IRS updates procedures on liability/information return penalty

The IRS has updated its liability and information return penalty (IRP) procedures. This IRM addresses the instructions in the Small Business/Self-Employed (SB/SE) IRP program in the IRP process.

Generally, the IRP function assesses IRPs in the 500-514 Penalty Reference Number (PRN) series, including penalties for prior-year returns. First Time Abate (FTA) administrative waiver procedures do not apply to IRPs. The filing history should be considered, but penalties should not be waived or abated citing the FTA criteria alone. Code Sec. 6721 contains the provisions for the application of IRPs covered in this IRM. Information return data is processed and stored on the Payer Master File (PMF). Proposed penalty notices like the Notice 972CG, Notice of Proposed Civil Penalty, are generated from this data. PMF maintains data covering the five most current tax years of information return data, including generated penalty assessment or proposal amounts.

Although the IRS strives to improve its systems and provide better service, some taxpayers still have difficulty in getting solutions to their problems or appropriate responses to their inquiries. Taxpayers may contact either the Campus or the Technical Services Operation (TSO) to request recreates (copies) of Notice 972CG and/or Taxpayer Identification Number (TIN) listings. Information returns that are not timely and/or correctly filed by their respective due dates are subject to penalties as outlined in Code Sec. 6721.

The Notice 972CG determines and calculates (through electronic means) the Code Sec. 6721(a) penalty for failure to file an information return. The maximum penalty limitation will be reduced when the taxpayer’s average annual gross receipts for the three most recent tax years do not exceed $5 million. The Notice 972CG determines if the taxpayer is a “large business_ or “small business_ and calculates the penalty limitation accordingly. If an information return is potentially subject to more than one penalty, it will be considered if the taxpayer acted with reasonable cause or in responsible manner in order to determine which penalty/penalties can be waived/abated. Power of attorney (POA) documentation may be received with a response to a civil penalty notice.

Generally, an IRP may be waived or abated if it can be shown the error was due to reasonable cause and not due to willful neglect. When evaluating a response to determine if the proposed penalty can be waived/abated due to reasonable cause, the fact the error occurred does not prevent the possibility for the penalty to be waived/abated. The taxpayer is considered to have acted in a responsible manner when the response to the Notice 972CG relating to the late-filing and/or the magnetic media penalties addresses actions they took when the error was first identified and subsequent actions taken to prevent future occurrence. The electronic media filing requirement does not apply if the taxpayer applies for and receives a hardship waiver. The taxpayer must file Form 8508, Request for Waiver from Filing Information Returns Electronically, at least 45 days before the due date of the returns.

The electronic media penalty applies to information returns not filed in the required manner. A full abatement determination results when the taxpayer provides enough information to fully reverse the IRP assessment. A partial abatement determination results when the taxpayer agrees with a portion of the previously posted penalty and establishes reasonable cause (or shows it is not liable) for the remainder of the penalty. Code Sec. 6511(a) provides that a claim for credit or refund must be filed within three years from the time the return was filed or two years from the time the penalty was paid, whichever is later. Finally, the penalty for failure to file in the proper format is assessed for unprocessable paper and electronic returns identified by submission processing and technical services operation. (IRM 4.19.25, July 26, 2018.)

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