Once approval is received potential IRC 6707 penalty cases are established as penalty investigations on ERCS. See IRM 4.7.5.7.1, Requesting ERCS Controls and Incoming Inventory.

To establish ERCS controls:

For TEGE led investigations, the penalty case will be tracked by Non-Master File using the following codes:

Consents to extend the statute of limitation should be obtained when:

A separate consent should be obtained for each taxable period under consideration, but the related taxpayer returns for which the penalties are applicable can be included on each consent.

If a taxpayer refuses to sign a consent, see IRM 4.4.25.7, Quick Assessments on Civil Penalties, Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, Area Office Group Procedures, for procedures when the assessment statute expiration date (ASED) is less than 60 days and IRM 4.4.25.8, Quick Assessments on Civil Penalties, Form 8278, CCP Procedures. Centralized Case Processing (CCP) prepares Form 2859, Request for Quick or Prompt Assessment.

The IRC 6707A penalty may be imposed even if an examination results in no-change or if an examination was not opened. Sufficient factual evidence is required to show the taxpayer:

The examiner does not need to conclude the examination before issuing the 30-day letter for the IRC 6707A penalty. All relevant facts to support the penalty should be established when an IRC 6707A penalty is developed in conjunction with an examination. Likewise, an examiner does not need to conclude the IRC 6707A penalty investigation before issuing the 30-day letter for the examination. If the timing is appropriate, the 30-day letter for both the examination and IRC 6707A penalty cases can be issued at the same time.

If the penalty relates to a listed transaction and the taxpayer is a publicly traded company:

Potential IRC 6707A penalty cases are established as penalty investigations on ERCS. See IRM 4.7.5.7.1, Requesting ERCS Controls and Incoming Inventory.

To establish the penalty case on ERCS:

If Compliance is involved in a concurrent examination with TE/GE, the penalty case file will be assigned to the Compliance examiner. For example, a TE/GE examiner would analyze and document whether a transaction is substantially similar to a listed transaction and the Compliance examiner would analyze whether the taxpayer had a duty to disclose the transaction under 26 CFR 1.6011-4, whether the taxpayer had complied with the applicable disclosure requirement, and whether IRC 6707A was effective for the year(s) at issue.

Report Generation Software (RGS) can be used to calculate the tax benefit attributable to the reportable transaction. The examiner can use the tax benefit calculated to manually compute the penalty for individuals and C corporations.

Examiners should develop a case file containing all relevant documents and other evidence demonstrating the transaction was a reportable transaction and all documents demonstrating the required procedures have been followed. Minimum required documents are listed in IRM 20.1.13.3.2.3.2, Penalty Case File—Documents Required for All Listed and Non-Listed Reportable Transactions but other documents may be required depending on the case. Other documents can include but are not limited to:

Form 8886 must be filed by the taxpayer in the time and manner prescribed in 1.6011-4(d) and 1.6011-4(e) to meet the required disclosure obligation. The examiner should have sufficient basis to demonstrate the taxpayer participated in a reportable transaction under 26 CFR 1.6011-4.

Examiners handling an IRC 6707A penalty investigation related to a non-listed reportable transaction should attempt to document facts relating to any potential rescission request as explained in IRM 20.1.13.3.6.1, Factors Weighing in Favor of Rescission.

General period of limitations: When the Form 8886 is required to be filed with a return, the assessment of the IRC 6707A penalty for a failure to timely and or properly disclose a reportable transaction generally must be made within three years of the date of filing the underlying return pursuant to IRC 6501, Limitations on Assessment and Collection.

Disclosure is required with a return when a transaction is listed or otherwise reportable at the time the return is filed. The period of limitations on assessment of the IRC 6707A penalty begins on the date the return to which the disclosure should be attached is deemed filed.

There is an exception to the general three-year period of limitations for listed transactions. For listed transactions only, IRC 6501(c)(10) provides additional time to make an assessment of the penalty if the disclosure is not made with the return. IRC 6501(c)(10) provides the period to assess tax with respect to a listed transaction the taxpayer failed to disclose in accordance with IRC 6011 shall not expire before one year after the earlier of the following:

After first following instructions in IRM 20.1.13.3.3, Statute of Limitations - General Information, see Rev. Proc. 2005-26, 2005-1 C.B. 965, for further guidance on IRC 6501(c)(10) and consult Counsel to determine the applicability of this provision.

Applicable to transactions of interest entered into on or after November 2, 2006 and to listed transactions entered into on or after August 3, 2007, 26 CFR 1.6011-4(e)(2)(i) requires taxpayers to file a disclosure with OTSA within 90 calendar days of the date a transaction is listed or identified as a transaction of interest (TOI) by the IRS, if the taxpayer participated in the transaction and reported tax benefits from it on a previously filed return for which the period for assessing tax remains open.

Because the return on which the taxpayer took the tax benefits of the transaction was already filed and at the time of filing there was no requirement to make the disclosure, the three-year period for assessing tax on a return is not the appropriate limit of the period within which to assess the penalty for failing to file a stand-alone statement. In this situation, no limitations period to assess the IRC 6707A penalty should apply.

26 CFR 1.6011-4(b) currently lists five types of reportable transactions:

Examiners are to evaluate a taxpayer's participation in a reportable transaction and the terms of the listing notice in determining the applicability of IRC 6707A penalty. See 26 CFR 1.6011-4(c)(3)(i)(A) - (3)(i)(G).

The definition of reportable transaction varies greatly depending on which version of the regulations applies to the transaction. It is imperative to look to the actual language of the regulations.

Examiners reviewing a transaction should consult the regulations and Counsel to determine if a disclosure requirement may apply to the transaction.

Generally, a transaction will not be considered a reportable transaction if the Commissioner makes a determination, by published guidance, the transaction is not subject to the reporting requirements.

The application of IRC 6011 reportable transaction disclosure regulations requires the taxpayer meet the definition of participation in a reportable transaction as those terms are defined in the relevant versions of the regulations, as well as other requirements of the applicable regulations described below.

Whether a taxpayer was required to disclose under the IRC 6011 regulations depends on what version of those regulations was in effect when the taxpayer entered into the transaction.

The version of the regulations applicable to a transaction at the time the transaction was entered into by the taxpayer will remain applicable to the taxpayer, even if the regulations are subsequently modified. When the IRC 6011 regulations do not impose a disclosure requirement, the IRC 6707A penalty cannot apply. Therefore, as explained more fully below, even if a taxpayer files a tax return after October 22, 2004, reflecting participation in a listed or non-listed reportable transaction and fails to file a Form 8886, the taxpayer may not be subject to the IRC 6707A penalty; further analysis is required before imposing the IRC 6707A penalty.

Form 8886, Reportable Transaction Disclosure Statement, is used by taxpayers as the disclosure statement required under IRC 6011 and the regulations.

Under 26 CFR 1.6011-4(e), the Form 8886 must be attached to the taxpayer's tax return (or amended return) for each taxable year for which a taxpayer participates in a reportable transaction.

A taxpayer filing a Form 8886 with a return for the first time is required to file a duplicate copy of Form 8886 with OTSA at the same time the disclosure statement is first filed by the taxpayer. The requirement to file a duplicate disclosure statement with OTSA applies only with respect to the initial year the Form 8886 is filed.

When a taxpayer fails to file a required Form 8886 in the year the participation in a reportable transaction begins, the requirement to file a duplicate copy with OTSA arises with the earliest filing of a tax return that incorporates the requisite Form 8886. This requirement exists regardless of the duration of the taxpayer's participation in a reportable transaction prior to filing of the Form 8886 with a tax return.

There are special rules relating to the filing of a disclosure statement for transactions which become listed transactions or transactions of interest after the taxpayer has filed a return reflecting the taxpayer's participation in the transaction. See IRM 20.1.13.3.4, Penalty Computation Overview - IRC 6707A.

When a taxpayer participates in more than one reportable transaction, a separate Form 8886 must be filed with respect to each reportable transaction unless the reportable transactions are substantially similar, in which case one Form 8886 may be filed.

An IRC 6707A penalty case should not be submitted to Appeals unless there will be 365 days remaining on the statute of limitations when the case is received in Appeals.

Compliance should send the 6707A case to Appeals upon receipt of the valid protest and not "hold" the case pending receipt or completion of any examination case.

Ensure the penalty case file contains all the documentation described in IRM 20.1.13.3.2.3.2, Penalty Case File—Documents Required for All Listed and Non-Listed Reportable Transactions and IRM 20.1.13.3.2.3.2.1, Penalty Case File—Additional Documents Required for Non-Listed Reportable Transactions Only, as well as a rebuttal to the taxpayer's protest, if any.

When there is less than 365 days remaining on the statute and the examiner cannot secure a consent to extend the period of limitation, the examiner should request a quick assessment of the IRC 6707A penalty under the procedures described in IRM 20.1.13.3.2.3.4.1, Quick Assessment Closing Procedures for IRC 6707A Penalty Cases.

The examiner should notify the taxpayer of the assessment and the ability to seek post-assessment Appeals consideration at the same time the assessment documents are submitted. The examiner should include a copy of the report and a computation of the penalty, and should allow 30 days for response. The examiner should ensure a copy of this letter is included in the case file.

If the taxpayer submits a timely and valid Appeal request in response to the notification of assessment, See IRM 4.7.5.7.3, Transfers and Closings, the examiner should:

Ensure the penalty case file contains all the documentation described in IRM 20.1.13.3.2.3.2, Penalty Case File-Documents Required for All Listed and Non-Listed Reportable Transactions, and IRM 20.1.13.3.2.3.2.1, Penalty Case File-Additional Documents Required for Non-Listed Reportable Transactions Only. The case file should also include a rebuttal to the taxpayer's protest. The examiner must provide the taxpayer and representative, if any, with a copy of any rebuttal.

If, after 10 days, confirmation of receipt is not received, contact the receiving Appeals APS unit for confirmation the case was received.

Once confirmed as received in Appeals update ERCS to Status Code 90, Disposal Code 07, and enter the penalty amount.

If the IRC 6707A penalty case is on the Report Generation Software (RGS) generic workcenter, the examiner will move it to the server and the manager will send it to archives.

At the same time the case is being sent forward to Appeals, the examiner will provide the taxpayer's name and TIN to the appropriate Abusive Transactions - Contacts, who will work directly with Collection to ensure collection efforts are suspended appropriately during Appeals consideration.

If the penalty case file is missing relevant information, the Appeals officer will prepare Form 10467, Appeals Division Feedback Report and Transmittal Memorandum, and return the penalty case file as a premature referral to the examination group. Appeals will update Appeals case management systems to return responsibility for the case file to the field.

If Appeals returns a premature referral, the case will be reopened from closed Status Code 90 into active examination group Status Code 12 and the manager will reassign to the examiner.

The examiner will complete the development of the case and then re-close to Appeals.

The following non-exclusive list of factors, from Rev. Proc. 2007-21, Examination of Returns and Claims for Refund, Credit, or Abatement; Determination of Correct Tax Liability, weighing in favor of granting rescission and are relevant to the determination as to whether rescission would promote compliance with the requirements of the Code and effective tax administration.

A taxpayer filed a complete and proper but untimely, Form 8886 or any successor form, as applicable, as soon as becoming aware of the failure to disclose a reportable transaction. This factor will weigh strongly in favor of rescission, provided the following:

The taxpayer's failure to properly disclose was due to the existence of an unintentional mistake of fact despite the taxpayer's reasonable attempts to obtain the correct facts with respect to the transaction.

The taxpayer has an established history of properly disclosing other reportable transactions and complying with other tax laws.

The taxpayer demonstrates the failure to include on any return or statement any information required to be disclosed under IRC 6011 arose from events beyond taxpayer's control.

The taxpayer cooperates with the IRS by providing requested information timely.

The penalty assessment would weigh against equity and good conscience, including whether the taxpayer demonstrates there was reasonable cause for, and the taxpayer acted in good faith with respect to, the failure to timely file or to include on any return any information required to be disclosed under IRC 6011. An important factor in determining reasonable cause and good faith is the extent of the taxpayer's efforts to ensure persons who prepared the taxpayer's return were informed of the taxpayer's participation in the reportable transactions.

The list of factors weighing in favor of rescission set forth in Rev. Proc. 2007-21 is very similar to, but not identical to, the list of factors weighing in favor of rescission as set forth in 26 CFR 301.6707A-1(e)(3). To the extent these lists are inconsistent, the list in the Treasury Regulations controls.

In determining whether to grant rescission, the Commissioner or their delegate, will not consider doubt as to liability for the penalty, except to the extent doubt as to liability is a factor in determining reasonable cause and good faith. Additionally, in determining whether to grant rescission, the Commissioner or their delegate will not consider doubt as to collectability of the penalties.

The absence of facts establishing the factors in favor of rescission, described above, weighs against granting rescission; however, the absence of any one of these factors will not necessarily be determinative with respect to rescission.

In general, the examination should not be delayed pending consideration of a rescission request. There are situations, however, where the determination of whether the IRC 6707A penalty applies can affect the determination of whether the IRC 6662A penalty applies.

IRC 6662A, Imposition of Accuracy-Related Penalty on Understatements With Respect to Reportable Transactions, was added by section 812 of AJCA and imposes a 20-percent penalty on an understatement resulting from a properly disclosed reportable transaction (or for which there is no disclosure requirement for the taxpayer but there is an understatement to which IRC 6662A would apply) and a 30-percent penalty on an understatement resulting from a reportable transaction not properly disclosed. The IRC 6662A penalty will not be imposed if the taxpayer adequately disclosed the reportable transaction, and meets other criteria to establish reasonable cause and good faith.

If Appeals rejects the proposed assessment of an IRC 6707A penalty based on its determination the transaction in question was not a reportable transaction, then the IRC 6662A penalty will not apply. If Appeals rejects the proposed IRC 6707A assessment based on its determination the transaction was reportable but was properly disclosed, the IRC 6662A penalty will be reduced from 30 to 20-percent. For more information regarding the application of the IRC 6662A penalty. See IRM 20.1.5.17, IRC 6662A, Accuracy-Related Penalty on Understatements With Respect to Reportable Transactions.

For purposes of IRC 6662A, a taxpayer is deemed to have properly disclosed the reportable transaction if the Commissioner or their delegate has rescinded the IRC 6707A penalty with respect to the transaction. If the Commissioner or their delegate rescinds the IRC 6707A penalty, the IRC 6662A penalty might not apply depending on whether the taxpayer meets the other criteria for relief under the reasonable cause and good faith provisions of IRC 6664. For this reason, the examination case should not be closed until the rescission determination is made when:

If the IRC 6707A penalty is rescinded, the taxpayer is deemed to have properly disclosed the transaction and if the taxpayer met the criteria to demonstrate reasonable cause and good faith, the IRC 6662A penalty does not apply.

In contrast, if the results of the examination will not be affected by the rescission determination, the case should proceed and can be closed from the group without waiting for the conclusion of the rescission determination. For instance, if there is no proposed IRC 6662A penalty or the taxpayer would be liable for the penalty even if it had adequately disclosed because it failed to meet the other criteria to establish reasonable cause and good faith.

Potential IRC 6708 penalty cases are established as penalty investigations on ERCS. See IRM 4.7.5.7.1, Requesting ERCS Controls and Incoming Inventory.

To establish controls on ERCS: