an accuracy-related penalty. A penalty abatement amount can be in part or the full assessed penalty amount. A penalty reason code (PRC) must always be entered for penalty abatements. See IRM 20.1.1.5.1, Master File Penalty Reason Codes.

IRC 6676, Erroneous Claim for Refund or Credit, is assessed using Form 3870, Request for Adjustment, for married filing joint (MFJ) returns or Form 8278 for all other filing statuses including corporate returns. Use PRN 687 for MFJ returns only. Use PRN 565 for all other filing statuses. For additional guidance regarding IRC 6676 see IRM 20.1.5.18.

IRC 6664(c) provides a reasonable cause exception to the penalties under IRC 6662 and IRC 6663 where the taxpayer had reasonable cause and the taxpayer acted in good faith. The reasonable cause exception in IRC 6664(c) applies to all of the components of the accuracy-related penalty on underpayments and the fraud penalty, except for any portion of an underpayment that is attributable to one or more transactions lacking economic substance as described in IRC 6662(b)(6), or that is attributable to a gross valuation overstatement with respect to charitable deduction property. In addition, there are special reasonable cause rules outlined in IRC 6664(c)(3) for certain substantial valuation overstatements.

The determination of whether the taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all the relevant facts and circumstances.

Generally, the most important factor in determining reasonable cause is the taxpayer’s effort to report the proper tax liability. Other factors to consider are the taxpayer’s experience, knowledge, education, and the taxpayer’s reliance on the advice of a tax advisor.

All relevant facts, including the nature of the tax investment, the complexity of the tax issues, the competence of the tax advisor, the education of the taxpayer, and the quality of the opinion relied upon must be developed to determine whether the taxpayer was reasonable and acted in good faith.

Examples of types of conduct that may or may not constitute reasonable cause are described in Exhibit 20.1.5-6.

26 CFR 1.6664-4T(f) provides guidelines for applying the reasonable cause and good faith exception to IRC 6662(e) penalties for transactions between persons described in IRC 482, Allocation of Income and Deductions Among Taxpayers. For specific reasonable cause criteria on transfer pricing adjustments, see IRM 20.1.5.10.7.1.

Special rules apply to items of a corporation attributable to a tax shelter resulting in a substantial understatement. See IRM 20.1.5.7.7.

IRC 6664(d) provides a reasonable cause exception to the IRC 6662A penalty for any portion of a reportable transaction understatement with respect to which there was reasonable cause and the taxpayer acted in good faith.

Under IRC 6664(d), the reasonable cause exception to the IRC 6662A penalty does not apply unless:

Reminder: This section does not apply to IRC 6707A. See IRM 4.32.4, Abusive Transactions, IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return, for additional guidance.

For additional guidance see 26 CFR 1.6664-4.

Partnerships subject to the centralized audit regime are treated as the taxpayer for purposes of the reasonable cause and good faith exception under IRC 6664 and 26 CFR 1.6664-4. Special rules apply to reviewed year partners. Refer toIRM 20.1.5.19 and IRM 20.1.5.19.3.4 for additional information.

Generally, the most important factor in determining whether the taxpayer has reasonable cause and acted in good faith is the extent of the taxpayer’s effort to report the proper tax liability. For example, reliance on erroneous information reported on an information return indicates reasonable cause and good faith, provided that the taxpayer did not know or have reason to know that the information was incorrect. Similarly, an isolated computational or transcription error may indicate reasonable cause and good faith.

Generally, there is reasonable cause and good faith if the taxpayer relies on erroneous information inadvertently included in data compiled by various divisions of a multidivisional corporation or in financial books and records prepared by those divisions. The corporation, however, must have employed internal controls and procedures, reasonable under the circumstances, which were designed to identify factual errors.

Circumstances that may suggest reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of the facts, including the experience, knowledge, sophistication, and education of the taxpayer. The taxpayer’s mental and physical condition, as well as sophistication with respect to the tax laws at the time the return was filed, are relevant in deciding whether the taxpayer acted with reasonable cause.

If the taxpayer is misguided and unsophisticated in tax law, but acts in good faith, a penalty is not warranted.

Reliance upon a tax opinion provided by a professional tax advisor may serve as a basis for the reasonable cause and good faith exception to the accuracy-related penalty. The reliance, however, must be objectively reasonable. For example, the taxpayer must supply the advisor with all the necessary information to assess the tax matter. Similarly, if the advisor suffers from a conflict of interest or lack of expertise that the taxpayer knew or should have known about, the taxpayer might not have acted reasonably in relying on that advisor. The advice also must be based on all pertinent facts, circumstances, and the law as it relates to those facts and circumstances.

The advice must not be based on unreasonable factual or legal assumptions (including assumptions as to future events) and must not unreasonably rely on the representations, statements, findings, or agreements of the taxpayer or any other person. For example, the advice must not be based on a representation or assumption which the taxpayer knows, or has reason to know, is unlikely to be true, such as an inaccurate representation or assumption as to the taxpayer’s purposes for entering into a transaction or for structuring a transaction in a particular manner. Similarly, the advice must not be based on an assumption that the transaction has a business purpose other than tax avoidance.

"Advice" is defined as any communication, including the opinion of a professional tax advisor, setting forth an analysis or conclusion by a person other than the taxpayer and on which the taxpayer relied in preparing the return. Advice does not have to be in any particular form.

Whether a taxpayer reasonably relied on an opinion or advice cannot be determined without reviewing the opinion(s). At times, a taxpayer may refuse to turn over an opinion the taxpayer claims to have relied on or the taxpayer may assert a privilege claim. If the taxpayer refuses to provide the opinion, disallow the taxpayer's position as not being verifiable.

Whenever the penalty is not asserted because the taxpayer has met the "advice" standard under the reasonable cause exception, contact the professional tax advisor to confirm that the advice was provided and that the standard under the reasonable cause exception is available. This is mandatory before the case is closed from the group. This contact is authorized by IRC 6103(k)(6), Disclosure by Certain Officers and Employees for Investigative Purposes. The examiner should be mindful that a preparer of the return may not be the professional tax advisor or person who prepared or provided the advice. Contact with both may be necessary.

Whenever a return preparer’s conduct becomes an issue, the examiner should consider the applicability of the return preparer penalties under IRC 6694, Understatement of Taxpayer's Liability by Tax Return Preparer, and IRC 6695, Other Assessable Penalties With Respect to the Preparation of Tax Returns for Other Persons, and contact the preparer, if necessary. See IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties.

Examiners should be mindful of the third party contact requirements discussed in IRM 25.27, Third Party Contacts.

For penalties under IRC 6662, the failure of a taxpayer to disclose a reportable transaction is a strong indication that the taxpayer did not act in good faith with respect to the portion of an underpayment attributable to a reportable transaction, as defined under IRC 6011. A taxpayer may argue that the failure to disclose was based on the advice of a tax advisor concluding that the transaction was not reportable.

A taxpayer’s reliance on an opinion that a transaction is not reportable must be reasonable and made in good faith. An opinion providing that a transaction is not reportable, and, therefore, need not be disclosed is subject to the same scrutiny as the underlying tax opinion or advice. The taxpayer must demonstrate reasonable cause and good faith as described above. See IRM 20.1.5.17 for additional information on reportable transactions.

Where a tax benefit depends on non-tax factors, the taxpayer has a duty to investigate the underlying factors rather than simply relying on statements of another person, such as a promoter. Further, if the tax advisor is not versed in these non-tax matters, mere reliance on the tax advisor does not suffice.

If a corporate taxpayer has a substantial understatement that is attributable to a tax shelter item, the accuracy-related penalty applies to that portion of the understatement unless the reasonable cause and good faith exception applies. See 26 CFR 1.6664-4(f).

A corporation's legal justification may be taken into account in establishing that the corporation acted with reasonable cause and in good faith in its treatment of a tax shelter item, but only if there is substantial authority within the meaning of 26 CFR 1.6662-4(d)for the treatment of the item and the corporation reasonably believed when the return was filed, that the treatment was more likely than not the proper treatment. See 26 CFR 1.6664-4(f)(2)(i)(B).

The reasonable belief standard is generally met if either of the following applies:

Negligence includes any failure to make a reasonable attempt to comply with the provisions of the tax law, exercise ordinary and reasonable care in tax return preparation, or keep adequate books and records.

Negligence is strongly suggested if a taxpayer fails to make a reasonable attempt to ascertain the correctness of a reported item "which would seem to a reasonable and prudent person to be 'too good to be true,' under the circumstances" . See 26 CFR 1.6662-3(b)(1)(ii). Other indications of negligence include but are not limited to the following:

The penalty for negligence does not apply if the taxpayer's position has a reasonable basis. If a return position is reasonably based on one or more of the authorities in 26 CFR 1.6662-4(d)(3)(iii), the position will generally satisfy the reasonable basis standard even though it does not rise to the level of substantial authority.

The negligence penalty will not be asserted solely for filing a return late.

The negligence penalty will not be asserted solely due to the taxpayer’s failure to appear for an audit or respond to an inquiry or notice unless the taxpayer failed to include on an income tax return an amount of income shown on an information return. In addition, other facts and circumstances from the return and the case file may warrant assertion of the accuracy-related penalty attributable to negligence. Examples are as follows:

Disregard of rules or regulations relates to the taxpayer’s failure to follow the appropriate law in completing the return, and reflects a disregard of the IRC, temporary or final regulations, revenue rulings, or IRS notices (other than notices of proposed rule making). The term "disregard" includes careless, reckless, or intentional disregard.

There is no penalty for a position contrary to a revenue ruling or IRS notice published in the Internal Revenue Bulletin (IRB) if the position has a realistic possibility of being sustained on its merits, except for a reportable transaction as defined in the regulations under IRC 6011. Otherwise, a taxpayer may not avoid a penalty for disregard of a rule or regulation due to a position that did not have a realistic possibility of being sustained on its merits.

The amount of an understatement is reduced by that portion of the understatement attributable to the following:

Special rules apply in the case of a tax shelter item. See IRM 20.1.5.9.1.3.

See 26 CFR 1.6662-4(d), Substantial Authority.

See 26 CFR 1.6662-4(e), Disclosure of Certain Information and 26 CFR 1.6662-4(f), Method of Making Adequate Disclosure.

IRC 6664(c)(1) provides an exception to the substantial understatement penalty if the taxpayer has reasonable cause and acted in good faith. See IRM 20.1.5.7.1, Reasonable Cause.

The substantial understatement penalty can be asserted only when the understatement is determined to be substantial.

When the understatement is substantial, but the penalty is not asserted, the examiner should explain the applicable exceptions in the case file.

Written Supervisory approval is required when the understatement is substantial whether or not the penalty is asserted.

Examiner will identify the penalty attributable to each adjustment in the report and explain each penalty by name, IRC section, and calculated penalty amount.

The penalty can be asserted on "no show" cases (as defined by IRM 4.10.2.8.3) when the following occurs:

When the accuracy-related penalty attributable to a substantial understatement of income tax is not asserted due to the assertion of negligence or disregard of rules or regulations, any unagreed report will include the substantial understatement penalty as an alternative penalty position.

The preparer penalties under IRC 6694 must be considered and documented for all substantial understatement penalty cases with taxpayer contact. Preparer penalties are discussed in IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties.

The examiner will determine the substantial understatement penalty amount by completing the following actions:

For calculation examples, see Exhibit 20.1.5-2 & Exhibit 20.1.5-3.

A substantial valuation misstatement exists if the value or adjusted basis of any property claimed on a return is 150 percent or more of the amount determined to be the correct amount of such value or adjusted basis. See IRC 6662(e)(1)(A).

IRC 6662(e)(1)(B) imposes an accuracy-related penalty on any underpayment attributable to a substantial valuation misstatement pertaining to transfer pricing under IRC 482. These penalties are identified as the transactional penalty and the net adjustment penalty.

Transactional Penalty: This penalty applies when the price reported for any property or services is 200 percent or more (or 50 percent or less) of the amount determined under IRC 482 to be the correct price.

Net Adjustment Penalty: This penalty applies when the net IRC 482 adjustment exceeds the lesser of $5 million or 10 percent of the taxpayer’s gross receipts.

The term "price for any property or services" encompasses all kinds of adjustments under IRC 482, including purchase prices, fees, services, rents, interest, and advances.

See IRC 6662(e)(3)(B) for the net IRC 482 adjustments that are excluded from the penalty.

See 26 CFR 1.6662-6(c)(7) for calculation examples of penalty application to IRC 482 adjustments.

See Exhibit 20.1.5-3 flow chart for the IRC 6662(e) transfer pricing penalty.

A gross valuation misstatement exists in the following:

The examiner is responsible for the assertion of the accuracy-related penalty attributable to a valuation misstatement.

See IRC 6662(e)(1)(B) relating to substantial valuation misstatements under IRC 482 transactions.

If the value or adjusted basis of any property claimed on a return is 200 percent or more of the amount determined to be the correct amount of such value or adjusted basis, the valuation misstatement constitutes a "gross valuation misstatement." See IRC 6662(h)(2)(A). If there is a gross valuation misstatement, then the 20 percent penalty under IRC 6662(a) is increased to 40 percent. See IRC 6662(h)(1).

There is no disclosure exception to this penalty.

The substantial valuation misstatement penalty does not apply to any understatement upon which a penalty under IRC 6662A is imposed. IRC 6662A does not apply to any understatement upon which the gross valuation misstatement penalty is imposed.

In the example below, the substantial valuation misstatement penalty applies to the individual income tax return because of the following:

If the adjusted value in (b) above was $35,000, the amount reported of $106,000 would then exceed the adjusted amount ($35,000) by more than 200 percent ($106,000 divided by $35,000 = 303 percent). The gross valuation misstatement penalty would then apply at 40 percent of the applicable underpayment.

For calculation examples involving carryovers and flow through entities, see IRM 20.1.5.3.4 .

The penalty is considered separately for each property adjusted. To distinguish between a substantial and a gross valuation misstatement requires a property-by-property calculation.

With regard to the transfer pricing penalty under IRC 6662(e), please refer to the rules for coordinating between the transactional penalty and the net adjustment penalty illustrated by examples in 26 CFR 1.6662-6(f).

See IRM 20.1.5.4.2 for policies and procedures regarding the assessment and abatement of IRC 6662(h).

See IRM 20.1.5.7 for general information regarding relief of IRC 6662(h).

The following illustrates the penalty criteria and calculation:

Since the deduction claimed exceeds the corrected amount by more than 200 percent but is less than 400 percent, the penalty applies at the 20 percent rate. If the corrected deduction were $18,000, the percentage of the overstatement would be 444 percent ($80,000 divided by $18,000) and the penalty would apply at the 40 percent rate.

The penalty will not apply if the taxpayer shows that there was a reasonable cause for the valuation or assumptions used in deriving the deduction on the return and that the taxpayer acted in good faith.

See IRM 20.1.5.7 for additional penalty relief criteria.

There is a substantial estate or gift tax valuation understatement if the value of the property claimed on an estate or gift tax return is 65 percent or less of the corrected amount (or 40 percent or less in the case of a gross valuation misstatement). See IRC 6662(g)(1) and IRC 6662(h)(2)(C) respectively.

The penalty does not apply unless the underpayment attributable to the substantial estate or gift tax valuation understatement (or gross valuation misstatement, if applicable) exceeds $5,000.

The determination of whether the percentage threshold for a substantial or gross valuation misstatement is reached is made on a property-by-property basis. The percentage threshold is determined by dividing the value of the property reported on the return by the corrected value of the property.

The following example illustrates the calculation of the understatement percentage for three adjustments (assuming the $5,000 requirement is met and no exceptions to the penalty apply).

For calculation examples that relate to the above adjustments, see Exhibit 20.1.5-4.

See IRM 20.1.5.4.2 for policies and procedures regarding the assessment and abatement of IRC 6662(g).

Penalty relief may be available under certain circumstances if a taxpayer acquired property from a decedent who died in 2010.

Special rules may apply in determining tax items including basis, gain, loss, holding period, and character of the acquired property. Section 301(c) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P. L. 111-312, allows the executor of the estate of any decedent who died in 2010 to elect not to have the estate tax rules apply and instead to have modified carryover basis rules apply. This election could impact the amount of tax owed. See Pub 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010.

A taxpayer acquiring property from a decedent may not know whether the executor will elect not to have the estate tax rules apply to the decedent’s estate. Thus, a taxpayer may be entitled to penalty relief, for example, when a taxpayer acquired property from a decedent who died in 2010 and sold the same property in 2010. If the taxpayer filed a timely extension to file his or her income tax return, estimated the gain or loss from such a sale, and made any other estimates for the acquired property necessary to compute the tax, and it is later determined that the taxpayer owes additional tax because the estimate is incorrect, penalty relief will be considered if the estimate was based on a reasonable interpretation of the law.

See IRM 20.1.5.7 for additional information on penalty relief.

If any portion of an underpayment is attributable to one or more nondisclosed noneconomic substance transactions, the penalty increases to 40 percent as defined under IRC 6662(i).

Nondisclosed noneconomic substance transaction means any portion of a transaction described in IRC 6662(b)(6) where the relevant facts affecting the tax treatment are not adequately disclosed in the return or in a statement attached to the return. A taxpayer will be deemed to have adequately disclosed only if it provides the required information on Form 8275 or Form 8275-R, or on Schedule UTP (Form 1120), Uncertain Tax Position Statement, if required to file such schedule.

If the transaction is also a reportable transaction pursuant to 26 CFR 1.6011-4, the taxpayer has not adequately disclosed the transaction unless it is reported both in accordance with the reportable transaction reporting rules and on Form 8275, Form 8275-R, or Schedule UTP (or any subsequently issued form or schedule). Also, a taxpayer will be deemed to have adequately disclosed if it makes a disclosure consistent with the terms of Rev. Proc. 94-69.

The penalty applies to such underpayment on a return filed before the date the taxpayer is first contacted by the IRS and is not reduced by any amendments or supplements to a tax return filed after the date the taxpayer is first contacted by the IRS.

Each operating division will be responsible for developing procedures to administer the IRC 6662(b)(6) and IRC 6662(i) penalties. At a minimum, each operating divisions's procedures will include the following:

Refer to IRM 4.46.4.11.9, Economic Substance Doctrine for additional information.

Each operating division's procedures will be cited for cross-referencing in IRM 20.1.5.

When closing the case from the group, the examiner will do the following:

Reasonable cause does not apply to any transactions lacking economic substance entered into on or after March 31, 2010. See IRC 6664(c)(2) and IRC 6662(b)(6).

If any portion of an underpayment is attributable to one or more overstatements of the deduction provided in IRC 170(p), the 20 percent penalty under IRC 6662(a) is increased to 50 percent as defined under IRC 6662(l).

IRC 170(p) provides a special rule for taxpayers who do not elect to itemize deductions. Individuals are allowed a deduction for charitable contributions made in cash up to a maximum of $300 ($600 for joint returns).

The 50 percent penalty will be applied to the portion of the underpayment of tax related to the overstatement of the deduction.

The penalty is effective for tax years beginning after December 31, 2020.

IRC 6751(b)(2)(A) excludes IRC 6662(b)(9) from the requirement of written approval by the immediate supervisor prior to assessment.

IRC 6663 does not define fraud. Courts have long recognized that the essence of the fraud penalty is the state of mind. The state of mind has been described in various ways but most definitions require intent to evade tax. Intent is distinguished from inadvertence, reliance on incorrect professional advice, honest difference of opinion, negligence, or carelessness.

Because direct proof of a taxpayer’s fraudulent intent is rarely available, fraud must be proven by circumstantial evidence and reasonable inferences. Fraud will generally involve one or more of the following:

Some common indicators of fraud include the following:

Recommendations for asserting the civil fraud penalty should be carefully reviewed to fully establish that the evidence supports the assertion. Fraud must be proven by clear and convincing evidence.

All statutory notices of deficiency asserting the civil fraud penalty must be reviewed by division counsel.

Civil fraud penalty will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to civil fraud. Such evidence must show the taxpayer’s intent to evade tax that the taxpayer believed to be due and owing.

To assert the civil fraud penalty in a tax case, it is necessary to establish that a part of the underpayment is due to a knowingly false representation of facts by the taxpayer. The IRS bears the burden of proving civil fraud by clear and convincing evidence. See IRC 7454(a), Burden of Proof in Fraud, Foundation Manager, and Transferee Cases. The IRS must show that the taxpayer knew the content of the return was false and filed the return with the intent to evade tax.

The civil fraud penalty should be asserted on a case-by-case basis giving consideration to all factors that have a bearing on the taxpayer’s fraudulent intent.

Determination of Portion Attributable to Fraud - If any portion of the underpayment is attributable to fraud, then the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud. See IRC 6663(b).

Special rules apply for calculation of the fraud penalty for partnership adjustments under the centralized partnership audit regime. See IRM 20.1.5.19, Bipartisan Budget Act of 2015 - Penalties with Respect to Partnership Adjustments.

Qualified Amended Return - If a taxpayer submits an amended return, it does not cure the defects on the previously filed fraudulent return and the civil fraud penalty would apply. Under 26 CFR 1.6664-2(c)(2), if the understatement on the original return is due to fraud, the tax shown on the amended return is not included in the amount shown as the tax by the taxpayer on the return, for establishing the amount of the underpayment in determining the fraud penalty under IRC 6663. A qualified amended return is defined under 26 CFR 1.6664-2(c)(3).

The civil fraud penalty cannot be asserted on the same underpayment (or portion of an underpayment) on which accuracy-related penalties are asserted. Only one penalty can be applied to any portion of an underpayment of tax. See IRC 6662(b).

The criteria for proving fraudulent failure to file under IRC 6651(f) and civil fraud under IRC 6663 are the same. Generally, if a fraudulent return is filed late, IRC 6651(f) is the appropriate penalty to assert. Although there is no specific prohibition against asserting penalties under both IRC 6651(f) and IRC 6663, the examiner should exercise caution. The court is not likely to sustain the assertion of both penalties unless compelling facts support the IRS’s position. Divisional counsel should be consulted before asserting either penalty or, if appropriate, both penalties on the same return. See IRM 20.1.2.3.7.5, Fraudulent Failure to File—IRC 6651(f), for additional information regarding restrictions on the assertion of the civil fraud penalty with respect to the fraudulent failure to file penalty.

On a joint return, the civil fraud penalty does not apply to a spouse unless some part of the underpayment is due to civil fraud on the part of that spouse. See IRC 6663(c).

As a general rule, examiners in LB&I, SB/SE, TE/GE, and W&I, with the concurrence of the respective fraud enforcement advisor (FEA), are authorized to assess civil fraud penalties. To the contrary, employees in other functions and non-examination employees are generally not authorized to assess the civil fraud penalty. When fraud is identified by staff that are not examiners, the case must be discussed with the employee's manager and the FEA for referral consideration. See IRM 25.1.11, Campus Collection Fraud Procedures, and IRM 25.1.14, Campus Examination Fraud Procedures.

In cases closed as unagreed with a civil fraud penalty, the report must include any alternative penalty positions that are applicable. Closing an unagreed case without including an explanation of the alternative penalty positions in the report may hamper the government’s litigation because the basis for the alternative penalty positions may be unclear to either Appeals or Counsel.

The examiner’s report will reflect the civil fraud penalty under IRC 6663 or IRC 6651(f) as appropriate, and identify the adjustments attributable to fraud.

Written supervisory approval of penalties under IRC 6751(b)(1) must be obtained timely. See IRM 20.1.1.2.3.1, Timing of Supervisory Approval.

Determination of a civil fraud penalty is a shared responsibility of the examiner, the examiner’s group manager, and the FEA.

For additional information see IRM 25.1, Fraud Handbook.

If an examiner determines affirmative acts (firm indications) of fraud/willfulness exist and criminal criteria are met, the examiner will discuss with his or her group manager and the FEA for referral to Criminal Investigation (CI). Referral guidelines to CI are listed in IRM 25.1.3, Criminal Referrals.

When an examiner and FEA determines that only the civil fraud penalty applies, a referral to CI is not required. See IRM 25.1.2, Recognizing and Developing Fraud, and IRM 25.1.6, Civil Fraud.

The major difference between civil and criminal fraud is the degree of proof required to establish fraud on the part of the taxpayer.

Due to the lower standard of proof in civil cases, the civil fraud penalty may be imposed upon a taxpayer who was not convicted of criminal tax evasion. If the taxpayer is convicted of criminal tax evasion under IRC 7201, Attempt to Evade or Defeat Tax, the civil fraud penalty should be asserted for the same tax year.

Criminal conviction does not mean the civil penalty will be automatically sustained.

Examiners and managers should be aware of collateral estoppel and the important distinction it can have in civil tax fraud penalty cases. Collateral estoppel is a legal doctrine that prevents a taxpayer, who has been previously convicted of criminal tax evasion under IRC 7201, from asserting a defense to the civil fraud penalty. See IRM 25.1.6.4, Collateral Estoppel.

In collateral estoppel circumstances where the taxpayer was convicted under IRC 7201, written supervisory approval of penalties must be approved timely. See IRM 20.1.5.2.3, Supervisory Approval of Penalties

Examiners should coordinate closely with the group manager, fraud enforcement advisor, and counsel on cases involving potential fraud.

Restitution Based Assessments (RBA) - The civil fraud penalty must be addressed in all RBA cases and must have counsel approval if the fraud penalty will NOT be asserted, since the taxpayer(s) have been convicted in Federal Court.

The civil fraud penalty is derived by multiplying the 75 percent penalty rate times the underpayment attributable to civil fraud.

If any part of an underpayment is due to civil fraud, then the entire underpayment shall be treated as attributable to civil fraud unless the taxpayer establishes (by a preponderance of the evidence) that such portion of the underpayment is not attributable to fraud. See IRC 6663(b). The examiner will make a good faith effort to objectively weigh the evidence provided and eliminate those items that are inaccurate but not fraudulent from the penalty calculation. See IRC 6663(b).

For a calculation example involving civil fraud when gross receipts cause an adjustment to self-employment tax with a related change in the income tax deduction allowed under IRC 164(f), see Exhibit 20.1.5-5.

If it is determined that a case has indications of fraud but not yet met criminal criteria, Form 11661, Fraud Development Recommendation—Examination, must be prepared. See IRM 25.1.2, Recognizing and Developing Fraud, for procedures on developing and processing a civil fraud case.

The examiner will compute the penalty and provide any special closing instructions for CCP on Form 3198 or Form 3198-A.

The total civil fraud penalty amount will be assessed to MF with TC 320 using one of the following:

Under certain conditions the fraud penalty is assessed to the Non-Master File (NMF) with TC 320 using one of the following:

The Form 5734 will be processed with the tax return.

In general, no fraud penalty is imposed on any portion of an underpayment if it is shown (by a preponderance of the evidence) that it is not attributable to fraud.

In the case of a joint return (married filing jointly), the fraud penalty will not apply to a spouse unless some part of the underpayment is due to fraud of such spouse. See IRC 6663(c).

A taxpayer is treated as meeting the disclosure requirements of IRC 6011 and the associated regulations if the Commissioner (or the Commissioner’s delegate) rescinds the penalty under IRC 6707A. See IRM 4.32.4.9, IRC 6707A Penalty Rescission Consideration, and IRM 4.32.4.11, Continuation of the Income Tax Examination and IRC 6662A Considerations, for additional guidance.

IRC 6707A authorizes the Commissioner to rescind the imposition of the penalty with respect to reportable non-listed transactions if it would promote compliance with the tax laws and effective tax administration. The penalty cannot be rescinded with respect to a listed transaction.

The examiner should question the taxpayer or otherwise determine whether the taxpayer successfully sought rescission of an IRC 6707A penalty with respect to the reportable transaction at issue because such rescission could directly impact the application of IRC 6662A.

See IRM 4.32.4, IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return, for detailed guidance regarding IRC 6707A. If questions arise with regards to the abatement procedures for IRC 6707A (and not the criteria or procedures for processing a rescission request), see IRM 4.32.4.8, Abatement Procedures, for specific information on IRC 6707A penalty abatement.

Although IRM 4.32.4.9(19), IRC 6707A Penalty Rescission Consideration, states that the rescission determination is not reviewable by Appeals or by any court, a taxpayer may appeal the applicability of IRC 6707A (whether associated with a listed or non-listed reportable transaction) independent of a rescission request. See IRM 4.32.4.6, Timely Appeals Requests-Overview, for additional guidance. However, a taxpayer is deemed to have disclosed its reportable transaction for purposes of IRC 6662A only where the IRC 6707A penalty has been rescinded by the Commissioner and abatement of the IRC 6707A penalty for any other reason is not deemed adequate disclosure.

The reportable transaction understatement is defined in IRM 20.1.5.3.1.

The information below provides a calculation of a reportable transaction understatement using the following facts:

If the taxpayer files an amended return after the IRS first contacts the taxpayer regarding an examination of the return or any other dates specified by the IRS, the tax treatment of an item on the amended return is not taken into account in determining the reportable transaction understatement.

The IRC 6662A penalty does not apply to:

If the IRC 6662A penalty is imposed, the penalty under IRC 6676, Erroneous Claim for Refund or Credit, cannot not be imposed as a primary position but should be developed as an alternative position where appropriate.

The understatement attributable to the IRC 6662A reportable transaction is included in the IRC 6662(d) understatement calculation. However, the reportable transaction understatement upon which the IRC 6662A penalty is asserted is not included in the amount of the understatement used to determine the underpayment upon which the 20 percent under IRC 6662(d) penalty is asserted. Consequently two understatement calculations must be performed. The example below illustrates the calculation of the IRC 6662(d) and IRC 6662A penalties when both are applicable.

IRC 6662A penalty is assessed on an examination report in the same manner as IRC 6662 penalties.

The examiner should determine whether the taxpayer successfully sought rescission of an IRC 6707A penalty with respect to the same transaction, as rescission may impact the application of the IRC 6662A penalty. See IRM 20.1.5.17.1.

Taxpayers are entitled to pre-assessment appeals consideration and statutory notice of deficiency procedures for the IRC 6662A penalty. When forwarding a case to Appeals, the examiner should ensure the IRC 6662A case file transmitted to Appeals through Technical Services includes an alternative penalty position and information, if available, on any prior Appeals decisions pertaining to this issue, including the appeals officer’s name.

See IRM 20.1.5.4.2 for additional penalty assessment and abatement guidance.

The IRC 6664(d) reasonable cause provision for the IRC 6662A penalty will not apply to any transaction lacking economic substance. See IRC 6664(d)(2).

The accuracy-related penalty under IRC 6662A does not apply with respect to any portion of a reportable transaction understatement if, pursuant to IRC 6664(d), it is shown that there was reasonable cause and the taxpayer acted in good faith with respect to that portion of the understatement. A taxpayer does not have reasonable cause and did not act in good faith unless:

An IRC 6676 penalty can be asserted against perpetrators of identify theft who, without authority, use a third party's identifying information to file a return(s) or claim(s) for refund or credit.

Identity theft occurs when someone uses an individual’s personal information, such as name, social security number (SSN), or other identifying information without permission to commit fraud or other crimes.

Whether the IRC 6676 penalty applies to an identity theft perpetrator must be determined based on the specific facts and circumstances in the assigned identity theft case. Other penalties, including penalties under IRC 6694, IRC 6695, or IRC 6701, may more appropriately apply to the perpetrator. Field counsel may need to be contacted for assistance in determining the appropriate penalty for your identity theft case.

If an IRC 6676 penalty applies to an identity theft perpetrator, the penalty should be assessed against the taxpayer identification number (TIN) of the perpetrator. Use the procedures (without deficiency procedures) below in IRM 20.1.5.18.5.

If a perpetrator is believed to have filed multiple claims for refund or credit returns involving identity theft, a referral should be made to the SB/SE Lead Development Center for consideration of a promoter investigation. See IRM 4.32.2.4.2, SB/SE Lead Development Center (SB/SE LDC). Referrals to CI may also be warranted. See IRM 25.1.3, Criminal Referrals.

For additional information about working with identity theft victims, see IRM 25.23, Identity Protection & Victim Assistance.

To avoid uncertainty, the IRC 6676 penalty should be assessed within three years of the date when the claim for refund or credit was filed. The assessment statute expiration date (ASED) for assessment of an erroneous claims penalty can be extended using Form 872-EC, Consent to Extend the Time on Assessment of IRC section 6676 Erroneous Claim for Refund or Credit Penalty.

IRC 6676 penalties apply to any form or document that presents a claim for refund or credit that has no reasonable cause (reasonable basis if filed before December 18, 2015). The forms to which the penalty could apply include, but are not limited to: Form 843, Form 1040 series, and Form 1120 series. This list is not all inclusive. It may be asserted during an examination or upon the disallowance of a claim.

When examining federal income tax returns, claims or amended tax returns, if there is a question as to whether there is a reasonable cause (reasonable basis if the claim was filed before December 18, 2015), the IRC 6676 penalty should be considered.

Generally, the penalty will not be proposed until the excessive amount is determined. See IRM 4.10.8.10, Claims.

The IRC 6676 penalty should be included on examination deficiency reports when determination of the IRC 6676 penalty is dependent on the determination of a deficiency. That will be the case only when the taxpayer makes an erroneous claim for refund or credit of a refundable credit and the refund is frozen. The disallowed refundable credit will result in a deficiency, but because the refund is frozen, there will be no underpayment. See IRM 20.1.5.18. This includes examination deficiency reports incorporated into AUR, RGS, and other IRS programs that generate deficiency reports.

In all other cases in which the IRC 6676 penalty is applicable, the penalty is not dependent on the existence of a deficiency and is therefore assessable without following deficiency procedures. See IRM 20.1.5.18.5.

Generally, penalties are assessable without deficiency procedures when they are not dependent upon the determination of a deficiency.

IRC 6676 penalties are generally assessable without deficiency procedures when an excessive amount of a claim for credit or refund arises from an item or transaction other than an erroneous refundable credit.

A separate IRC 6676 penalty case file or case files must be created. The penalty case files are referred to as the "related" cases. The income tax file or the claim file is the "key" case. See IRM 20.1.5.18.6 for guidance on "related" case files.

Special procedures apply when asserting the penalty on Married Filing Joint (MFJ) cases. See IRM 20.1.5.18.6.

Do not establish or control the IRC 6676 penalty cases on the Audit Information Management System (AIMS). For SB/SE and LB&I examiners, penalty cases are controlled on Examination Returns Control System (ERCS) only as a related case file. The examiner prepares a Form 5345–D for each penalty case. Managerial approval of Form 5345–D is required.

TE/GE functions do not use ERCS. The five business units of TE/GE have their own processing functions. If the TE/GE examiner determines the penalty is warranted, group manager approval should be secured.

After securing supervisory approval, the examiner advises the taxpayer(s) of the opening of the IRC 6676 penalty case.

After consideration of all the facts and circumstances, if the examiner determines IRC 6676 penalties apply, then the examiner prepares Form 886-A, Explanation of Items, for each case.

Penalties requiring supervisory approval must be approved timely. See IRM 20.1.5.18.4.1(4) and IRM 20.1.1.2.3.1, Timing of Supervisory Approval, for policy regarding timing of supervisory approval. The immediate supervisor is required to sign line 11a and date line 11b of Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

Written supervisory approval of the IRC 6676 penalty must be obtained prior to issuing Letter 4143-C and Form 5838-EC to the taxpayer. Examiners should complete the appropriate IRC 6676 penalty lead sheet and include it in the penalty case file. Any supervisory involvement must be documented in the case file.

The examiner explains the issue to the taxpayer and or representative and offers a meeting with the examiner’s manager to discuss the penalty issue.

If further discussion of the penalty results in non-assertion, the conversation should be documented in the penalty case file workpapers and the ERCS control closed. The related penalty case files can be associated with the claim for refund or credit "key" case and closed under normal claim procedures.

If further discussion of the penalty results in a determination that the penalty is warranted, the examiner prepares and issues Letter 4143-C, 30-Day Letter for IRC Section 6676 Penalty. This letter advises the taxpayer of the proposed penalty, solicits payment, offers an Appeals conference, and provides an explanation of the dispute process. The examiner will include a copy of Form 5838-EC, Agreement to Assessment and Collection-Section 6676 Erroneous Claim for Refund or Credit Penalty; Form 886-A; and other pertinent documents and workpapers with the letter.

Do not prepare Form 4549. The IRC 6676 penalty should not be included on the examination report (30-day letter), or SNOD when the penalty is a non-deficiency penalty.

Associate the IRC 6676"related" case file with the "key" income tax case (or claim for refund or credit) until it is resolved.

If the "key" case and the penalty case are not resolved with an agreement by the taxpayer, close the unagreed case files together as a package.

When claims are disallowed and the IRC 6676 penalty is not applicable, the examiner documents the basis for non−assertion of the IRC 6676 penalty in the "related" case file workpapers. A standard statement such as "Erroneous claims penalty deemed not applicable" is not sufficient. The reasons for applicability or non-applicability of the penalty must be clearly stated. The examiner's manager should sign off on the decision not to apply the penalty when a substantial portion of the claim for refund or credit is disallowed.

Consult the group manager for assistance in developing the IRC 6676 penalty and evaluating a taxpayer’s reasonable cause (reasonable basis if the claim was filed before December 18, 2015) defense. Contact counsel if appropriate.

The examiner identifies the IRC 6676 penalty on Form 5838-EC and attaches a Form 886-A. The Form 886-A will clearly explain the IRC section, penalty name, and penalty computation.

The examiner's time for the penalty case is applied to Activity Code 554.

If a paid tax return preparer prepared the claim for refund or credit return, it is the examiner’s responsibility to investigate and coordinate with his or her respective business unit’s return preparer coordinator (RPC) to ensure no return preparer violations exist. The Lead Sheet 300, Civil Penalty Approval Form has a preparer penalty section that should be completed to document that return preparer penalties were considered.

Form 8278 is used for IRC 6676 penalty cases except for MFJ income tax return claims. The IRC 6676 penalty is assessed on MFT 55 for IMF and MFT 13 for BMF with PRN 565 using Form 8278.

Form 3870, Request for Adjustment, is used when asserting the IRC 6676 penalty on MFJ income tax returns. The penalty "related" case for MFJ income tax return claims must be assessed on MFT 30 with PRN 687. Do not use Form 8278 for MFJ penalty cases.

Use the chart below for the correct penalty assessment form, MFT code and PRN.

The applicable "Special Handling Notice" is placed on the outside front cover of each case file.

Included in the "related" penalty case file and placed in the location typical for the operating division are the following:

In the event that the "key" case file is closed separately from the "related" or penalty case file, the following information and documentation from the income tax case file should be placed in the "related" case file.

Pre-assessment Appeal rights procedures generally apply to IRC 6676 penalty cases not subject to deficiency procedures.

If the taxpayer timely requests Appeals consideration and provides a protest, the penalty case file will be updated to Status Code 21 and sent to Technical Services to be forwarded to Appeals in accordance with functional procedures. The IRS's position should be clearly outlined with any alternative positions (if appropriate) prior to forwarding the case to Appeals. Appeals will contact the taxpayer to schedule an appointment.

Taxpayers may seek review of their liability for the IRC 6676 penalty in a United States District Court or the United States Court of Federal Claims. However, to seek court review of the liability for the IRC 6676 penalty, the taxpayer must first fully pay the liability and file a claim for refund with the IRS. Refund claims are usually filed on Form 843, Claim for Refund and Request for Abatement.

The IRC 6676 penalty case is not established or controlled on AIMS.

For SB/SE and LB&I cases, the group clerk or secretary inputs the IRC 6676 penalty "related" case on ERCS using information from the Form 5345–D completed by the examiner. Information unique for completing the Form 5345–D include the following:

At the time of case closing, Form 3198 (SB/SE and LB&I) or Form 3198-A (TE/GE) will be completed by the examiner and affixed to the front of the case file.

IRC 6676 penalty case is not subject to mandatory review.

Reasonable cause criteria applies to an IRC 6676(a) penalty if the claim was filed on or after December 18, 2015 (reasonable basis for claims filed before December 18, 2015).

If a taxpayer entered into a transaction after March 30, 2010, any excessive amount that is attributable to a transaction described in IRC 6662(b)(6) will not be treated as having reasonable cause (reasonable basis if the claim was filed before December 18, 2015) under IRC 6676(c).

The imputed underpayment (IU) is the liability imposed on the partnership. It is generally computed by taking the total netted partnership adjustments for the reviewed year, multiplied by the highest rate of tax in effect for the reviewed year under IRC 1 or IRC 11, and increasing or decreasing the resulting product by the sum of net positive adjustments to creditable expenditure and credit groupings (and net negative adjustment to the credit grouping if appropriate).

The IU is calculated by segregating each partnership adjustment into one of four groupings:

Net positive adjustments in the credit grouping are added to the calculation of the IU after application of the tax rate to the total netted partnership adjustments. Net negative adjustments in the credit grouping are not to be included in the calculation unless the IRS determines it appropriate to include them. Decreases to creditable expenditures are to be treated as net positive adjustments in the credit grouping for purposes of the IU calculation. Increases to creditable expenditures are treated as net negative adjustments and are not to be included in the calculation of the IU.

The IU is assessed and collected in the same manner as a tax under Subtitle A of the Code, except deficiency procedures do not apply. See IRC 6232, and 26 CFR 301.6232-1.

A partnership making a push-out election is not liable for the IU. Instead, each reviewed year partner is liable for the tax, interest and penalties resulting from the partner taking into account its allocable share of adjustments to the partnership-related items. The partner is responsible for making and reporting these calculations.

For purposes of computing accuracy-related and fraud penalties, the partnership is treated as an individual subject to tax under Chapter 1 of Subtitle A of the Code for the reviewed year. The IU is treated as the underpayment or understatement of tax for the reviewed year, and penalties are determined based on the IU.

The applicable penalties computed for the partnership’s reviewed year should be reported on Form 14791, Form 14792, or Form 15027. The penalty code section and amount should be listed on the forms.

If the partnership elects push-out under IRC 6226, Form 8985, Pass-Through Statement-Transmittal/Partnership Adjustment Tracking Report, and Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Item(s), will be used by the partnerships to furnish and transmit the adjustments and the applicability of any penalties to partnership-related items.

The applicability of any penalties, additions to tax, or additional amounts is determined at the partnership level. Penalties are paid by the partnership unless it elects to push out, then the penalties (if applicable based on the partner’s facts and circumstances) are the liability of the partners. See IRM 20.1.5.19.4.

This section provides special rules outlined in 26 CFR 301.6233(a)-1(c)(2)(iv)(A)-(D)

A partnership may elect the alternative to payment of imputed underpayment under IRC 6226. If a partnership makes a valid election to push-out the adjustments determined at the partnership level to its reviewed year partners, the reviewed year partners are liable for any penalties, additions to tax, or additional amounts on their share of the adjustments. See 26 CFR 301.6226-3(d).

If the reviewed year partner does not have an understatement after taking the partnerships adjustments into account, or has an understatement that falls below the applicable threshold for the imposition of a penalty, no penalty is due from that reviewed year partner. See 26 CFR 301.6226-3(d)(2).