This section covers procedures for preparing settlement computations involving penalties and additions to tax on cases worked in Appeals.

As stated in IRC 7803(e)(3), the Appeals mission is to resolve Federal tax controversies without litigation on a basis that is fair and impartial to both the Government and the taxpayer, promotes a consistent application and interpretation of, and voluntary compliance with, the Federal tax laws, and enhances public confidence in the integrity and efficiency of the IRS. Appeals accomplishes its mission by considering protested and Tax Court cases and negotiating settlements in a manner which ensures Appeals employees act in accord with the Taxpayer Bill of Rights (TBOR) in every interaction with taxpayers.

IRM 8.17, Settlement Computations and Statutory Notices of Deficiency, establishes the TCS policy framework for Appeals.

The Appeals TCS is responsible for the accurate preparation of tax computations, including all applicable computation schedules.

The Appeals TCS Program Analyst is responsible for:

See IRM 8.1.1-1, Common Terms Used in Appeals, for common terms and definitions used in IRM Part 8.

The table below lists commonly used acronyms and definitions:

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.

In accordance with IRM 25.30.2.3, Statement of Commitment, Appeals will work collaboratively with the Taxpayer Advocate Service (TAS) to enhance the taxpayer experience. For more information, see IRM 25.30.2, Service Level Agreement between the IRS Independent Office of Appeals and the Taxpayer Advocate Service.

The Tax Court does not have jurisdiction over certain underpayments of additions to tax or penalties.

When the Tax Court does not have jurisdiction to determine a penalty, the penalty is assessable and not subject to a deficiency procedures. Penalties that are not subject to deficiency procedures are not included in the computation of the deficiency shown on the notice of deficiency.

In general, the Tax Court has no jurisdiction over the following penalties.

For more discussion of the Tax Court jurisdiction, see the following IRM sections for additional information:

For loss carrybacks, generally, the penalty provisions of the Code sections in effect for the loss year generating the carryback govern penalties applicable to the carryback years, and for deficiencies resulting from a carryback recapture.

Net operating loss carrybacks, capital loss carrybacks and all credit carrybacks cannot be used to reduce the underpayment subject to the penalty.

Prepayment credits and frozen refunds may impact the penalty computations:

If the income tax return is more than 60 days late, including an extension of time to file, a minimum FTF penalty shall apply. See IRM 20.1.2.3.7.4, Minimum Penalty, for details.

The minimum penalty applies only to income tax returns. It does not apply to employment tax, excise tax, gift tax, or estate tax returns.

In order for the minimum penalty to apply, there must be a net tax due. Withholding and other allowable credits as of the due date of the return must be less than the revised tax liability or tax required to be shown on the return.

When both the failure to pay (FTP) penalty and the minimum FTF penalty apply (income tax returns only), the minimum FTF penalty is not reduced by the amount of the FTP penalty.

The FTF and the fraud penalties may be asserted for the same tax year and against the same portion of the tax liability.

If the FTF is due to fraud, the FFTF penalty under IRC 6651(f) should be asserted with the FTF penalty under IRC 6651(a)(1). See IRM 20.1.2.3.7.5.1.2, FFTF Penalty Assessment Process.

See discussion of IRC 6651(f) in IRM 8.17.7.6, Fraudulent Failure to File (FFTF), IRC 6651(f).

IRC 6651(c)(1) provides that the penalty for filing late under IRC 6651(a)(1) is to be reduced by the amount of any penalty for paying late imposed under IRC 6651(a)(2) for any month or part of a month during which both penalties apply. The penalties are said to be running concurrently.

The above reduction does not reduce the total penalty for filing late below the minimum penalty, if applicable. See IRM 20.1.2.3.7.4, Minimum Penalty.

When both the IRC 6651(a)(1) FTF and IRC 6651(a)(2) FTP penalties apply to an original assessment, see example below of the computation of the FTF penalty that should be assessed by the campus if the return is filed late:

If the taxpayer has filed a return late and an additional tax liability is determined:

If the taxpayer has filed a return late and FTF penalty applies, and the IRC 6651(a)(2) FTP penalty has been assessed:

If the taxpayer has not filed a return and an additional tax liability is determined, see IRM 8.17.7.5, Nonfilers: Substitute for Return (SFR), IRC 6651(a)(1) and 6651(a)(2), for SFR procedures for computing the FTF and FTP penalties.

Notices of Levy: IRC 6651(d) increases the FTP penalty rate under IRC 6651(a)(2) or IRC 6651(a)(3) from 0.5% (.005) to 1% (.01) of the tax at the start of the month beginning after:

These are the only two conditions (trigger dates) that allow for the FTP penalty rate increase to 1%. See IRM 20.1.2.3.8.1.1, 1 Percent Penalty Rate—IRC 6651(d), for more information.

An individual's FTP penalty will be reduced to 0.25% (.0025) for any month in which an installment payment agreement with the IRS under IRC 6159 is in effect, provided the individual timely filed (taking extensions into account) the return relating to the liability that is subject to the installment agreement.

Termination of installment agreement

See IRM 20.1.2.3.8.1.2, 1/4 Percent Penalty Rate—IRC 6651(h), for more detailed information.

Pursuant to IRC 6020(b), the IRS generally prepares a return when it determines that a taxpayer is liable for filing the tax return, but failed to do so after receiving notification from the IRS.

A valid return must have been prepared under IRC 6020(b) in order to assert the IRC 6651(a)(2) FTP penalty. The requirements of a valid IRC 6020(b) return are discussed in 26 CFR 301.6020-1.

The requirements of a valid IRC 6020(b) return include the following documents for each nonfiled tax period (known as the 6020(b) Certification package):

The ATE or Counsel attorney must determine that SFR procedures were followed in order to sustain the FTP penalty asserted by compliance. See the steps they must take below:

SFRs for employment and excise tax returns:

Because the IRC 6651(a)(1) FTF and IRC 6651(a)(2) FTP penalties are asserted concurrently on SFRs, the amount of the FTF penalty must be reduced by the amount of the FTP penalty for any month or part of a month during which both penalties apply, but not below the minimum IRC 6651(a) FTF penalty, if applicable. See IRM 8.17.7.3.3 , FTF Penalty with Concurrent FTP Penalty Assessment, for additional information.

If the IRC 6651(a)(2) FTP penalty has not reached the maximum penalty of 25%, see procedures below:

If the IRC 6651(a)(2) FTP penalty has reached the maximum amount, either because the penalty has reached the maximum rate of 25% or because the tax has been paid in full, see procedures below:

IRC 6654 provides for a penalty when individuals underpay any required installment(s) of estimated income tax liabilities reportable on Form 1040, U.S. Individual Income Tax Return.

For the purpose of asserting the IRC 6654 penalty, tax is defined as income tax and self-employment tax less all credits allowed by Part IV, Subchapter A, Chapter 1 of the IRC, other than tax withheld from wages. Tax withheld from wages is allowed as a payment of estimated tax.

RGS computations:

See IRM 20.1.3.3, IRC 6654 - Individual Taxpayers and Fiduciaries, for more detailed information about IRC 6654.

IRC 6654(l) provides for a penalty when estates and trusts (other than charitable trusts and private foundations) underpay any required installment(s) of estimated income tax liabilities reportable on Form 1041, U.S. Income Tax Return for Estates and Trusts.

Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, is used by the taxpayer to figure any penalty.

For information and exceptions when computing the estimated tax penalty for estates and trusts, consult the IRC and treasury regulations. The following resources are also available:

Charitable trusts and any private foundation organized as a trust, will be subject to the corporate estimated tax provisions under IRC 6655, rather than IRC 6654.

IRC 6655 imposes a penalty when a corporation, private foundation, private foundation organized as a trust, or tax exempt organization underpays estimated tax.

A corporation or other entity subject to IRC 6655 must make estimated tax payments if its tax shown on the return (income tax minus credits) is $500 or more. If the tax is less than $500, no estimated tax payments are required, and a penalty will not be assessed.

Since the law can be complex, it is best to consult the IRC and treasury regulations if computation of this penalty is involved in a case. Also IRM 20.1.3.4, IRC 6655—Corporations and Others Not Covered by IRC 6654, has very detailed information about IRC 6655.

IRC 6662A generally imposes an accuracy-related penalty at the rate of 20% on any reportable transaction understatement for tax years ending after October 22, 2004. The penalty applies to:

The computation of the IRC 6662A penalty is:

Due to the definition of reportable transaction understatement, the IRC 6662A penalty, unlike the IRC 6662 penalty, can apply even if there is no underpayment of tax on the taxpayer’s return. See IRM 20.1.5.17.2, Penalty Calculation, for discussion of IRC 6662A penalty computations.

Coordination with other penalties: