Source: https://www.irs.gov/irm/part4/irm_04-032-004.html
Timestamp: 2016-05-01 06:11:12
Document Index: 244414774

Matched Legal Cases: ['§ 6011', '§ 6707', '§ 6011', '§ 6707', '§ 6707', '§ 6707', '§ 6707', '§ 6707', '§ 6707', '§ 6707', '§ 6707', '§ 165', '§ 6707', '§ 6707', '§ 6707', '§ 6707', '§ 6707', '§ 6707']

Internal Revenue Manual - 4.32.4 IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return
Section 4. IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return
4.32.4 IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return
4.32.4.1
IRC 6707A Penalty
4.32.4.2
IRC 6011—Overview of Disclosure Requirements
4.32.4.3
Processing Procedures—IRC 6707A Penalty
4.32.4.4
IRC 6707A Penalty Approval Process
4.32.4.5
Issuing the 30-Day Letter (Modified)—Letter 4143
4.32.4.6
Timely Appeals Requests—Overview
4.32.4.7
30-Day Letter Issued and Taxpayer Does Not Appeal
4.32.4.8
4.32.4.9
IRC 6707A Penalty Rescission Consideration
4.32.4.10
Factors Weighing in Favor of Rescission
4.32.4.11
Continuation of the Income Tax Examination and IRC 6662A Considerations
4.32.4.12
IRC 6707A Penalty Case File Closures
Exhibit 4.32.4-1
Sample of Page 1 of Form 872 IRC 6707A Penalty Only
Exhibit 4.32.4-2
Sample of Page 1 of Form 872 IRC 6707A Penalty and Income Tax
Exhibit 4.32.4-3
Opening Letter for IRC 6707A Investigation
Exhibit 4.32.4-4
Case Overview and Penalty Approval Record
Exhibit 4.32.4-5
IRC 6707A No Change Letter
Exhibit 4.32.4-6
IRC 6707A Notification of Assessment and Post Assessment Appeals Rights
Exhibit 4.32.4-7
IRC Section 6707A Penalty Rescission Checklist
Exhibit 4.32.4-8
IRC Section 6707 Penalty Rescission Checklist
(1) This transmits revised IRM 4.32.4, Abusive Transactions, IRC 6707A Penalty for Failure to Include Reportable Transaction Information With Return.
(1) Significant changes to this IRM are reflected in the table below: Reference
IRM 4.32.4.1.4
Updated to include provisions of IG memo SBSE-04-0714-0024 related to time required on statute to send case to Appeals.
IRM 4.32.4.6.2 (1)
IRM 4.32.4.7.2
Updated to include provisions of IG memo SBSE-04-0714-0024.
IRM 4.32.4.9
Updated instructions for processing and approving requests for penalty rescission.
Amended Checksheet for 6707A Penalty Rescission
Added Checksheet for 6707 Penalty Rescission
IRM 4.32.4, dated 12-12-2013, is superseded. This IRM incorporates Interim Guidance Memorandum SBSE-04-0714-0024, Interim
Guidance Memorandum Regarding Changes to Statute of Limitations Period for Appealed Cases, dated 07-09-2014.
This section provides guidance for Small Business and Self-Employed (SB/SE) Examination area office employees, Tax Exempt
and Governmental Entities (TE/GE) employees, and Large Business and International (LB&I) employees.
Michael W. DamasiewiczDirector, Exam Case SelectionSE:S:E:HQ:ECSSmall Business/Self-Employed
4.32.4.1 (06-05-2012)IRC 6707A Penalty
This section presents guidance in the application of the IRC 6707A penalty, including identification of reportable transactions,
the basis for asserting the penalty, and the statute of limitations for assessment.
4.32.4.1.1 (12-12-2013)Overview—IRC 6707A Penalty
IRC 6707A provides a monetary penalty for the failure to include on any return or statement any information required to be
disclosed under IRC 6011 with respect to a reportable transaction. This penalty was enacted October 22, 2004 under the American
Jobs Creation Act (AJCA).
Under Treas. Reg. 1.6011-4, Requirement of Statement Disclosing Participation in Certain Transactions by Taxpayers, taxpayers are required to disclose their participation in several categories of reportable transactions.
The IRC 6707A penalty is imposed in addition to any other penalty that may be imposed against a taxpayer. The penalty applies
without regard to whether the underlying transaction is ultimately determined to result in an understatement of tax.
Subject to the maximum and minimum limits, the amount of the penalty is "75 percent of the decrease in tax shown on the return"
as a result of the reportable transaction (or which would have resulted from such transaction if such transaction were
respected for federal tax purposes).
The maximum penalty in the case of a listed transaction is $100,000 for a natural person and $200,000 for all other taxpayers.
In the case of a non-listed reportable transaction, the maximum penalty is $10,000 for a natural person and $50,000 for all
The minimum penalty for each reportable transaction (listed or non-listed) is $5,000 for a natural person and $10,000 for
all other taxpayers.
IRC 6707A(e) further provides that taxpayers that have U.S. Securities and Exchange Commission (SEC) filing requirements under
Sections 13 or 15(d) of the Securities Exchange Act of 1934 (for example, publicly traded companies) are required to disclose
their liability for certain penalties under IRC 6707A, IRC 6662A(c) and IRC 6662(h) in public reports filed with the SEC.
See Rev. Proc. 2005-51, 2005-2 C.B. 296, as well as Rev. Proc. 2007-25, 2007-1 C.B 761, for additional information.
There is no reasonable cause exception to the IRC 6707A penalty. The Commissioner of Internal Revenue (or the commissioner's
delegate), however, may rescind the penalty in whole or in part if doing so would promote compliance with the tax code and
effective tax administration. This authority applies only to reportable transactions that are not listed transactions.
If a penalty is rescinded, the commissioner (or the commissioner's delegate) must keep on file a record of the determination,
including the facts and circumstances relating to the violation, the reasons for the decision to rescind the penalty, and
the amount of the penalty rescinded. See IRM 1.15.8.1, Description and Authorities, for appropriate retention standards and authorities.
While a taxpayer may challenge an examiner's determination as to its participation in a reportable transaction or as to the
adequacy or timeliness of its disclosure of any transaction in Appeals and in court, a taxpayer may not seek review (in Appeals
or in court) of the commissioner's denial of a request to rescind the penalty.
The IRS is required to submit an annual report to Congress that includes information regarding the application of the IRC
6707A penalty and the rescission provision, as well as information about the application of certain other penalties.
4.32.4.1.2 (12-12-2013)Effective Date—IRC 6707A Penalty
The penalty under IRC 6707A applies to returns that are due after October 22, 2004, the date of enactment of the American Jobs Creation Act (AJCA) and that were not filed before that date.
4.32.4.1.3 (12-12-2013)General Application—IRC 6707A Penalty
Treas. Reg. 301.6707A-1, published on September 7, 2011, advises that the Service may assess a penalty under IRC 6707A with
respect to each failure to timely and adequately disclose a reportable transaction as required by IRC 6011 and the associated
A taxpayer that is required to disclose a reportable transaction with a return (including an amended return or application
for tentative refund) and who is also required to provide a copy of that form to the Office of Tax Shelter Analysis (OTSA)
will only be subject to a single penalty under 6707A for failure to make those disclosures. The penalty is also applicable
if the taxpayer complies with only one of these two requirements. See Treas. Reg. 301.6707A-1(c)(1) and IRM 4.32.4.2, IRC 6011—Overview of Disclosure Requirements, for a discussion of when the Form 8886, Reportable Transaction Disclosure Statement, must be sent to OTSA.
The following two examples from Treas. Reg.301.6707A-1(c) illustrate the application of the IRC 6707A penalty for failure
to comply with the requirement to file a reportable transaction disclosure statement: Example 1—Taxpayer T is required to attach a Form 8886 to his or her return for the 2008 taxable year and to send a copy of
the Form 8886 to OTSA at the time the return is filed. Taxpayer T fails to attach the Form 8886 to the return and fails to
send a copy of the Form 8886 to OTSA. Taxpayer T is subject to a single penalty under IRC 6707A for failure to disclose because
Taxpayer T failed to comply with the disclosure requirements of IRC 6011 as described in Treas. Reg. 1.6011-4(d) and Treas.
Reg. 1.6011-4(e) of that chapter. A penalty under IRC 6707A also would apply if Taxpayer T had failed to comply with only
one of the two requirements.
Example 2—Same as Example 1, except that Taxpayer T also subsequently files an amended return for 2008 that reflects Taxpayer
T's participation in the reportable transaction described in Example 1. Taxpayer T fails to attach a Form 8886 to the amended
return as required by Treas. Reg. 1.6011-4(e)(1) of this chapter. Taxpayer T is subject to an additional penalty under IRC
6707A for failing to disclose a reportable transaction on the amended return for 2008.
Filing an amended return with a disclosure will not cure the failure to file a disclosure with the original return unless the amended return is filed before the due date of the original return (including extensions). However, the regulations
provide that filing a disclosure statement with an amended return will weigh in favor of rescission, provided specific procedures
Taxpayer's extended due date is August 15. On June 1, he files a return but fails to include the required disclosure. On September
1 (in other words, after the due date of the return), he files an amended return with the disclosure. He is still liable for
the penalty. It does not matter that he attempted to cure the problem or whether he attempted to do so before or after the
IRS discovered his participation. If, however, Taxpayer filed the amended return before August 15, the amended return would
be considered a "superseding return"
that is treated as the original return. Because this superseding return was filed with the required disclosure before
the due date (as extended), taxpayer is not liable for the IRC 6707A penalty.
In making penalty determinations involving flow-through entities, examiners should note that the IRC 6707A penalty can apply
at both the entity level and the individual level. Each entity must be separately analyzed to determine if it is required
to disclose its participation in a reportable transaction, and failed to file Form 8886 with its return, and if necessary,
with OTSA. See IRM 4.32.4.2, IRC 6011—Overview of Disclosure Requirements, for a discussion of when the Form 8886 must be sent to OTSA.
In instances when the disclosure statement is due with a return, the IRC 6707A penalty will not be imposed until the taxpayer
files a return. In other words, where a disclosure is due with the return, an IRC 6707A penalty will not be imposed where
a taxpayer has not yet filed a return, even if the due date for the return has already passed or where the taxpayer files
a late return that includes the required disclosure statement (and the required copy to OTSA, if required). In instances where
the disclosure statement is not due with a return, such as when a transaction is listed after the taxpayer files a return
reflecting participation and is required to provide a disclosure statement to OTSA within 90 days of publication of the listing
notice, the penalty is applicable after expiration of the 90-day period.
IRC 6707A penalties must be approved by management. See IRM 4.32.4.4, IRC 6707A Penalty Approval Process.
4.32.4.1.4 (02-11-2016)Statute of Limitations—General Information
As a conservative measure, the period of limitations in the context of the IRC 6707A penalty should be determined by reference
to IRC 6501, Limitations on Assessment and Collection, if disclosure is required with a return. As such, a period of limitations on assessment for the IRC 6707A penalty should
be treated as applying when disclosure is required with a return and begins to run from the date the disclosure is required.
Under the IRC 6011 regulations, disclosure of a reportable transaction on Form 8886, Reportable Transaction Disclosure Statement, is not always made with the taxpayer's return. If a disclosure is not required with a return, then no limitations period
applies to assessment of the IRC 6707A penalty. See IRM 4.32.4.1.4.1, Statute of Limitations When Disclosure Is Required With a Return and IRM 4.32.4.1.4.2, Statute of Limitations When Disclosure Is Required Without a Return for further information.
In general, the 30-day letter for the penalty case should be issued with at least 15 months remaining on the period of limitations
on assessment. This will allow sufficient time for the taxpayer to respond to the 30-day letter; potentially request a 30-day
extension of time to prepare a protest; and for the examiner to send the case to Appeals while still ensuring that Appeals
receives the case file with 365 days remaining on the period of limitations on assessment. This also allows time for Appeals
to consider and assess the penalty as appropriate.
If the 30-day letter cannot be issued with at least 15 months remaining on the period of limitations, the examiner should
request an extension of the time to make the assessment from the taxpayer on Form 872, Consent to Extend the Time to Assess Tax. See IRM 4.32.4.1.4.4, Form 872, for required modifications to Form 872.
Examiners should also consult IRM 25.6.22.2.1, Assessment, which requires that a manager approve the examiner soliciting a consent and IRM 25.6.22.3, Notification of Taxpayer's Rights, which requires that the examiner advise the taxpayer of their right not to extend the statute. Note:
IRM 25.6.22.2.1, Assessment, provides that consent should be solicited at the 180-day time frame. For IRC 6707A penalties, Appeals has requested that
examiners solicit consent at the 15 months time frame to ensure that Appeals has additional time due to the complexity of
the IRC 6707A cases.
If the taxpayer refuses to extend the statute and all relevant facts to support the penalty are established, proceed to assessment
(as described in IRM 4.32.4.7.2) and offer the taxpayer post-assessment Appeals consideration. See IRM 4.32.4.6.3, Sending the Case to Appeals-Post Assessment Consideration, for additional information.
Because the IRC 6707A penalty can be assessed at the entity level (distinct from the shareholder or partner level), the limitations
period for assessing the penalty against an S corporation or partnership depends on when the entity was required to disclose
its participation and is not controlled by the associated shareholder's or partner's statute.
If the penalty is developed along with the determination of a deficiency with respect to the reportable transaction and a
statutory notice of deficiency is issued, the statutory notice of deficiency suspends the time to assess a deficiency (during
the 90-day period to file a petition with the Tax Court, while the case is before the Tax Court, and an additional 60 days
after the Court's decision is final) but does not suspend the time to assess the IRC 6707A penalty.
4.32.4.1.4.1 (12-12-2013)Statute of Limitations When Disclosure Is Required With Return
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, as a conservative measure, 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
and the period of limitations on assessment of the IRC 6707A penalty begins on the date that the return to which the disclosure
should be attached is deemed filed.
Disclosure is also required with a return in certain situations where the transaction was not listed at the time that the
taxpayer filed a return reflecting participation but becomes listed later.
Prior versions of Treas. Reg. 1.6011-4, applicable to transactions entered into on or after January 1, 2001 (unless reported
on a tax return filed on or before June 14, 2002) through August 2, 2007, provide that when a return is filed reflecting a
transaction that is not listed but becomes listed at a later time, a taxpayer must attach a disclosure form with respect to
"open years"
to the "return next filed after the date the transaction is listed"
(Treasury Decision (T.D.) 9000, 2002-2 Cumulative Bulletin (C.B.) 87).
Accordingly, in this situation, the period of limitations begins when the "return next filed after the date the transaction
is listed"
is deemed filed regardless of the tax year or years to which the disclosure relates.
Taxpayers who entered into the transaction when this earlier version of Treas. Reg. 1.6011-4 was in effect are subject to
this version of the regulations for as long as they are in the transaction. See IRM 4.32.4.1.4.2, Statute of Limitations When Disclosure Is Required Without a Return, which discusses Treas. Reg. 1.6011-4 as it applies to situations where a transaction becomes listed after a return reflecting
participation is filed.
The foregoing rules are conservative measures that do not consider the potential applicability of IRC 6501(c)(10) that may
extend the period of limitations.
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 that 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:
The date the taxpayer provides the information required under IRC 6011, or
The date that a material advisor meets the requirements of IRC 6112.
After first following instructions in IRM 4.32.4.1.4.3, General Procedures Applicable to All Reportable Transactions, 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
4.32.4.1.4.2 (12-12-2013)Statute of Limitations When Disclosure Is Required Without a Return
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, Treas. Reg. 1.6011-4(e)(2)(i) requires taxpayers to file a disclosure with OTSA within 90 calendar
days of the date that a transaction is listed or identified as a transaction of interest (TOI) by the Service, 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.
4.32.4.1.4.3 (12-12-2013)General Procedures Regarding the Statute of Limitations—Applicable to All Reportable Transactions
A determination regarding the application of the IRC 6707A penalty should be made within the three-year period (if disclosure
is required with the return), if possible, to avoid questions about whether the limitations period is open.
Where it is not possible to complete an appropriate investigation within the three-year period, an examiner should try to
obtain the taxpayer's consent to extend the period of limitations. See IRM 4.32.4.1.4.4, Form 872.
examiners solicit consent at the 9-month time frame to ensure that Appeals has additional time due to the complexity of the
IRC 6707A cases.
If a taxpayer refuses to extend the period of limitations on assessment and the case is sufficiently developed to assess the
IRC 6707A penalty, assess the penalty.
If the taxpayer refuses to extend the period of limitations on assessment for a case involving a listed transaction, and the
case is not sufficiently developed to assess the penalty, the examiner should consult with Counsel to determine whether the
period in which to assess the tax (and the penalty) is extended under IRC 6501(c)(10).
If the taxpayer refuses to extend the period of limitations on assessment, the examiner may also consult with Counsel, as
necessary, to determine whether any other exceptions to the normal period of limitations apply.
4.32.4.1.4.4 (12-12-2013)Form 872, Consent to Extend the Time to Assess Tax
The Form 872 for the underlying income tax does not extend the period of limitations for assessment of the IRC 6707A penalty
unless the form includes specific language addressing the penalty.
The following language is approved for use on the Form 872: Example:
"Without otherwise limiting the applicability of this agreement, this agreement also extends to the expiration date identified
in paragraph (1) above the period of limitations for assessing any penalty pursuant to IRC 6707A, Penalty for Failure to Include Reportable Transaction Information With the Return, with respect to the taxpayers, kind of tax, and tax periods identified above."
To extend the period of limitations for the IRC 6707A penalty without also extending the period of limitations for the income
tax on the return associated with the IRC 6707A penalty, the language of paragraph (1) of the Form 872 must be revised. See
Exhibit 4.32.4-1, Sample Form 872 IRC 6707A Penalty Only, for a sample of the penalty only Form 872. See Exhibit 4.32.4-2, Sample Form 872 IRC 6707A Penalty and Income Tax, for a sample of Form 872 to use with both a penalty and income tax. Counsel approved sample Forms 872 for both situations
(penalty only or income tax and penalty) can also be found on the 6707A webpage.
The IRC 6707A penalty is not assessed as a joint and several liability; it can be individually applied to each spouse who
jointly files a Form 1040, U.S. Individual Income Tax Return, provided each meets the legal criteria for the penalty. For these cases, the examiner should request that each spouse sign
a separate Form 872 that has the explicit language from number (2) above. The examiner does not need a separate Form 872 from
a spouse for whom the examiner is not considering an IRC 6707A penalty.
To extend the period of limitations for a partnership potentially subject to an IRC 6707A penalty, the Form 872 should be
signed by the general partner and not the tax matters partner. As there is no line on the Form 872 for a general partner to
sign, the examiner should strike through the words "Corporate Name,"
write in "Partnership Name,"
strike through "Corporate Officer,"
and substitute "General Partner."
When there is no general partner, such as when dealing with an limited liability company (LLC), strike through "Corporate
and substitute "Manager-Member"
or other person authorized by the partnership/LLC’s operating agreement.
If the taxpayer extends the statute of limitations with respect to the IRC 6707A penalty, the Examination Returns Control
System (ERCS) should be updated to reflect the new statute date. The examiner will need to validate that the statute has been
updated in the ERCS system. The examiner should secure a printout of the ERCS penalty case record to verify the updated statute.
4.32.4.2 (12-12-2013)IRC 6011—Overview of Disclosure Requirements
The application of IRC 6011 reportable transaction disclosure regulations requires that 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.
will remain applicable to the taxpayer, even if the regulations subsequently were 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, he or she may not be subject to the IRC 6707A penalty; further analysis is required before
imposing the IRC 6707A penalty.
Returns filed on or before February 28, 2000: The disclosure regulations do not apply to any tax returns filed on or before February 28, 2000. See T.D.
8877, 2000-11, C.B. 747 for more details.
Returns filed after February 28, 2000 and transactions entered into before January 1, 2001: The disclosure regulations initially applied only to federal corporate income tax returns filed after February
28, 2000. A listed transaction is not treated as a reportable transaction if it has affected the taxpayer's federal income
tax liability as reported on any tax return filed on or before February 28, 2000. A transaction may be an "other reportable
only if it is entered into after February 28, 2000. See Treas. Reg. 1.6011-4T(b)(3). If a taxpayer entered into the transaction
before 2001, it could be subject to the disclosure regulations if it: (1) was a corporation and (2) met the projected tax
effect test, which requires that (a) for listed transactions, the taxpayer reasonably estimated that the transaction would
reduce the taxpayer's federal income tax liability by more than $1 million in any single taxable year or by a total of more
than $2 million for any combination of taxable years or (b) for "other reportable transactions,"
the taxpayer reasonably estimated that the transaction would reduce the taxpayer's federal income tax liability by more
than $5 million in any single taxable year or by a total of more than $10 million for any combination of taxable years. Treas.
Reg. 1.6011-4T(b)(4). See T.D. 8877, 2000-11, C.B. 747; T.D. 8896, 2000-36, C.B. 249 and T.D. 8961, 2001-2 C.B. 194. for more
Transactions entered into on or after January 1, 2001, and before January 1, 2003: If the taxpayer entered into the transaction on or after January 1, 2001, and filed its tax return reporting
the transaction (e.g. reflecting the tax impact of that transaction) on or before June 14, 2002, the taxpayer was subject
to the old rule. In other words, the taxpayer was subject to the disclosure rules only if it was a corporation and the transaction
reduced the taxpayer's federal income tax liability by the threshold amounts listed under the old rule above. See T.D. 9000,
2002-2 C.B. 87, T.D. 8877, 2000-11, C.B. 747, T.D. 8896, 2000-36, C.B. 249, and T.D. 8961, 2001-2, C.B. 194 for more details.
If the taxpayer entered into the transaction on or after January 1, 2001 and did not file its tax return reporting the transaction (i.e., reflecting the tax impact of that transaction)
on or before June 14, 2002, the taxpayer was subject to the disclosures if it was a corporation, individual, trust, partnership,
or S corporation. However, taxpayers other than corporations were only subject to the disclosure rules with respect to listed
transactions. Listed transactions no longer had to meet the projected tax effect test. See T.D. 9000, 2002-2 C.B. 87 for more
Transactions entered into on or after January 1, 2003: All taxpayers who are required to file a tax return are subject to the disclosure rules with respect to
all reportable transactions, including listed transactions. See T.D. 9017, 2002-2 C.B. 815, T.D. 9046, 2003-1 C.B. 614, T.D.
9108, 2004-1 C.B. 429, T.D. 9295, 2006-2 C.B. 1030, and T.D. 9350, 2007-38 IRB 607 for more details.
Since March 2003, the Form 8886, Reportable Transaction Disclosure Statement, has been available to taxpayers for use as the disclosure statement required under IRC 6011 and the regulations. For transactions
governed by the regulations issued prior to T.D. 9017, 2002-2 C.B. 815, (i.e., generally transactions entered into before
January 1, 2003), taxpayers did not have to use the Form 8886, but they had to disclose the information required under the
regulations on a statement attached to their return.
Under Treas. Reg. 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.
A taxpayer must file a Form 8886 with each tax return (or amended return) with respect to the taxable years in which the taxpayer
participated in a reportable transaction. 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 commences, 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.
A failure by a taxpayer to submit the disclosure with its return or, when required, the duplicate of the disclosure with OTSA,
is a failure to satisfy the disclosure requirement of IRC 6011, which may result in a liability for an IRC 6707A penalty.
There are special rules relating to the filing of a disclosure statement for transactions that become listed transactions
or transactions of interest after the taxpayer has filed a return reflecting the taxpayer's participation in the transaction.
In these situations, taxpayers generally have to disclose to OTSA within 90 days after the date the transaction became a listed
transaction or transaction of interest.
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.
4.32.4.2.1 (12-12-2013)Identifying Reportable Transactions
Treas. Reg. 1.6011-4(b) currently lists five types of reportable transactions:
The definition of reportable transaction varies greatly depending on which version of the regulations applies to the transaction,
so it is imperative to look to the actual language of the regulations.
Generally, a transaction will not be considered a reportable transaction if the commissioner makes a determination by published
guidance that the transaction is not subject to the reporting requirements.
Additionally, exceptions to the disclosure requirements under IRC 6011 have been created and additional exceptions may be
created in the future. See Rev. Proc. 2013-11, 2013-2 IRB 269 (exceptions from the loss transaction category) and Rev. Proc.
2007-20, 2007-7 IRB 517 (exceptions from the contractual protection transaction category).
4.32.4.2.2 (12-12-2013)Participation in Reportable Transactions
In determining the applicability of the IRC 6707A penalty, examiners must evaluate a taxpayer's participation in a reportable
transaction within the meaning of Treas. Reg. 1.6011-4(c)(3)(i)(A) through (3)(i)(G). This determination will vary based upon
which version of the regulations is in effect for the transaction, so the actual language of the regulations must be consulted.
For various categories of transactions, regulations may provide distinct definitions of participation.
Examiners should consult the regulations and Counsel if the examiner believes that a disclosure requirement may apply to the
transaction he or she is reviewing. Examiners can consult SB/SE and TE/GE technical specialists for the issue (if applicable).
LB&I examiners can consult the LB&I Penalties Issue Practice Group. SB/SE examiners should also refer to IRM 4.32.1.5, Activities of an Issue Management Team, for further guidance where an Issue Management Team (IMT) exists for an issue.
4.32.4.2.3 (12-12-2013)Miscellaneous Considerations—Tax Accrual Workpapers
When evaluating Forms 8886 filed by a taxpayer, examiners should also consider whether a request for the taxpayer's tax accrual
workpapers is appropriate. Checking the box for a listed transaction is one of the requirements on Form 8886, and claiming
tax benefits from a listed transaction on a return (or amended return) may also indicate a requirement for the examiner to
request certain tax accrual workpapers. However, checking the box on Form 8886 for a transaction of interest, a confidential
transaction, a loss transaction, or a contractual protection transaction should not necessarily lead the examiner to consider
requesting any tax accrual workpapers. The examiner should also be cautious in evaluating a taxpayer's "protective disclosure,"
that a transaction is actually listed or substantially similar to a listed one, before consulting Counsel on whether a
request for tax accrual workpapers is appropriate.
For guidance in making this determination, examiners should refer to Announcement 2002-63, IRB 2002-27, which sets forth the
Service's revised policy regarding when it will request, and, if necessary, summon tax accrual workpapers and other financial
Examiners also should review IRM 4.10.20, Requesting Audit, Tax Accrual or Tax Reconciliation Workpapers, and consult Counsel.
4.32.4.3 (12-12-2013)Processing Procedures—IRC 6707A Penalty
This section describes the procedures examiners must follow to assert the IRC 6707A penalty.
4.32.4.3.1 (12-12-2013)General Information
The IRC 6707A penalty may be imposed even if an income tax examination results in no change in tax liability or if no income
tax examination is opened, as long as sufficient evidence is obtained to support the conclusion that the taxpayer participated
in a reportable transaction, had a duty to disclose that participation, and failed to properly disclose. There must also be
sufficient factual information to support the calculation of the penalty amount.
When an IRC 6707A penalty is developed in conjunction with an income tax examination, the examiner does not need to conclude
the income tax examination before issuing the 30-day letter for the IRC 6707A penalty, provided all relevant facts to support
the penalty are established. Likewise, an examiner also does not need to conclude the IRC 6707A penalty investigation before
issuing the 30-day letter for the income tax examination. In other words, the examiner should not arbitrarily hold one case
to allow the other case to "catch up."
If the timing is appropriate for the income tax and IRC 6707A penalty cases, the 30-day letters for both can be issued
If the penalty relates to a listed transaction and the taxpayer is a publicly traded company:
The examiner sends a copy of the Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties and attachments to OTSA. Contacts can be found at the OTSA website.
OTSA will review the Form 8278 and attachments to ensure compliance with IRC 6707A(e) (i.e., disclosures to the SEC where
a taxpayer has an SEC reporting requirement and participated in a listed transaction).
4.32.4.3.1.1 (12-12-2013)Case Handling and Time Reporting Procedures
Penalty cases involving a potential IRC 6707A penalty are established as penalty investigations on the Examination Returns
Control System (ERCS) and include the appropriate project and tracking codes. See IRM 4.32.2.5.5. SB/SE Tracking Codes, or examiners may refer to the ATTI website on My SB/SE Examination or the LB&I Office of Tax Shelter Analysis (OTSA) website.
Complete Form 5345-D, Examination Request-ERCS Users (for each spouse under the respective TIN, if applicable), to put the investigation on ERCS; check the box "Control Penalty
use Source Code 99, and use penalty MFT P5.
An examiner's time will be charged to Activity Code 505.
This case is created and tracked on ERCS. It will not be on the AIMS database.
If SB/SE or LB&I is involved in a concurrent examination with TE/GE, then the penalty case file will be assigned to the SB/SE
or LB&I examiner. For example, a TE/GE examiner would analyze and write-up whether a transaction is substantially similar
to a listed transaction and the SB/SE or LB&I examiner would analyze whether the taxpayer had a duty to disclose the transaction
under Treas. Reg. 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.
The Report Generating System (RGS) can be used to calculate the tax benefit attributable to the reportable transaction. The
examiner can use the tax benefit to manually compute the penalty for cases involving individuals and C corporations only.
This method can be used if an income tax examination is ongoing to substantiate the tax benefit for IRC 6707A purposes only.
Indicate this in the remarks area. RGS cannot generate the actual penalty report. A manual Form 4549-A, Income Tax Discrepancy Adjustments, will need to be completed using a supportive workpaper justifying the penalty amount. Because flow-through entities have
no tax shown on the return, they are subject to the minimum penalty, which is $10,000 for non-individual taxpayers. This flat
penalty applicable to flow-through entities does not need to be calculated on RGS.
Although not required, examiners can use RGS to store and backup documents and workpapers associated with the IRC 6707A penalty
case file. RGS uses the generic workcenter for miscellaneous civil penalty cases.
4.32.4.3.2 (12-12-2013)Development of Penalty Case Files—Overview
The examiner must develop a case file that contains all relevant documents and other evidence that demonstrate that the transaction
was a reportable transaction. Minimum required documents are listed in IRM 4.32.4.3.2.3, Penalty Case File—Documents Required for All Listed and Non-Listed Reportable Transactions, below, but other documents may be required depending on the case (for example, transactional documents, e-mails, other correspondence,
opinions about whether the transaction is a reportable transaction, or promotional material). In addition, where applicable,
include any evidence about why a disclosure is deficient, including the Form 8886 and any other evidence about the time or
manner of filing the Form 8886. Finally, ensure that the case file contains copies of all documents demonstrating that the
required procedures have been followed.
The statute provides no reasonable cause or other good faith exception to the penalty. An examiner must fully develop the
relevant facts and must process the penalty as described in these procedures whenever an IRC 6707A penalty investigation indicates
that the penalty legally applies. Reasonable cause may be a factor considered in requests for rescission of non-listed reportable
transactions but the presence of reasonable cause and good faith will not necessarily be determinative of whether the commissioner
or his or her delegate grants rescission.
Examiners handling an IRC 6707A penalty investigation related to a non-listed reportable transaction should attempt to document
facts related to any potential rescission request as explained in IRM 4.32.4.3, Processing Procedures—RC 6707A Penalty, and IRM 4.32.4.10, Factors Weighing in Favor of Rescission.
There is no difference between a TEFRA partnership and a non-TEFRA partnership for purposes of imposing the penalty for failure
to disclose a reportable transaction because the IRC 6707A penalty is not a partnership item. Specifically, this penalty is
not subject to the TEFRA procedures because the TEFRA procedures apply only to partnership items (items under subtitle A of
the Code), and penalties that "relate to an adjustment"
of such partnership items. See IRC 6221, Tax Treatment Determined at Partnership Level, for additional information.
4.32.4.3.2.1 (12-12-2013)Opening an IRC 6707A Penalty Examination
When starting examination activities related to an IRC 6707A penalty, all examiners should contact OTSA to determine whether
a Form 8886 was filed with OTSA and the date and tax year of such filing. The examiner should be prepared to provide OTSA
the taxpayer's name, TIN, year or years of interest, type of transaction, and whether the disclosure was incomplete or not
attached to the return. Contacts at OTSA are listed at the OTSA website. LB&I examiners, when placing a tax return under examination
that has a Form 8886 attached, must contact OTSA under certain conditions. Refer to IRM 4.32.2.3.3.1.2, Taxpayer Disclosures, for further information.
The examiner must order the original return if the original return is the only method available to confirm whether the Form
8886 disclosure was filed with the return. Request the original paper filed income tax return using Form 5345-D and Source
Code 45. Use alpha Statute Code "FF"
if the statute date has expired or is due to expire within 180 days. When received, make a copy of the original return
for the case file and attach the Form 5345-D to the return. The group clerical staff will transfer the return on ERCS to Centralized
Case Processing (CCP) in Status Code 51 with Disposal Code 45 and ship it to CCP for closure. If the return was electronically
filed, a graphic image of the return can be requested by the group clerical staff with command code TRPRT. If the return was
filed through Modernized E-File a PDF file of the return can be requested through your AIMS/ERCS staff.
If no Form 8886 was filed by the taxpayer and there is sufficient basis to demonstrate that the taxpayer participated in a
reportable transaction under Treas. Reg. 1.6011-4, then the required disclosure obligation has not been met.
Once an examiner determines that a taxpayer either has failed to properly disclose a reportable transaction (whether listed
or non-listed) on Form 8886 or has not timely filed the Form 8886 with the return or with OTSA (if required), the examiner
prepares a separate case file for the penalty investigation. Examiners handling an IRC 6707A penalty investigation related
to a non-listed reportable transaction should attempt to document facts related to any potential rescission request as explained
in IRM 4.32.4.10, Factors Weighing in Favor of Rescission.
If an IRC 6707A penalty is being considered without an associated income tax examination, an opening letter should be sent
by the examiner. If the IRC 6707A penalty is being considered as part of an income tax examination, a separate opening letter
for the IRC 6707A penalty is not required. See Exhibit 4.32.4-3, Opening Letter for IRC 6707A Investigation, for a sample letter to be used to open a penalty only investigation. The sample is also posted at the IRC 6707A penalty
link on the SB/SE website. Power of Attorney. In general, when a taxpayer authorizes an individual to represent the taxpayer with respect to a particular form, the representation
also covers any penalties related to the form. Thus, the IRC 6707A penalty is covered when the taxpayer authorizes the individual
to represent the taxpayer in connection with the Form 8886. Similarly, if the Form 8886 is included or should have been included
with a Form 1040, Form 1120, U.S. Corporate Income Tax Return, or any other tax return, an authorization with respect to that tax return will also authorize the representative for the
IRC 6707A penalty. Examiners need to obtain a Form 2848, Power of Attorney and Declaration of Representative, that refers to "civil penalties,"
"IRC 6707A penalty,"
or similar language only when the Form 8886 was or should have been filed without being attached to a return (i.e., when a transaction has been listed
after the taxpayer filed the return and the Form 8886 is required to be filed with OTSA separate from the tax return).
When married spouses file a joint Form 1040, the examiner should obtain a valid, separate Form 2848 for each spouse.
4.32.4.3.2.2 (12-12-2013)Penalty Computation
The Small Business Jobs Act of 2010 amended the IRC 6707A penalty and is retroactive to penalties assessed after December 31, 2006. Because the Service assessed
no IRC 6707A penalties on or before December 31, 2006, the amount of the penalty will always be calculated using this amended
formula. The application of the IRC 6707A penalty remains unchanged; only the calculation of the penalty amount has been amended.
Subject to the maximum and minimum limits, the penalty is "75 percent of the decrease in tax shown on the return"
respected for federal tax purposes). The maximum penalty in the case of a listed transaction is $100,000 for a natural person and $200,000 for all other taxpayers.
If only one spouse has participated in a reportable transaction (i.e., only one spouse is subject to the IRC 6707A penalty),
the examiner should propose the penalty against the participant-spouse. The examiner should:
Apply the minimum and maximum provisions of IRC 6707A(b)(2) and (3).
If both spouses participated in a reportable transaction (i.e., both spouses are subject to the IRC 6707A penalty), the examiner
must undertake the following additional analysis:
The examiner should analyze each spouse's potential liability for the IRC 6707A penalty as if he or she filed a separate return.
If one spouse would not meet the legal definition of "participation,"
as provided in Treas. Reg. 1.6011-4, had he or she filed a separate return, then the examiner should not impose the IRC
6707A penalty against that spouse. In other words, a penalty will not apply against a spouse who has not engaged in a reportable
transaction and has "participated"
solely by virtue of filing a joint return. The examiner will only impose the penalty against the spouse who would remain
a "participant"
even if he or she had filed a separate return.
If, however, each spouse would meet the legal definition of "participation"
even if he or she filed a separate return, then the examiner must determine whether the spouses were independently involved
in a reportable transaction:
If each spouse was independently involved in a reportable transaction, the examiner should propose a penalty against each
spouse (i.e., two penalties).
If one spouse was not independently involved in a reportable transaction, only one penalty will be imposed with respect to
the return and the penalty will be on the spouse who was independently involved. If neither spouse was independently involved in a reportable transaction only one penalty should be imposed with respect to
the Form 1040. The examiner should assess the penalty against the spouse who is more directly involved in the transaction.
However, if the spouses are equally involved in the transaction, the examiner should assess the penalty against the spouse
with the primary SSN.
If, following this analysis, the examiner imposes a separate penalty on each spouse, then:
The decrease in tax attributable to each spouse will be proportional to his or her participation in the transaction, and the
penalty imposed on each will be 75% of that amount.
The minimum and maximum provisions of IRC 6707A(b)(2) and (3) apply to each spouse separately.
If, following this analysis, the examiner imposes only one penalty on either spouse, then the entire decrease in tax will
be attributed to the penalized spouse, and the penalty imposed will be 75% of that amount (subject to the minimum and maximum
4.32.4.3.2.3 (02-11-2016)Penalty Case File—Documents Required for all Listed and Non-Listed Reportable Transactions
Documents describing the transaction(s) for which disclosure is required and an explanation of the category of reportable
transaction (such as listed transaction, confidential transaction, transaction with contractual protection, loss transaction,
or transaction of interest).
Statement of facts and explanation of the examiner's rationale for concluding that the taxpayer participated in a reportable
Statement of whether the taxpayer filed a Form 8886.
If a Form 8886 was filed, statement of facts and explanation of the examiner's rationale for concluding that the form was
deficient. If the Form 8886 was not timely filed, include a statement of facts and explanation as to why the examiner determined
the filing was not timely.
A copy of the opening letter, if one was required.
Form 872.
The IRC 6707A 30-day letter or post-assessment letter.
Signed Form 895, Notice of Statute Expiration, attached to the front of the IRC 6707A penalty case file.
Information on associated flow-through entities (for example, Schedule K-1).
Other information necessary to identify related cases.
Copy of the associated income tax return that gave rise to the disclosure obligation, if applicable (i.e., where disclosure
was required with the tax return).
Penalty calculation, including detailed computation schedules.
IRC 6707A Case Overview and Record of Approval. See Exhibit 4.32.4-4, Case Overview and Record of Approval of IRC 6707A Penalty. This form is also posted at the IRC 6707A penalty link on the SB/SE website.
Completed Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties. Please ensure that you are using the most current Form 8278. The appropriate penalty reference number (PRN) to use on Form
8278 for the IRC 6707A penalty is 648. The examiner and manager must sign the Form 8278. Where the IRC 6707A penalty is proposed
on a taxpayer which is a publicly traded company and the transaction is either a listed transaction, or a reportable transaction
where the IRC 6662A(c) 30% or IRC 6662(h) 40% penalty is applicable, the examiner will also send a copy of the Form 8278 to
4.32.4.3.2.4 (12-12-2013)Penalty Case File—Additional Documents Required for Non-Listed Reportable Transactions Only
Include any information relevant to the presence or absence of the rescission factors from Treas. Reg. 301.6707A-1(d)(3),
which are listed in IRM 4.32.4.10.
Although the absence of any one factor will not necessarily be determinative with respect to rescission, the absence of facts
establishing the factors in favor of rescission weighs against granting rescission. Examiners should, therefore, document negative findings. Consult Treas. Reg. 301.6707A-1(d)(4) for further details.
4.32.4.4 (12-12-2013)IRC 6707A Penalty Approval Process
The penalty is generally approved at the Territory Manager level unless the Territory Manager or SB/SE Area Director (AD)
or LB&I Director of Field Operations (DFO), as applicable, requests AD or DFO approval. The examiner submits the file to his
or her immediate supervisor for written approval of the imposition of the penalty. See Exhibit 4.32.4-4, Case Overview and Record of Approval of IRC 6707A Penalty, for a sample of the approval form. The form is also posted at the IRC 6707A penalty link on the SB/SE website.
If approved, the immediate supervisor records and dates his or her approval on the Case Overview and Record of Approval of IRC 6707A Penalty form and forwards the file to the SB/SE or LB&I Territory Manager. In the case of a penalty, the amount of which is determined
under IRC 6707A(b)(2) (i.e., the proposed penalty is the maximum penalty allowable under IRC 6707A), the immediate supervisor
should forward the file to the SB/SE Area Director or the LB&I Director of Field Operations for approval. The Area Director
or Director of Field Operations, in considering an examiner's request for approval, will review the fully developed case file
and consider any recommendations from Counsel (if applicable). If the penalty is not approved, the immediate supervisor will
return the case to the examiner for further development or other action. For TE/GE approval procedures, please see the TE/GE
webpage under ATAT Portal, Procedures and Guidance.
If the Territory Manager (Area Director or Director of Field Operations, as appropriate) approves the penalty, the file, including
the record of approval, will be returned to the examiner. Thereafter, the examiner will issue only one report with Letter
4143, 30-Day Letter for Section 6707A Penalty, allowing 30 days for the taxpayer to agree or protest.
4.32.4.5 (12-12-2013)Issuing the 30-Day Letter (Modified)—Letter 4143
The report to assert the IRC 6707A penalty cannot be prepared on RGS. As noted previously, an examiner should use RGS to calculate
the deficiency attributable to the reportable transaction and then compute the penalty amount for individuals and C corporations
and may use RGS to store workpapers, but RGS is not able to produce the report.
After the Territory Manager (Area Director or Director of Field Operations, as appropriate) approves assertion of the IRC
6707A penalty, the examiner prepares and sends to the taxpayer the 30-day letter, Letter-4143, and encloses:
Form 4549-A, Income Tax Discrepancy Adjustments (examiners must manually prepare, listing type of tax as Form 8278 with IRC 6707A penalty and amount listed on page 2)
Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment
Computation workpaper
Pub 5, Your Appeal Rights and How to Prepare a Protest if You Don't Agree
An example of the 30-day letter is posted at the IRC 6707A penalty link on the SB/SE website.
The 30-day letter, Letter-4143, used for the IRC 6707A penalty informs taxpayers of their appeal rights, and specifies that
the taxpayer must request review by Appeals within 30 days of the date of the letter.
In addition, this 30-day letter has been modified to explain that certain information contained in Pub 1 and Pub 5 is not
applicable to the IRC 6707A penalty.
If the taxpayer agrees with the proposed assessment, the examiner should request the taxpayer's signature on a Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. If the taxpayer makes a payment regarding the penalty, see IRM 4.32.4.7 (2), 30-Day Letter Issued and Taxpayer Does Not Appeal, for processing instructions.
4.32.4.5.1 (06-05-2012)Agreed IRC 6707A Penalty Cases
For agreed IRC 6707A penalty cases, examiners should request a taxpayer's signature on Form 870.
See closing instructions in IRM 4.32.4.12, IRC 6707A Penalty Case File Closures.
4.32.4.5.2 (12-12-2013)No-Change Letter
If, after opening an IRC 6707A investigation and contacting the taxpayer, it is determined that no IRC 6707A penalty applies,
the examiner will issue a no-change letter specifically addressing this penalty. See Exhibit 4.32.4-5, IRC 6707A No Change Letter. The IRC 6707A no-change letter is also posted at the IRC 6707A penalty link on the SB/SE website.
See the closing instructions in IRM 4.32.4.12, IRC 6707A Penalty Case File Closures.
4.32.4.6 (06-05-2012)Timely Appeals Requests—Overview
If possible, taxpayers are offered pre-assessment Appeals consideration of any proposed IRC 6707A penalty. See IRM 4.32.4.6.2, Sending the Case to Appeals—Pre-Assessment Consideration, for more information.
A taxpayer is offered post-assessment Appeals consideration where the IRC 6707A penalty must be assessed before the Government
can offer the taxpayer an opportunity to seek pre-assessment Appeals consideration (i.e., because the period of limitations
is about to expire and the Government cannot obtain a consent to extend the period of limitations). A taxpayer is not offered
post-assessment Appeals consideration merely because he or she failed to timely request pre-assessment Appeals consideration.
See IRM 4.32.4.6.3, Sending the Case to Appeals—Post-Assessment Consideration, below for more information.
4.32.4.6.1 (12-12-2013)General Information—All Appeals Requests
To obtain Appeals consideration, the taxpayer must submit a timely written request (regardless of the total amount of the
proposed assessment) in response to the 30-day letter or the post-assessment notice, and follow the standard protest procedures.
If the taxpayer's protest is incomplete, the group manager should return it to the taxpayer and grant additional time to perfect
If the protest contains information warranting further consideration, the group manager should return the case to the examiner
for further development. Cases returned for additional development should be considered priority work and be given expedited
The group manager should attempt to discuss the disputed issues with the taxpayer (or the taxpayer's representative) in an
attempt to resolve the issues, obtain agreement and limit taxpayer burden. If agreement cannot be reached, the case will be
forwarded to Appeals as outlined in the steps below.
Upon receipt of a protest, the examiner will take the following actions:
Consider the information contained therein and, if appropriate, reconsider the assertion of the penalty.
Make written comments in response to the protest. See IRM 4.23.10.17.4, Review of Protests. If the examiner prepares a rebuttal to the taxpayer's protest, the examiner must send a copy of the rebuttal to the taxpayer.
Examiners should consult Rev. Proc. 2012-18, 2012-10 IRB 455, Ex Parte communications between Appeals and other Internal Revenue Service employees before contacting Appeals' employees or sending case information to Appeals' employees.
4.32.4.6.2 (02-11-2016)Sending the Case to Appeals—Pre-Assessment Consideration
To ensure sufficient time to allow a taxpayer to file a protest and for Appeals to receive the case file with at least 365
days remaining on the statute, the examiner should issue the 30-day letter with at least 15 months remaining on the statute.
Once an examiner sends the taxpayer a 30-day letter and the taxpayer timely requests Appeals consideration in response to
the letter, the examiner should follow the steps listed below. Reminder:
Under current procedures, when the case is transferred to Appeals, jurisdiction and case responsibility, including protecting
the statute of limitations and submitting assessment documents, where appropriate, will be transferred to Appeals.
Prepare Form 3210, Document Transmittal. The Form 3210 is used to track the transfer of the case to the Appeals office as the IRC 6707A penalty is not controlled
on the Automated Information Management System (AIMS).
Appeals should acknowledge the Form 3210 within 10 days of receipt.
Prepare a Form 3198, Special Handling Notice for Examination Case Processing, listing Status Code 90 and Disposal Code 07 (Appeals). The group clerical staff or examiner will retain a copy of this Form
3198 until the case is closed to files. Caution:
The statutes will not be confirmed as transferred to Appeals until the signed confirmation receipt of the Form 3210 comes
back from Appeals, see below.
Ensure that the penalty case file contains all the documentation described in IRM 4.32.4.3.2.3, Penalty Case File—Documents Required for All Listed and Non-Listed Reportable Transactions and IRM 4.32.4.3.2.4, Penalty Case File—Additional Documents Required for Non-Listed Reportable Transactions Only, as well as a rebuttal to the taxpayer's protest, a copy of which must have been provided to the taxpayer and the taxpayer's
Attach a copy of Form 895, Notice of Statute Expiration, to the front of the IRC 6707A penalty case file. Ensure that the correct information and signatures of the examiner and
group manager are present.
Send the complete penalty file to the local Appeals Processing Services (APS) location based on the taxpayer's address (not
the examiner's post of duty). Attach the Form 3210. For additional information about where to send the file, please refer
to the Appeals website. Do not send any RGS files.
Update the ERCS record to Suspense Type 203, "Civil Penalty Case In-Transit to Appeals."
The ERCS record will remain in Status Code 12.
Once the examiner or group clerical staff receives a signed Form 3210 from Appeals, the group clerical staff should update
the ERCS to Status Code 90, Disposal Code 07 and enter the penalty amount. If the agent or group clerical staff has not received
a signed Form 3210 after 10 days he or she should contact the Appeals APS unit the case was sent to. If the APS unit provides
e-mail confirmation that the case was received, the group clerical staff may then update ERCS to Status Code 90, Disposal
Code 07 and enter the penalty amount. If the IRC 6707A penalty case is on the RGS generic folder system and is live in the inventory, the examiner will move it
to the server and the group manager will send the case to archives.
Upon completion of Appeals consideration, the appeals officer will send the case file to APS to assess the penalty as appropriate
and close the case, ensuring the file includes the Appeals case memorandum, closing letter, and agreement form, if any.
4.32.4.6.3 (12-12-2013)Sending the Case to Appeals—Post-Assessment Consideration
When there is less than nine months 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 4.32.4.7.2, Less Than Nine Months Remain on Statute and Examiner Cannot Obtain Consent to Extend the Statute of Limitations. See IRM 4.32.4.1.4 (4) for additional discussion of taxpayer rights.
At the time the examiner submits the assessment documents, he or she must also send a letter notifying the taxpayer of the
assessment and the ability to seek post-assessment Appeals consideration. The examiner should include a copy of the report
and a computation of the penalty, and should allow 30 days for response. See Exhibit 4.32.4-6, IRC 6707A Notification of Assessment and Post Assessment Appeals Rights for a sample letter. A copy of the Notice of Assessment and of Post-Assessment Appeal Rights letter is also posted on the SB/SE website. The examiner should ensure that a copy of this letter is included in the case
If the taxpayer submits a timely appeals request in response to the notification of assessment, the examiner should prepare
a Form 3210.
Form 3210 is used to track the transfer of the case to the Appeals Office, as the IRC 6707A penalty is not controlled on the
Automated Information Management System (AIMS). Prepare a Form 3198 listing Status Code 90 and Disposal Code 07 (Appeals).
The group clerical staff or examiner will retain a copy of this Form 3198. Reminder:
back from Appeals, see more below). Ensure the penalty case file contains all the documentation described in IRM 4.32.4.3.2.3, Penalty Case File-Documents Required for All Listed and Non-Listed Reportable Transactions, and IRM 4.32.4.3.2.4, 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.
Use Form 3210 to send the complete penalty file to the appropriate APS location via mail. Do not forward any RGS files. For
additional information about where to send the file, please refer to the Appeals website.
The following actions should be taken to move the case to a closing status: Update ERCS to Status Code 90, Disposal Code 07, and enter the penalty amount upon receipt of a signed Form 3210.
If, after 10 days, no signed Form 3210 is received, contact the receiving Appeals APS unit for e-mail confirmation that the
case was received. Once Appeals responds, update as outlined in (a) above. If the IRC 6707A penalty case is on the RGS generic folder system, the examiner will move it to the server and the manager
will send it to archives.
At the same time that the case is being sent forward to Appeals, the examiner will provide the taxpayer's name and TIN to
the appropriate 6707A point of contact, who will work directly with Collection to ensure that 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 using Form 3210. Appeals will update Appeals
case management systems to return responsibility for the case file to the field. Appeals should not send the case to Technical
If Examination receives a premature referral back from Appeals, the group clerical staff will reopen the case back from closed
Status Code 90 into active examination group Status Code 12 and will give the case to the manager for re-assignment to an
examiner. The examiner will complete the development of the case and then re-close to Appeals using the procedures listed above.
4.32.4.7 (12-12-2013)30-Day Letter Issued and Taxpayer Does Not Appeal
No agreement signed: For cases where the taxpayer does not timely request Appeals consideration, the examiner will request
assessment of the IRC 6707A penalty be done by CCP.
The examiner will complete Form 3198 and Form 8278 for the case file.
The group clerical staff will transfer the case on ERCS to CCP with Status Code 51, Disposal Code 12 and the penalty amount.
Special instructions on Form 3198 should instruct CCP to use the Form 8278 to process the assessment.
CCP will input the assessment, close to Status Code 90 and ship to files.
If the taxpayer makes a payment, the examiner will immediately process the payment using Form 3244-A, Payment Posting Voucher-Examination, identifying the proper MFT as 13 or 55 and the penalty year, using Transaction Code 640, advance payment.
No penalty module exists until assessment is made. After agreed closure, once CCP makes the assessment, the payment will associate
with the module when it is created.
Interest charges will accrue only after the penalty has been assessed and the taxpayer has failed to remit payment in response
to the notice and demand for payment.
If the taxpayer has agreed by signing Form 870, the examiner will take the following action:
Complete Form 3198 (Special instructions on Form 3198 should instruct CCP to use the Form 8278 to process the assessment.
CCP will input the assessment, close to Status Code 90 and ship to files.)
Complete Form 8278 (with signatures).
Close the case with normal agreed closure procedures using Disposal Code 03 to CCP.
Update case to Status Code 51.
4.32.4.7.1 (12-12-2013)The 30-Day Report (L-4143) Issued and Taxpayer Appeals
For cases where a taxpayer timely requests Appeals consideration, Appeals will request assessment through its Appeals Processing
Services. See IRM 4.32.4.6.2 (12), Sending the Case to Appeals—Pre-Assessment Consideration.
For instructions on the transmittal of the pre-assessment case from Examination to Appeals, see IRM 4.32.4.6.2, Sending the Case to Appeals—Pre-Assessment Consideration.
4.32.4.7.2 (02-11-2016)Less Than 365 Days Remain on Statute and Examiner Cannot Obtain Consent to Extend the Statute of Limitations
For cases where less than 365 days remain on the statute of limitations and no extension can be secured, the examiner should
request a quick assessment from CCP.
The examiner should request via e-fax a quick assessment from CCP. The assigned CCP Field Office Resource Team (FORT) will
work quick assessments within five business days of receipt in the FORT.
The examiner must e-fax to CCP a copy of the Form 8278 along with a Form 3210.
The examiner will receive a copy of Form 8278 back from CCP within two weeks. This document will contain the document locator
number (DLN) for the quick assessment that was input by CCP.
Once CCP has made the assessment, the expiration of the statute of limitations on assessment is no longer an issue; however,
the ERCS system will not reflect the fact that the statute has been protected (i.e., that the penalty has been assessed).
The group must monitor the receipt of the Form 8278 and Form 3210 from the CCP after the quick assessment.
Once the 23C DLN is received, the group can use that number on the Form 3198 to close the case and ship to files.
SPECIAL INSTRUCTIONS FOR FISCAL YEAR ASSESSMENTS: If you are assessing a fiscal year penalty, include this instruction on
the Form 3198, Special Handling Notice for Examination Case Processing: "Please use ADJ54 NOT Form 2859 to process this penalty."
Fiscal year assessments take longer to process, so the examiner should expect to receive a copy of Form 3210 with the
assessment (23C) DLN approximately three weeks after the date that the examiner e-faxed the Form 8278 requesting assessment
to the CCP. The examiner must monitor Integrated Data Retrieval System (IDRS) for posting of the assessment, which should
be reflected after 5 to 6 weeks.
To request a quick assessment, the examiner should alert the appropriate FORT manager and e-fax the documents listed below,
including the Form 8278 signed by the manager and the Form 3198:SB/SE: FORT Manager (Memphis, TN)Phone: 901-786-7019E-fax: 855-235-6795LB&I: FORT Manager (Ogden, UT)Phone: 801-620-2102E-fax: 855-235-8844
The examiner sends the signed Form 8278 and Form 3198 to the FORT Manager with a cover sheet that requests that CCP confirm
the assessment via fax by returning the Form 8278 along with a copy of the Form 3210 with the assessment (23C) DLN associated
with the assessment.
Upon completion of the quick assessment, the CCP will take the following actions:
Notate Form 8278"Request Completed."
Fax a copy of Form 8278 and the Form 3210 with the assessment (23C) DLN back to the examiner for association with the original
case file to show that the assessment was completed. Once assessed, the expiration of the statute of limitations on assessment
When there is a quick assessment, the CP 15/215 computer generated notice and demand letter (bill and explanation of the assessment)
to the taxpayer is not generated. The quick assessment process uses Form 3552, Prompt Assessment Billing Assembly, as the notice and demand to the taxpayer (bill and explanation of the assessment). See IRM 3.17.244.7, General Information Mailing Form 3552, for additional information.
If the penalty relates to a non-listed reportable transaction or a disputed listed transaction, the examiner also completes
the IRC 6707A Penalty Rescission Checklist and forwards this checklist, a copy of the penalty file, and a copy of the appeals case memorandum (if available) to Office
of Tax Shelter Analysis (LB&I:PAIR:OTSA) for potential rescission request procedures:
Internal Revenue Service LB&I:PAIR:OTSA, Office of Tax Shelter Analysis1973 North Rulon White BlvdM/S 4916Ogden, UT 84404
If the penalty relates to a non-listed reportable transaction or a disputed listed transaction and the taxpayer waives his
or her rights to go to Appeals, has agreed in writing to the assessment of the penalty, and has agreed not to file or pursue
a claim for refund or credit of the penalty, administratively or through litigation, other than by requesting rescission,
then the examiner also completes the IRC 6707A Penalty Rescission Checklist and forwards the copy of the penalty file to LB&I:PAIR:OTSA. Attach information and documents that support responses. A sample
IRC 6707A Penalty Rescission Checklist can be found at Exhibit 4.32.4-7 and also on MySB/SE at AJCA Penalties.
In order to properly complete the IRC 6707A Penalty Rescission Checklist, all questions should be answered by the examiner and LB&I:PAIR:OTSA. Attach information and documents that support responses.
Example 1—In response to Question 5, an IDRS 10-year history showing whether the taxpayer was in compliance with other tax
laws, copies of other Forms 8886 filed and verification from OTSA of Forms 8886 filed should be attached.
Example 2—Provide any information that would rebut any factors in favor of rescission. If the taxpayer did not cooperate during
the examination or impeded the examination, the examiner should provide details in response to Question 6.
Example 3—Provide information/documents that support any factors in favor of rescission. If the examiner has information/documents
that show that the taxpayer's failure to file Form 8886 arose from events beyond the taxpayer's control, the examiner should
provide the information/documents in response to Question 7.
If there are workpapers in the case file that support the responses, then the examiner may provide workpaper page references
instead of the supporting information/documents.
The examiner also sends Form 8278 and attachments to OTSA. Contacts can be found at the OTSA website.
OTSA will review to ensure compliance with IRC 6707A(e) (i.e., disclosures to the SEC where a taxpayer has an SEC reporting
requirement and participated in a listed transaction).
Taxpayers who were not offered an opportunity to seek pre-assessment Appeals consideration (i.e., taxpayers for whom the examiner
requested quick assessment) will be offered post-assessment Appeals consideration.
When the examiner e-faxes to CCP the request for a quick assessment, he or she will also mail to the taxpayer a "Notice of
Assessment and of Post-Assessment Appeal Rights"
letter with a copy of the penalty report, calculations and other items listed on the letter as attachments. See Exhibit 4.32.4-6, for a copy of the letter.
If the taxpayer timely requests post-assessment Appeals consideration, the examiner will transmit the case to Appeals using
the procedures in IRM 4.32.4.6.3, Sending the Case to Appeals—Post-Assessment Consideration above.
If the taxpayer does not timely request post-assessment Appeals consideration and CCP has confirmed the assessment DLN, the
case can be closed according to the procedures in IRM 4.32.4.12, IRC 6707A Penalty Case File Closures below.
4.32.4.8 (12-12-2013)Abatement Procedures
Examination can abate a penalty only if the penalty does not legally apply and was assessed in error.
If the examiner determines that an assessment must be abated in full or in part, the examiner must:
Obtain approval from his or her manager and ensure that the record of approval is associated with the case file(s). Examiners
may use the standard penalty approval form available within the RGS work center to record approval of the abatement by the
Use Form 5345-D, Examination Request—ERCS, to establish the penalty on ERCS.
Complete a Form 8278. In column E (amount abated), enter total dollar amount of penalties to be abated in parenthesis. Please
ensure that the amount abated does not exceed the amount originally assessed. In column F, enter the penalty reason code.
See IRM Exhibit 20.1.1-2, Penalty Reason Code Chart, for a list of appropriate penalty reason codes and explanations. Always use the most current version of the form.
Ensure that all documents related to the abatement are associated with the case files.
Prepare the case for closure from the group. Agreed (abated in full or in part and full paid) cases are closed to the Memphis
Campus using Disposal Code 03 Status Code 51. Send the case to CCP following local procedures.
Prepare Form 3198, Special Handling Notice for Examination Case Processing, and attach to the outside of the penalty case file. In addition to the regular entries on the form, check the "Other"
box and write-in "6707A Penalty Claim Case—Send to CCP."
If Form 2363, Master File Entity Change, was sent to CCP to update the person's address, notate the Form 3198 and include a copy of the form in the case file. Note
on the workpaper copy the date the form was e-faxed or sent to CCP. If appropriate, also note that Form 3177, Notice of Action for Entry on Master File, was sent to CCP in the same box.
In the "Special Features"
section, check the Civil Penalties (Form 8278) box.
At the bottom of the first page of Form 3198, check the "Forward to CCP"
Complete the case information section, paying particular attention to the adjustment amount.
On the second page of Form 3198, in the letter instructions for CCP area, check the "No letter required to be sent by CCP"
4.32.4.9 (02-11-2016)IRC 6707A Penalty Rescission Consideration
Non-listed reportable transactions are eligible for rescission (i.e., the penalty can be rescinded in whole or in part). Listed
transactions are not eligible for rescission consideration.
Currently, in order to request rescission, a taxpayer must have exhausted the administrative remedies available within the
Office of Appeals regarding the proposed assessment of the penalty, unless the person has agreed in writing to the assessment
of the penalty and has agreed not to file or prosecute a claim for refund or credit of the penalty, administratively or through
litigation, other than by requesting rescission.
The Business Operating Division (BOD) Commissioner over the penalty examination has been delegated the responsibility to determine
for the commissioner whether to rescind the penalty in part or in full.
The taxpayer must send the rescission request to LB&I:PAIR:OTSA for review.
After receiving the rescission request, LB&I:PAIR:OTSA will review the request to ensure it meets the requirements of Rev.
Proc. 2007-21 and Treas. Reg. 301.6707A-1(d). Should the taxpayer not meet these requirements, OTSA will secure Servicewide
Compliance Strategy Executive Steering Committee (SCS ESC) approval to send the request back to the taxpayer with appropriate
explanation. See IRM 4.32.1.1 for additional information about the SCS ESC.
After OTSA has determined that the request is eligible for rescission consideration, they may make a written request seeking
additional information and documents relating to the transaction, such as marketing materials and tax opinions, from the person
requesting rescission. Requested information must be submitted to LB&I:PAIR:OTSA within 30 days of the date of mailing of
the request for additional information by LB&I:PAIR:OTSA.
LB&I:PAIR:OTSA may grant an extension of time for good cause to persons who request additional time within the 30-day period.
A person's failure to provide the requested information within the applicable time period may weigh against rescission. Meritless
claims of privilege may weigh against rescission.
LB&I:PAIR:OTSA may ask the examiner, Appeals or other Service employees involved with the examination to review and comment
on the rescission request.
LB&I:PAIR:OTSA will compile the rescission request package and forward a recommendation to the SCS ESC for review.
The rescission package will include the following:
Letters prepared for the BOD Commissioner to sign and send to the taxpayer.
Executive summary sheet that includes a short summary of the amount of the penalty, the basis for asserting the penalty (i.e.,
what type of transaction), the basis for the taxpayer's rescission request and recommendation.
Completed IRC 6707A Penalty Rescission Checklist and all attachments. A sample IRC 6707A Penalty Rescission Checklist can be found at Exhibit 4.32.4-7 and also on MySB/SE at AJCA Penalties. A sample IRC 6707 Penalty Rescission Checklist can be found at Exhibit 4.32.4-8.
The SCS ESC will review the recommendation and, if it agrees, will forward it to the office of the BOD Commissioner over the
penalty examination.
If the BOD Commissioner agrees with the recommendation, he will sign the letter to the taxpayer that was prepared by LB&I:PAIR:OTSA.
The BOD Commissioner's office will retain a copy of the signed letter and executive summary sheet, and send the original letter
The BOD Commissioner's office will return the rescission package to LB&I:PAIR:OTSA and include a copy of the signed letter.
If the BOD Commissioner's office does not agree with the recommendation or needs more information, it will contact LB&I:PAIR:OTSA.
LB&I:PAIR:OTSA will notify any function in the IRS that still has the taxpayer's return under consideration (e.g., Exam, Appeals,
or Counsel) of the rescission request determination.
Where rescission is granted, LB&I:PAIR:OTSA will ensure that abatements are posted to the taxpayer account(s).
The rescission determination is not reviewable by Appeals or by any court. 4.32.4.10 (06-05-2012)Factors Weighing in Favor of Rescission
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 are relevant to the determination that rescission would promote compliance with
the requirements of the Code and effective tax administration. No one factor is determinative of whether to grant rescission.
The commissioner, or his or her delegate, must weigh all relevant factors, regardless of whether the factor is included in
Upon becoming aware of its failure to disclose a reportable transaction properly, a taxpayer filed a complete and proper,
albeit untimely, Form 8886 or Form 8264, Application for Registration of a Tax Shelter, (or any successor form) as applicable. This factor will weigh strongly in favor of rescission, provided the following:
The taxpayer files the Form 8886 prior to the date the Service first contacts the taxpayer (including contacts by the Service
with any partnership in which the taxpayer is a partner, any S corporation in which the taxpayer is a shareholder, or any
trust in which the taxpayer is a beneficiary) concerning a tax examination for the tax period in which the taxpayer participated
in the reportable transaction, and
Other circumstances suggest that the taxpayer did not delay filing an untimely but properly completed Form 8886 until after
the Service had taken steps to identify the taxpayer's participation in the reportable transaction in question.
The taxpayer's failure to properly disclose was due to an unintentional mistake of fact that existed despite the taxpayer's
reasonable attempts to ascertain 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 that 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 Service by providing timely information with respect to the transaction at issue that the
commissioner (or the commissioner's delegate) may request in consideration of the rescission request.
Assessment of the penalty would weigh against equity and good conscience, including whether the taxpayer demonstrates that
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. For a penalty assessed under IRC 6707A, an important
factor in determining reasonable cause and good faith is the extent of the taxpayer's efforts to ensure that persons who prepared
the taxpayer's return were informed of the taxpayer's participation in the reportable transactions. Note:
This factor will be disregarded if the persons who prepared the taxpayer's return were material advisors with respect to the
See Treas Reg. 301.6707A-1(d)(3) for additional details. Note that the list of factors weighing in favor of rescission that
is set forth in Rev. Proc. 2007-21 is very similar to, but not identical to, the list of factors weighing in favor of rescission
that is set forth in Treas. Reg. 301.6707A-1(d). To the extent that these lists are inconsistent, the list in the regulations
4.32.4.10.1 (06-05-2012)Absence of Favorable Factors Weighs Against Rescission
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.
4.32.4.10.2 (06-05-2012)Factors Not Considered in Rescission Determination
In determining whether to grant rescission, the commissioner (or delegate) will not consider doubt as to liability for the
penalty, except to the extent that doubt as to liability is a factor in determining reasonable cause and good faith. Additionally,
in determining whether to grant rescission, the commissioner (or delegate) will not consider doubt as to collectibility of
4.32.4.10.3 (06-05-2012)Effect of Rescission Request on Collection Action
A taxpayer need not pay the assessed penalties to receive rescission consideration; however, the Service will not suspend
collection efforts solely because the taxpayer has made a request for rescission.
See Rev. Proc. 2007-21 for procedures by which a taxpayer requests rescission. Note that the list of factors weighing in favor
of rescission that is set forth in Rev. Proc. 2007-21 is very similar to, but not identical to, the list of factors weighing
in favor of rescission that is set forth in Treas. Reg. 301.6707A-1(d). To the extent that these lists are inconsistent, the
list in the regulations controls.
4.32.4.11 (12-12-2013)Continuation of the Income Tax Examination and IRC 6662A Considerations
In general, the income tax 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 the American Jobs Creation Act (AJCA) and imposes a 20-percent penalty on an understatement resulting from a reportable transaction that is properly disclosed
(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 that is 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 that 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 that 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 MySB/SE, Issues and Procedures,
AJCA Penalties, IRC 6662A Guidance. Additional guidance can also be found in IRM 20.1.5.15, IRC 6662A, Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions.
In addition, for purposes of IRC 6662A, a taxpayer is deemed to have properly disclosed the reportable transaction if the
commissioner has rescinded the IRC 6707A penalty with respect to the transaction. If the commissioner 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. Therefore, the income tax case should not be closed until the
rescission determination is made if the following:
The examiner proposes an IRC 6662A penalty with respect to the reportable transaction,
The taxpayer meets the substantial authority standard in IRC 6664(d)(3)(B), and
The taxpayer meets the reasonable belief standard in IRC 6664(d)(3)(C).
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 commissioner's rescission determination (i.e.,
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), the case should proceed and can
be closed from the group without waiting for the conclusion of the rescission determination.
4.32.4.12 (06-05-2012)IRC 6707A Penalty Case File Closures
Whether or not an examiner has pursued an IRC 6707A penalty in connection with an income tax examination, the penalty case
file will need to be closed in a particular fashion. Using these case closing procedures should ensure the closed case file
can be secured from files using the DLN of the TC 240 PRN 648.
4.32.4.12.1 (12-12-2013)Cases That Have Not Been Assessed or Appealed but Penalty Proposed
If the case has not been assessed (i.e., there was no request for a quick assessment) and the taxpayer has not requested Appeals
consideration, follow normal closing to CCP for assessment to be made using Form 8278. CCP will make the assessment, close
to Status Code 90 and ship the case to files. (See IRM 4.32.4.7 above that contains the Form 3198 instructions and group closing codes, i.e., Status Code 51 with Disposal Code 03 for agreed
cases and Disposal Code 12 for unagreed cases that are not appealed).
4.32.4.12.2 (12-12-2013)Closing Quick Assessment Cases
Obtain a transcript after final posting of the taxpayer's account and identify the document locator number (DLN) that is associated
with Transaction Code (TC) 240 and Penalty Reference Number (PRN) 648. (If necessary, the examiner can use the assessment
(23C) DLN provided on the Form 3210 when CCP confirmed the assessment.)
Place a Form 3198 on the case file. In the "Special Features"
section, check the box for "Other Instructions"
and include the language: IRC 6707A Penalty Case File—Associate with Penalty Assessment under DLN (and input the DLN identified from the transcript or 23C DLN in item 1). Use Status Code 41 (PSP) and Disposal Code 12 on
Attach a signed Form 895, Notice of Statute Expiration, on the front of the case file.
Ensure that the penalty case file includes the items identified in IRM 4.32.4.3.2.3, Penalty Case File—Documents Required for All Listed and Non-Listed Reportable Transactions, and IRM 4.32.4.3.2.4, Penalty Case File—Additional Documents Required for Non-Listed Reportable Transactions Only above.
Send case to manager for review.
The group clerical staff will transfer the record in ERCS to Status Code 41, Disposal Code 12, and enter the penalty amount.
(Please ensure the penalty amount is entered under the penalty amount and not erroneously entered into the deficiency amount.)
The group clerical staff will send an e-mail to the AIMS/ERCS analyst requesting the penalty record be closed to Status Code
90 on ERCS. The AIMS/ERCS analyst will update to Status Code 42 and verify the assessment has been made prior to closing the
ERCS record to Status Code 90.
If the IRC 6707A penalty case has been worked using the RGS generic folder system and is live in inventory, the examiner will
move it to the file server and the manager will send the case to archives.
The group clerical staff will ship the case to files. The closed case must be associated with the DLN of the quick assessment
with the TC 240 and PRN 648. The mailing of the closed case file must include a confirmation of receipt Form 3210 that the
group retains for three years. SB/SE closed case file is sent to:
Internal Revenue Service Cincinnati Service Center201 W Rivercenter Blvd. Stop 2800-FCovington, KY 41011
LB&I closed cases are sent to: Internal Revenue Service1973 North Rulon White Blvd. Stop 6727Ogden, UT 84404
4.32.4.12.3 (12-12-2013)No-Change Procedures
If no IRC 6707A penalty was proposed, but the case was established on ERCS:
Complete Form 8278Penalty Assessment - Columns (c) and (d) for the applicable penalty amount of zero. The three digit reference
code is 648. Complete the section referring to the income tax return. The examiner and the group manager must both sign the
Form 8278.
Attach Form 3198 indicating MFT 13 for an entity or MFT 55 for an individual; reflect the penalty amount as "$0,"
report the time on the case to the penalty administrative file. Mark Status Code 51 (CCP) and Disposal Code 02. Under
instructions, insert directions for CCP to post a $0 assessment, and for all workpapers to be kept with the closed case administrative
file and filed with the Form 8278 DLN that will be assigned for TC 240 PRN 648.
Ensure that the case is flagged to note that a penalty was considered but not assessed.
The group clerical staff will transfer the ERCS record to Status Code 51 (CCP), Disposal Code 02 and ship to CCP.
Follow normal closing procedures to Memphis CCP for SB/SE or Ogden CCP for LB&I. CCP establishes a TC 240 PRN 648 (noting
that no penalty was assessed) and a DLN for the file. The file is stored like an audit file and can be retrieved if needed
in the future using the DLN. CCP will close the case to Status Code 90.
If the taxpayer was contacted, the examiner should prepare the undated 6707A no-change letter, indicating the examiner as
the contact and the manager as signor, and place the letter in the case file. The letter will then be signed, dated and mailed
by the manager as the case is closed to CCP for the zero posting. The manager will place a dated copy of the no-change letter
in the case file and note on the back of the Form 3198 that no letter should be sent by CCP.
Exhibit 4.32.4-1 Sample of Page 1 of Form 872 IRC 6707A Penalty Only
Exhibit 4.32.4-2 Sample of Page 1 of Form 872 IRC 6707A Penalty and Income Tax
Exhibit 4.32.4-3 Opening Letter for IRC 6707A Investigation
Employee ID#: Contact Telephone Number:
Last Day to Respond to this Letter:
We are commencing an investigation to determine whether you complied with the requirements of Internal Revenue Code (IRC)
§ 6011 and the associated regulations.
IRC § 6707A imposes a monetary penalty for failure to disclose a reportable transaction as required by IRC § 6011 and associated
regulations and/or for failing to disclose in a periodic report required under section 13 or 15(d) of the Securities Exchange
Act of 1934 a previously assessed penalty under IRC § 6707A (e)(2) that a taxpayer was required to pay. Please provide the items listed on the attached Form 4564, Information Document Request (IDR), within 30 days of receipt of
Someone May Represent You
You may have someone represent you during any part of this investigation. If you want someone to represent you, please provide
me with a complete Form 2848, Power of Attorney and Declaration of Representative that refers to “income taxes and civil penalties.”
(Emphasis added.) In addition, please ensure that information regarding the applicable years is complete, e.g., “Dec. 31,
2004” or “12/31/2004,” and not merely “2004” or “04.”
You may mail or fax the form to me. You can get this form from our office or from our web site at www.irs.gov, or by calling 1-800-829-3676. If you decide that you wish to get representation after the investigation has started, we
will delay further investigation activity until you can secure representation.
Enclosures We have enclosed the following publications: Publication 1, Your Rights as a Taxpayer, Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don't Agree, and Publication 594, What You Should Know About the IRS Collection Process. Please note that, as explained below, certain information contained in Publication 1 and Publication 5 is not applicable
to the IRC § 6707A penalty.
Publication 1, Section VIII states that the IRS will waive penalties when allowed by law if you can show you acted reasonably
and in good faith. However, under law the IRS cannot waive the IRC § 6707A penalty. Instead, the IRC § 6707A penalty for a
non-listed reportable transaction can be rescinded by the commissioner (or the commissioner's delegate) only if it would promote
tax compliance and effective tax administration. An IRC § 6707A penalty for a listed transaction cannot be rescinded.
Publication 5 states in the Section entitled "If You Do Not Agree"
that if you decide to do nothing and your case involves certain penalties; you will receive a formal Notice of Deficiency.
However, please note that you are not entitled to receive a formal Notice of Deficiency for the IRC § 6707A penalty. This
means that the Tax Court cannot consider your case. Instead, if you do nothing, the IRS will send you a bill for the penalty.
If you do nothing, please disregard the information about seeking Tax Court review of this penalty.
Under the section entitled "Protests,"
Publication 5 states that you may file a formal written protest or a small case request. Publication 5 further states
that a small case request is available where the total amount for any tax period is not more than $25,000. Please disregard
the Publication 5 information about filing a small case request. Please note that you may not file a small case request for
an IRC § 6707A penalty even if the penalty is less than $25,000. You must file a formal written protest if you wish to dispute
the penalty. If you have any questions, please contact me.
Sincerely,Internal Revenue Agent
Enclosures: IDR Publication 1 Publication 5 Publication 594
The Privacy Act of 1974 and Paperwork Reduction Act of 1980 require that when we ask you for information we must first tell
you our legal right to ask for the information, why we are asking for it, and how it will be used. We must also tell you what
could happen if we do not receive it and whether your response is voluntary, required to obtain a benefit or mandatory under
the law. Our legal right to ask for information is contained in Internal Revenue Code sections 6011 and 6707A and their regulations.
We ask for the information to carry out the Internal Revenue laws of the United States. Your response is mandatory and we
need the information to ensure you are complying with these laws and to ascertain whether you are subject to any penalties
or injunctive action. Failure to provide the information requested, or providing false or fraudulent information, may subject
you to further penalties or criminal prosecution.
Routine uses of the information may include providing it to the Department of Justice to enforce the tax laws, both civil
and criminal, and to cities, states, the District of Columbia, U.S. commonwealths or possessions, and certain foreign governments
to carry out their tax laws. We may disclose your tax information to the Department of Treasury and contractors for tax administration
purposes, and to other persons as necessary to obtain information which we cannot get in any other way in order to determine
the amount of or to collect the tax or penalties you owe. We may disclose your tax information to the Comptroller General
of the Untied States to permit the Comptroller General to review the Internal Revenue Service. We may disclose your tax information
to committees of Congress; federal, state, and local child support agencies; and to other federal agencies for the purposes
of determining entitlement for benefits or the eligibility for and the repayment of loans. We may also disclose this information
to other countries under a tax treaty, to federal and state agencies to enforce federal non-tax criminal laws, or to federal
law enforcement and intelligence agencies to combat terrorism.
Exhibit 4.32.4-4 Case Overview and Penalty Approval Record
Page 1- Case Overview and Penalty Approval Record
Page 2- Case Overview and Penalty Approval Record
Yes/No(If yes, provide date)
30-day letter issued
Appeals consideration timely requested
Assessment Requested
Rescission Requested
Rescission Determination
Page 3- Case Overview and Penalty Approval Record
6707A Case Overview Attachment
INSERT APPLICABLE PARAGRAPH(S) ON SUMMARY SHEET I am proposing the assessment of a penalty under IRC § 6707A for failing to disclose one or more reportable transactions described
as follows: (INSERT RELEVANT PARAGRAPHS). For more details, please see the Revenue Agent Report included in this penalty case
Listed transactions: A listed transaction is a transaction that is the same as or substantially similar to one of the types
of transactions that the Internal Revenue Service (IRS) has determined to be a tax avoidance transaction and identified by
notice, regulation, or other form of published guidance as a listed transaction.
Confidential transactions: A confidential transaction is a transaction that is offered to a taxpayer under conditions of confidentiality
and for which the taxpayer has paid an advisor a minimum fee.
Transactions with contractual protection: A transaction with contractual protection is a transaction for which the taxpayer
or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences from
the transaction are not sustained. A transaction with contractual protection also is a transaction for which fees are contingent
on the taxpayer's realization of tax benefits from the transaction.
Loss transaction: A loss transaction is a transaction resulting in the taxpayer claiming certain minimum single year or cumulative
year losses under IRC § 165.
Transactions with significant book-tax differences: A transaction with a significant book-tax difference is a transaction
where the amount for tax purposes of any item or items of income, gain, expense, or loss from the transaction differs by more
than $10 million on a gross basis from the amount of the item or items for book purposes in any taxable year.
Transactions involving brief asset holding periods: A transaction involving a brief asset holding period is any transaction
resulting in the taxpayer claiming a tax credit exceeding $250,000 (including a foreign tax credit) if the underlying asset
giving rise to the credit is held by the taxpayer for 45 days or less.
Transaction of interest: A transaction of interest is a transaction that is the same as or substantially similar to one of
the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction
I am proposing the assessment of a penalty under IRC § 6707A(e) for failing to disclose in a periodic report required under
section 13 or 15(d) of the Securities Exchange Act of 1934 any penalty described in IRC § 6707A(e)(2) that taxpayer was required
to pay. Specifically, taxpayer was assessed a penalty under IRC § 6707A(e)(2) on INSERT DATE and has failed to disclose that
assessment in a periodic report required under section 13 or 15(d) of the Securities Exchange Act of 1934. For more details,
please see the Revenue Agent Report that is included in this penalty file.
Exhibit 4.32.4-5 IRC 6707A No Change Letter
We have completed our consideration of the applicability of penalties provided under Internal Revenue Code (I.R.C.) § 6707A
for not adequately disclosing the reportable transaction described below: which affected the tax return(s) filed for the period(s) shown above. The IRC § 6707A penalty will not be imposed with respect
If you have any questions, please call or write us at the telephone number or address shown above. If you write, please include
your telephone number, the best time for us to call you in case we need to contact you, and a copy of this letter.
You may want to keep a copy of this letter for your records. Thank you for your cooperation. Sincerely,
Exhibit 4.32.4-6 IRC 6707A Notification of Assessment and Post Assessment Appeals Rights
Insert applicable paragraphs in the sample letter below.
Internal Revenue Service Department of the Treasury Date:
Tax Period(s) Ended and Amount(s): Person to Contact: Employee Identification Number:
Contact Telephone Number: Last Day to Respond to this Letter:
Dear Why We Are Sending You This Letter
This letter notifies you that because we have been unable to obtain an agreement to extend the period of limitations, we have
assessed a penalty or penalties under IRC § 6707A. This penalty is being assessed for your failure to disclose a reportable
transaction as required by IRC 6011 and associated regulations. The paragraph below describes the possible grounds for proposing
this penalty. Please review this proposed assessment and let us know whether or not you agree by following the directions
Proposed Adjustment [Selectable paragraph for Proposed Adjustment] [Selectable paragraph for Reportable Transaction, if applicable]
What to Do If You Agree If you agree to the assessment and collection of the proposed penalty or penalties, please sign, date, and return one copy
of the enclosed Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment,
in the envelope provided. Electronic payment methods are available to you—please visit www.irs.gov and click on payments to
learn more. If you prefer, make your check or money order payable to the United States Treasury for the amount indicated on
the agreement form. If you agree but cannot pay in full, pay what you can within 30 days from receipt of this notice and we
will send you a bill for the remaining amount with information on your payment options. What to Do If You Disagree If you do not agree to the assessment and collection of the proposed penalty or penalties, you can request a conference with
our Appeals Office. To do so, forward a written protest in duplicate before the designated response date, which is shown at
the top of the first page of this letter, and mail it to the revenue agent indicated above. Include the following:
1. A request for a conference;
2. Your name, address, and daytime telephone number;
3. Your social security number or employer identification number;
4. The date and number of this letter;
5. The taxable years involved;
6. The penalties that you contest;
7. An explanation of why you contest those penalties;
8. All information pertinent to your position;
9. A statement of law or other authority that you relied on, and how that law or other authority applies in your case; and
10. The following signed statement: "Under penalties of perjury, I declare that I have examined the facts presented in this
statement and any accompanying information and, to the best of my knowledge and belief they are true, correct and complete."
A representative who submits a protest should substitute for this declaration a statement that he or she prepared the
protest and accompanying documents, and knows personally that the statement of facts contained in the protest and the documents
are true, correct and complete. The commissioner may rescind the penalty under IRC section 6707A for transactions other than listed transactions, if rescission
would promote tax compliance and effective tax administration. If you would like to preserve your ability to submit a rescission
request for a penalty related to a non-listed reportable transaction, you must first seek Appeals consideration of your case
(as set forth in the 10 steps above) or waive in writing such consideration by signing and submitting the enclosed Form 870.
Additional information about submitting a rescission request is contained in Rev. Proc. 2007-21. You may seek review in a United States District Court or the United States Court of Federal Claims of your liability for the
section 6707A penalty with respect to the determination that you participated in a reportable transaction, and that you failed
to properly disclose that participation. (You cannot seek review of the commissioner's determination to deny a rescission
request.) To seek court review of your liability for the section 6707A penalty, you must first fully pay the liability and
What Will Happen If You Do Nothing If you do not take any action by the response date noted above, we will begin collection procedures. If you fail to seek Appeals
consideration of your case or fail to waive in writing such consideration or allow the 30-day response time to lapse without
contact, the commissioner will not consider a request to rescind the penalty. Enclosures We have enclosed the following publications: Publication 1, Your Rights as a Taxpayer; Publication 5, Your Appeal Rights and
How to Prepare a Protest if You Don't Agree; and Publication 594, What You Should Know About the IRS Collection Process. Please
note that, as explained below, certain information contained in Publication 1 and Publication 5 is not applicable to the IRC
section 6707A penalty. Publication 1, Section VIII states that the IRS will waive penalties when allowed by law if you can show you acted reasonably
and in good faith. However, under law the IRS cannot waive the IRC section 6707A penalty. Instead, the IRC section 6707A penalty
for a non-listed reportable transaction can be rescinded by the commissioner (or the commissioner's delegate) only if it would
promote tax compliance and effective tax administration. The IRC section 6707A penalty for a listed transaction cannot be
rescinded. Publication 5 states (under the Section entitled "If You Do Not Agree"
) that if you decide to do nothing and your case involves certain penalties, you will receive a formal Notice of Deficiency.
However, please note that you are not entitled to receive a formal Notice of Deficiency for the IRC section 6707A penalty
and the information about seeking Tax Court review of this penalty should be disregarded. The Tax Court cannot consider your
case under the procedures explained in Publication 5. Under the section entitled "Protests,"
an IRC section 6707A penalty even if the penalty is less than $25,000. You must file a formal written protest if you wish
to dispute the penalty. If you have any questions, please contact the person identified at the top of the first page of this letter. Thank you for
your cooperation. Sincerely yours, Internal Revenue Agent Enclosures:
Form 4549-A Form 886A Form 870 Publication 1 Publication 5 Publication 594
Do Not Mail This Page Selectable Paragraphs for Proposed Adjustment
We are assessing a penalty under IRC section 6707A (a) for failing to disclose the reportable transaction listed below. 2.
We are assessing a penalty under IRC section 6707A(e) for failing to disclose in a periodic report required under section
13 or 15(d) of the Securities Exchange Act of 1934 any penalty described in IRC section 6707A(e)(2) that you were required
to pay. The penalty is 75 percent of the decrease in tax shown on your tax return as a result of such transaction (or which
would have resulted from such transaction if such transaction were respected for Federal tax purposes) for each penalty that
should have been disclosed, but was not. The maximum penalty shall not exceed $200,000 in the case of a listed transaction
and $50,000 in the case of any other reportable transaction; and the minimum penalty shall not be less than $10,000.
Selectable Paragraphs for Reportable Transactions Item Paragraph
notice, regulation, or other form of published guidance as a listed transaction. Subject to maximum and minimum limitations,
for each failure to disclose a transaction, the penalty is 75 percent of the decrease in tax shown on your tax return as a
result of such transaction (or which would have resulted from such transaction if such transaction were respected for Federal
tax purposes). The maximum penalty shall not exceed $100,000 for an individual and $200,000 for all others. The minimum penalty
shall not be less that $5,000 for an individual and $10,000 for all others.
and for which the taxpayer has paid an advisor a minimum fee. Subject to maximum and minimum limitations, for each failure
to disclose a transaction, the penalty is 75 percent of the decrease in tax shown on your tax return as a result of such transaction
(or which would have resulted from such transaction if such transaction were respected for Federal tax purposes). The maximum
penalty shall not exceed $10,000 for an individual and $50,000 for all others. The minimum penalty shall not be less that
$5,000 for an individual and $10,000 for all others.
on the taxpayer's realization of tax benefits from the transaction. Subject to maximum and minimum limitations, for each failure
Loss transactions: A loss transaction is a transaction resulting in the taxpayer claiming certain minimum single year or cumulative
year losses under IRC section 165. Subject to maximum and minimum limitations, for each failure to disclose a transaction,
the penalty is 75 percent of the decrease in tax shown on your tax return as a result of such transaction (or which would
have resulted from such transaction if such transaction were respected for Federal tax purposes). The maximum penalty shall
not exceed $10,000 for an individual and $50,000 for all others. The minimum penalty shall not be less that $5,000 for an
individual and $10,000 for all others.
than $10 million on a gross basis from the amount of the item or items for book purposes in any taxable year. Subject to maximum
and minimum limitations, for each failure to disclose a transaction, the penalty is 75 percent of the decrease in tax shown
on your tax return as a result of such transaction (or which would have resulted from such transaction if such transaction
were respected for Federal tax purposes). The maximum penalty shall not exceed $10,000 for an individual and $50,000 for all
others. The minimum penalty shall not be less that $5,000 for an individual and $10,000 for all others.
giving rise to the credit is held by the taxpayer for 45 days or less. Subject to maximum and minimum limitations, for each
failure to disclose a transaction, the penalty is 75 percent of the decrease in tax shown on your tax return as a result of
such transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes).
The maximum penalty shall not exceed $10,000 for an individual and $50,000 for all others. The minimum penalty shall not be
less that $5,000 for an individual and $10,000 for all others.
Transactions of Interest: A transaction of interest is a transaction that is the same as or substantially similar to one of
the types of transactions that the IRS has identified by notice, regulation or other form of published guidance as a transaction
of interest. Subject to maximum and minimum limitations, for each failure to disclose a transaction, the penalty is 75 percent
of the decrease in tax shown on your tax return as a result of such transaction (or which would have resulted from such transaction
if such transaction were respected for Federal tax purposes). The maximum penalty shall not exceed $10,000 for an individual
and $50,000 for all others. The minimum penalty shall not be less that $5,000 for an individual and $10,000 for all others.
Exhibit 4.32.4-7 IRC Section 6707A Penalty Rescission Checklist
Exhibit 4.32.4-8 IRC Section 6707 Penalty Rescission Checklist