Section 7. Penalties/Additions to Tax in Computations

(1) This transmits a revised IRM 8.17.7, Penalties/Additions to Tax in Computations.

Material Changes

(1) The following editorial changes were made in this IRM:

1. IRM 8.17.7.1.2: The wording "prior to" in paragraph (3)(a) changed to "on or before" .
2. IRM 8.17.7.3.1, paragraph (1): Changed "filed" to "due" .
3. IRM 8.17.7.4, paragraphs (6)(b) and (c): Changes made to clarify procedures.
4. IRM 8.17.7.9, paragraphs (4)(a) and (d): The wording "prior to" in the first sentence of paragraph (4)(a) changed to "on or before" . Deleted the last sentence of paragraph (4)(a) and all of paragraph (4)(d) since IRC 6662 only applies to filed returns.

Effect on Other Documents

Audience

Effective Date

Lisa Zannitto
Acting Director, Policy, Quality and Case Support

Settlements with Penalties and Additions to Tax

1. This subsection briefly discusses the various penalties and additions to tax that are included in settlement computations. These penalties and additions to the tax are generally considered by Appeals concurrently with the tax liability generating the penalty or addition to tax amounts.
2. For detailed information on these penalties and additions to tax, see IRM 20.1, Penalty Handbook.
3. The more common penalties and additions to the tax by Code section and kind of tax are summarized in the Penalty Reference Chart found in the exhibit. See Exhibit 8.17.7-2.
4. For useful information about penalty computations, click on the "Procedures and Resources" link on the Tax Computation Specialist (TCS) web site, and then see the "Penalty Information" folder.

• This folder has a file with a very helpful chart which discusses whether certain penalties can be asserted on a deficiency determined in Appeals, depending on if the return was timely filed, late filed, or is a Substitute for Return (SFR) case.
• The file also contains flow charts to assist in determining whether or not certain penalties can be asserted on a deficiency determined in Appeals.

When Tax Court Lacks Jurisdiction

1. The Tax Court does not have jurisdiction over certain underpayments of additions to tax or penalties.
2. When the Tax Court does not have jurisdiction, the additions (penalties) can be assessed directly. This should be done prior to issuance of the notice of deficiency. Penalties that are assessed are not included as part of the deficiency determined in the notice of deficiency.
3. In general, Tax Court has no jurisdiction over the following penalties.

• IRC 6651 : The IRC 6651 penalty (including the fraudulent failure to file penalty under IRC 6651(f)) where the penalty applies to tax shown on a filed return. Tax Court only has jurisdiction if the penalty is applicable to a deficiency.

• IRC 6652(b) : The IRC 6652(b) penalty.

• IRC 6654: The IRC 6654 penalty when a tax return has been filed.

• IRC 6655: The IRC 6655 penalty when a tax return has been filed.

• IRC 6656: The IRC 6656 penalty where the penalty relates to the failure to deposit employment taxes withheld. (However, see IRC 7436 and IRM 8.7.16, Appeals Employment Tax Procedures, for information concerning IRC 7436 Notices of Determination).

Note:

Tax Court does have jurisdiction over the IRC 6656 addition to tax when the addition relates to a deficiency due to the failure to withhold and deposit taxes pursuant to IRC 1441 and IRC 1442. (See IRM 20.1.4.11.5, Deficiency Procedures Form 1042, for additional information).

• IRM 8.17.4.3, Adjustments Requested by AO Prior to Issuing Notice of Deficiency
• IRM 8.17.4.17, Including Penalties/Additions to Tax in the Notice of Deficiency
• IRM 8.11.1, Return Related Penalties in Appeals
• IRM 20.1.1.4.2, Introduction and Penalty Relief, Deficiency Procedures

Items Impacting the Penalty Computations

1. In most cases, penalty provisions of the code sections in effect for the loss year generating the carryback govern penalties applicable to carryback years, for deficiencies due to a carryback recapture.
2. Net operating loss carrybacks, capital loss carrybacks and all credit carrybacks cannot be used to reduce the underpayment subject to the penalty.
3. Prepayment credits and frozen refunds may impact the penalty computations:

1. Prepayment credits are payments of tax such as withholding tax, estimated tax payments, etc., made on or before the due date of the return. Prepayment credits also include payments made on or before the due date for an unfiled return.
2. Prepayment credits do not include advance payments, cash bonds, or amounts applied from other tax liabilities subsequent to the due date of the return for which the penalty applies.
3. Payments and credits from a filed return that are neither applied to a tax liability nor refunded to the taxpayer are called "frozen refunds" , and may also impact the penalty computations.

Penalties Repealed for Returns Due (Without Regard to Extensions) After 12/31/89

1. The following penalties were repealed for returns due (without regard to extensions) after 12/31/89. For detailed information on preparing a settlement computation with any of these penalties, refer to the historical IRM 8.17.2 found on the Publishing web site at http://publish.no.irs.gov.

1. Negligence Penalty, IRC 6653(a);
2. Fraud Penalty, IRC 6653(b);
3. Valuation Overstatement, IRC 6659;
4. Valuation Understatement (Estate and Gift), IRC 6660;
5. Substantial Understatement, IRC 6661.

Failure to File, IRC 6651(a)(1)

1. If a return is not timely filed, IRC 6651(a)(1) provides for a penalty of 5% if the failure is for not more than one month, with an additional 5% for each month or fraction thereof during which the failure continues, but not in excess of 25%.
2. The failure to file (FTF) penalty under IRC 6651(a)(1) applies to any delinquent return or substitute for return, except when the failure to file was due to reasonable cause and not willful neglect.
3. The FTF penalty is computed on the net amount due. The net amount due is the tax liability required to be shown on the return reduced by payments of tax on or before the date prescribed for payment and by the amount of allowable credits against the tax, which may be claimed on the return.

1. If valid extensions of time to file have been granted, the FTF penalty is not applicable until the expiration of the extension and then only from that date on. An extension may be considered invalid if tax is not properly estimated. In these instances, the FTF penalty is computed from the original due date.
2. To arrive at the tax liability required to be shown on return, compute the revised tax liability of the case, excluding all net operating loss, capital loss and credit carrybacks.
3. All withholding credits are considered timely paid regardless of the posting date shown on the IDRS transcript. Additional withholding credits allowable are considered timely paid and are allowed as credits when computing the delinquency penalty.
4. Refundable credits such as earned income credit, additional child tax credit, first time homebuyer credit, etc:

1. Are treated as payments when computing the FTF penalty.
2. Adjustments made to change these credits are not included in the revised tax liability.
3. Instead, when computing the FTF penalty with adjustments to these credits, the revised tax liability as determined in paragraph (b) above is reduced by the allowable amount of these refundable credits.
4. The "allowable" amount of refundable credit is the total amount shown on the transcript increased or decreased by any adjustments made to the refundable credit in the Appeals tax computation.

Minimum Failure to File Penalty

1. If the return is at least 60 days late, including extensions, a minimum FTF penalty applies:

• For returns due (without regard to extensions) after 12/31/2008, the minimum penalty is the lesser of $135 or 100 percent of the tax required to be shown on the return that was not paid on or before the due date.
• For returns due (without regard to extensions) before 1/1/2009, the minimum penalty is the lesser of $100 or 100 percent of the tax required to be shown on the return that was not paid on or before the due date.

Coordination with Fraud Penalty

1. Effective for returns due after December 31, 1989 (determined without regard to extensions), the FTF and the fraud penalties may be asserted for the same tax year and against the same portion of the tax liability.
2. If the failure to file is due to fraud, the fraudulent failure to file penalty under IRC 6651(f) may be asserted rather than the regular FTF penalty under IRC 6651(a)(1).
3. See discussion of IRC 6651(f) in IRM 8.17.7.6 .

FTF Penalty With Concurrent FTP Penalty Assessment

1. IRC 6651(c)(1) provides that the penalty for filing late under IRC 6651(a)(1) is to be reduced by the amount of any penalty for paying late imposed under IRC 6651(a)(2) for any month or part of a month during which both penalties apply. The penalties are said to be running concurrently.
2. The above reduction does not reduce the total penalty for filing late below the minimum penalty, if applicable. See IRM 20.1.2.2.7.4, Minimum Penalty.
3. When both the IRC 6651(a)(1) FTF and IRC 6651(a)(2) FTP penalties apply to an original assessment, see example below of the computation of the FTF penalty that should be assessed by the Campus if the return is filed late:

1. Compute the FTF penalty at the total rate of 5% per month allowable under IRC 6651(a)(1).
2. Generally, the FTP penalty under IRC 6651(a)(2) can't be asserted on a subsequently determined tax deficiency when the taxpayer has filed a return.

Caution:

If the Compliance report (RAR) or notice of deficiency has asserted the IRC 6651(a)(2) FTP penalty and the taxpayer filed a return, the AO or Counsel attorney will need to determine whether the FTP penalty should be sustained or eliminated.

1. Generally the RGS penalty schedules or the TCS Excel penalty spreadsheets on the Technical Support SharePoint site are used for the IRC 6651 penalty computations.
   
2. RGS Penalty Computations :

• Generally the IRC 6651(a)(2) FTP penalty can't be asserted on a subsequently determined tax deficiency when the taxpayer has filed a return. Therefore, the RGS user should not indicate that the IRC 6651(a)(2) FTP penalty applies on the RGS "Return Related Penalty Details" input screen. If an amount is entered on this input screen for the IRC 6651(a)(2) FTP penalty previously assessed, it won't be considered in the computation of the FTF penalty.
• Therefore, the correct amount to enter into RGS for the previously assessed FTF penalty must include both the assessed FTF penalty and the concurrent IRC 6651(a)(2) FTP penalty assessed. This amount must be determined manually.
• For an article that discusses how to compute the FTF penalty for late filed returns using RGS, click on the "Procedures and Resources" link on the TCS web site, and then see the "Penalty Information" folder.

• The TCS Excel IRC 6651 penalty spreadsheet on the Technical Support SharePoint will reduce the FTF penalty amount by the amount of the IRC 6651(a)(2) FTP penalty previously assessed for any month or part of a month during which both penalties apply.

Failure to Pay Penalty, IRC 6651(a)(2) and IRC 6651(a)(3)

1. The Failure to Pay (FTP) penalties apply to the balance of tax due and shown on returns, and to balances due where notice and demand is given. In general, the applicable FTP penalty should be assessed at one-half of 1% of the unpaid tax for the first month the penalty applies and an additional one-half of 1% for each additional or fraction of the month the tax is unpaid, not to exceed 25% of the tax.
2. IRC 6651(a)(2):

1. Computed from the date prescribed for payment of tax (determined with regard to any extension of time for payment.)
2. Generally, the failure to pay penalty is computed from the original due date of the return to the date the tax is paid.

1. The IRC 6651(a)(3) penalty generally applies to the following additional assessments:
   • A deficiency, or
   • An amendment to the original return, or
   • Tax assessed due to the a correction of a mathematical error as defined under IRC 6213(b)(1).
2. The IRC 6651(a)(3) penalty is assessed if payment is not made within 21 calendar days (or 10 business days if the balance due amount equals or exceeds $100,000) of notice and demand.

1. The IRC 6651(a)(2) failure to pay penalty generally can't be asserted on a deficiency when the taxpayer filed a return. Therefore, the IRC 6651(a)(2) penalty should not be computed on the deficiency shown in the settlement computation when a return is filed by the taxpayer.
2. However, if the Compliance report (RAR) or statutory notice of deficiency has asserted IRC 6651(a)(2) and the taxpayer filed a return, the AO or Counsel attorney will need to determine whether the IRC 6651(a)(2) penalty should be sustained or conceded.
3. If the IRC 6651(a)(2) penalty is conceded, then the IRC 6651(a)(1) penalty asserted in the RAR or notice of deficiency will need to be recomputed.
4. If an IRC 6651(a)(2) penalty was assessed, see IRM 8.17.7.3.3 for information on how to recompute the IRC 6651(a)(1) penalty.

Failure to Pay Penalty and Notices of Levy - IRC 6651(d)

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

• 10 days after the date of notice of intent to levy [IRC 6331(d)], or
• The day on which notice and demand for immediate payment is given in the case of jeopardy [IRC 6631(a)].

Note:

The 1% penalty rate applies to all subsequent assessments on that module. However, once a module is fully paid, a later tax assessment will begin to accrue at the one-half of one percent rate.

Failure to Pay Penalty and Installment Agreement - IRC 6651(h)

1. An individual's FTP penalty will be reduced to one quarter of one percent (.0025) for any month in which an installment payment agreement with the IRS is in effect, provided the individual timely filed (taking extensions into account) the return relating to the liability that is subject to the installment agreement.
2. This reduction does not apply if the 1% FTP penalty rate under IRC 6651(d) is in effect.
3. Termination of installment agreement

1. The one quarter of one percent rate ends following the month during which the installment agreement is terminated.
2. When an installment agreement is terminated, the basic penalty rate reverts to the rate in effect prior to the installment agreement beginning with the first penalty month that begins after the installment agreement is terminated.

Nonfilers : Substitute for Return (SFR), IRC 6651(a)(1) and 6651(a)(2)

1. If the taxpayer has not filed a return and an additional tax liability is determined:

1. IRC 6651(g) provides that for returns due (without regard to extension) after July 30, 1996, a taxpayer with a substitute for return (SFR) prepared by the IRS pursuant to IRC 6020(b) will be treated as a return filed by the taxpayer for purposes of determining the IRC 6651(a)(2) penalty.
2. Therefore, substitute for return (SFR) computations generally will include both a failure to file (FTF) penalty under IRC 6651(a)(1), and a failure to pay (FTP) penalty under IRC 6651(a)(2).

IRC 6651(a)(2) and IRC 6020(b) Returns

1. Pursuant to IRC 6020(b), the IRS generally prepares a return when it determines that a taxpayer is liable for filing the tax return, but failed to do so after receiving notification from the IRS.
2. A valid return must have been prepared under IRC 6020(b) in order to assert the IRC 6651(a)(2) penalty on a nonfiler. The requirements of a valid IRC 6020(b) return are discussed in Treas. Reg. section 301.6020-1.
3. The requirements of a valid IRC 6020(b) return would include the following documents for each nonfiled tax period (known as the 6020(b) Certification package).

1. A properly completed and signed Form 13496, IRC 6020(b) Certification, dated on or after the date of the 30-day letter.
2. Form 4549 or Form 4549-A, signed by a duly authorized IRS employee.
3. Form 886-A, Explanation of Items.

Note:

See IRM 4.19.17.1.2, Form 13496 Certification Procedures, for more information, including information about the electronic Form 13496.

1. Verify that the taxpayer did not file a return, and that there is a SFR TC 150 posting on the transcript.
2. Check the administrative file to see if the case file includes a 6020(b) Certification package.
3. Where no 6020(b) Certification package is included in the administrative file, the AO or Counsel attorney will need to review the file to determine whether there are documents that would meet the requirements of an IRC 6020(b) return, as outlined in Treas. Reg. section 301.6020-1. (Also see CC Notice 2003-019, as modified by CC Notice 2004-009.)

1. See IRM 8.7.16.16, IRC 6020(b) Substitute for Return Case Processing, for information about SFR returns prepared for employment tax cases.
2. See IRM 8.7.10.5, Preparing an Excise Tax Return under IRC 6020(b), for information about SFR returns prepared for excise tax cases.

Failure to File and Failure to Pay Computations for SFR Returns

1. Since the IRC 6651(a)(1) failure to file (FTF) and IRC 6651(a)(2) failure to pay (FTP) penalties are asserted concurrently on substitute for returns, the amount of the FTF penalty must be reduced by the amount of the FTP penalty for any month or part of a month during which both penalties apply. See IRM 8.17.7.3.3 for additional information.

1. For simplicity purposes, RGS implements this reduction by reducing the 5 percent FTF penalty rate by the 0.5 percent penalty rate of the FTP penalty for any month during which both penalties apply. This results in an IRC 6651(a)(1) penalty rate of 4.5 percent a month (to a maximum of 22.5 percent) shown on the RGS IRC 6651 penalty computation schedule. The RGS IRC 6651 penalty computation schedule may be included in the settlement computation as long as the computations are accurate.
2. The TCS Excel IRC 6651 penalty spreadsheet on the Technical Support Sharepoint site will correctly reduce the IRC 6651(a)(1) penalty amount by the concurrent IRC 6651(a)(2) penalty amount.

Caution:

If the taxpayer made payments after the due date of the return, the RGS IRC 6651 penalty computation schedule and the TCS IRC 6651 penalty Excel spreadsheet won't be accurate for the FTP penalty. This is because these penalty schedules won't consider any late payments in the FTP penalty computation. When there are late payments, these penalty schedules must be corrected or other schedules used.

1. Show the FTP penalty amount on Form 3610 (if prepared) or Form 5278, (or Form 4549, etc.) as an asterisk (*). An explanation should also be included to explain that the amount cannot be determined. Suggested sample language that can be used is "Amount to be determined" or "To be computed later."

Exception:

In certain circumstances the FTP penalty may be computed at the maximum rate when the penalty is still accruing. An example is when Counsel or the AO determines that the FTP penalty should be computed at the maximum 25% rate because the maximum FTP penalty rate will be reached soon after the computations are prepared (usually within a month or two).

1. Compute the IRC 6651(a)(2) penalty and include on the settlement computation.
2. Also include penalty computations in the settlement computation. The RGS or the TCS Excel IRC 6651 penalty schedules are generally used for this purpose, but other schedules may also be used.

Fraudulent Failure to File (FFTF), IRC 6651(f)

1. IRC 6651(f) provides for an increase in the penalty rate for failure to file if the failure to file is fraudulent. The penalty rate is increased from 5 percent per month to 15 percent for each month or part of a month the return is late, and the maximum penalty is increased from 25 percent of the amount subject to IRC 6651(a)(1) to 75 percent of that amount.
2. The IRC 6651(f) fraudulent failure to file (FFTF) penalty is a counterpart of the IRC 6663 civil fraud penalty. The fraud components of the FFTF penalty and the civil fraud penalty are generally similar:

• The civil fraud penalty requires an underpayment which is attributable to the willful and knowing intent to defraud.
• The FFTF penalty requires that all or part of the tax required to be shown on the return was unpaid on the due date for payment.

Failure to Report Tips, IRC 6652(b)

1. IRC 6652(b) provides for a penalty on employees for failure to report tips.
2. The IRC 6652(b) penalty is 50% of FICA tax on tip income that the employee failed to report to his or her employer. This penalty, though applicable to employment tax, is assessed and collected as a part of the taxpayer's income tax.
3. See IRM 20.1.10.3.2, IRC 6652(b) Failure to Report Tips, for additional information about the penalty computation.
4. See IRM 8.7.16.8, Computations for Unreported Tip Income Cases, for information on how to include the IRC 6652(b) penalty in a settlement computation.
5. See IRM 8.17.4.26, Tip Income Cases, and FICA Tax Informational Notice, for information about tip income cases and the IRC 6652(b) penalty when a notice of deficiency must be issued.

Estimated Tax Penalties, IRC 6654 and IRC 6655

1. Taxpayers are generally required to pay income tax as income is earned. This is accomplished via withholding from income, or via estimated tax payments. Taxpayers who do not have sufficient amounts withheld, and who fail to make estimated tax payments as required by law, may be assessed a penalty under IRC 6654 or IRC 6655 for underpayment of estimated tax.
2. Although IRC 6654 and IRC 6655 penalties are generally computer generated by the Campus when the return is filed by the taxpayer, Compliance will sometimes assert or adjust these penalties. If an adjustment is made to the tax of an original return, after the return due date (including extensions) as a result of either an audit or the taxpayer filing an amended return, the penalty amount will generally not be adjusted.

Note:

An estimated tax penalty cannot be asserted on a deficiency when the taxpayer has filed a return. An estimated tax penalty can be asserted in "Substitute for Return" cases.

IRC Section 6654 - Individuals

1. IRC 6654 provides for a penalty when individuals underpay any required installment(s) of estimated income tax liabilities reportable on Form 1040.

1. Taxpayers are required to make estimated tax payments if the tax that will be shown on their return (or, if no return is filed, their tax liability), minus tax amounts withheld from wages during the year, is $1,000 or more.
2. "Tax shown on the return" is defined in the instructions for Form 2210. It's generally net tax reduced by net refundable credits listed for line 3 of Form 2210.
3. The required annual payment is generally based on the lesser of:
   1) A percentage of the tax shown on the original return or, if no return is filed, on the tax as determined or
   2) A percentage of the prior year’s tax.

Note:

1. RGS will not show an amount on Form 5278 (or Form 4549/Form 4549-A) for IRC 6654 if the computed penalty is less than $100.
2. The RGS Form 5278 (or Form 4549/Form 4549-A) that is generated without an IRC 6654 penalty when the penalty is less than $100 can be used in the settlement computation.
3. If the AO or Counsel wants TCS to include the IRC 6654 penalty on the Form 5278 (or Form 4549/Form 4549-A) for amounts under $100, they must specify this requirement in their work request to TCS.

IRC Section 6654 - Estates and Trusts

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

1. All estates and most trusts are required to make estimated tax payments in the same manner as individuals.
2. Generally, an estate or trust is required to pay estimated tax if it expects to owe, after credit for withholding, an amount greater than $1,000.

• IRM 20.1.3.2.1.1.6, Determining the Required Annual Payment, Fiduciaries of Estates or Trusts
• Instructions for Form 2210
• Form 1041–ES, Estimated Income Tax for Estates and Trusts

IRC Section 6655 - Corporations & Others Not Covered by IRC Section 6654

1. IRC 6655 imposes a penalty when a corporation (C or S), private foundation, private foundation organized as a trust, or tax exempt organization underpays estimated tax.
2. A corporation (or other entity subject to IRC 6655) must make estimated tax payments if its tax shown on the return (income tax minus credits) is $500 or more. If the tax is less than $500, no estimated tax payments are required and a penalty will not be assessed.
3. Since the law can be complex, it is best to consult the Code and Regulations if computation of this penalty is involved in a case. Also IRM 20.1.3.3. IRC Section 6655 — Corporations & Others Not Covered by IRC Section 6654, has very detailed information about IRC 6655.

Accuracy-Related Penalty, IRC 6662

1. IRC 6662 imposes an accuracy related penalty at the rate of 20% on the portion of any underpayment attributable to any of the following, for returns due after 12/31/89 (without regard to extensions):

1. Negligence or disregard of rules or regulations. [IRC 6662(b)(1)]
2. Substantial understatement of income tax. [IRC 6662(b)(2)]
3. Substantial valuation misstatement under Chapter 1 of the IRC. [IRC 6662(b)(3)]
4. Substantial overstatement of pension liabilities. [IRC 6662(b)(4)]
5. Substantial estate or gift tax valuation understatement. [IRC 6662(b)(5)]
6. Transactions lacking economic substance. Applies for transactions entered into after 3/30/2010. [IRC 6662(b)(6) ]

1. Gross valuation misstatements. Applies for returns due after 12/31/89. [IRC 6662(h)]
2. Nondisclosed noneconomic substance transactions. Applies for transactions entered into after 3/30/2010. [IRC 6662(i)]
3. Any undisclosed foreign financial asset understatement. Applies for tax years beginning after 3/18/2010. [IRC 6662(b)(7) and IRC 6662(j)]

1. Prepayment credits are payments of tax such as withholding tax, estimated tax payments, etc., made on or before the due date of the return.
2. Prepayment credits do not include advance payments, cash bonds, or amounts applied from other tax liabilities subsequent to the due date of the return for which the penalty applies.
3. The deficiency attributable to IRC 6662 is decreased or increased by adjustments made in the settlement computation to prepayment credits:

Note:

For more information, click on the "Procedures and Resources" link on the Tax Computation Specialist (TCS) web site, and then see the "IRC 6662 Penalty and Frozen Refunds" folder. The folder contains Counsel memos on this topic, including a 2012 Counsel memo which discusses IRC 6664, and how to compute the IRC 6662 penalty when there are frozen refunds.

Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions, IRC 6662A

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

1. Any listed transaction (which is one category of reportable transactions); and
2. Any other reportable transaction if a significant purpose of the transaction is the avoidance or evasion of federal income tax.

1. 20 percent of the reportable transaction understatement where the reportable transaction was properly disclosed, and
2. 30 percent of the reportable transaction understatement where the transaction was not properly disclosed. (See IRM 20.1.5.15.1, Adequate Disclosure and Rescission of IRC 6707A Impact on IRC 6662A, for discussion of disclosure requirements.)

1. IRC 6662A does not apply to any portion of an understatement on which a penalty is imposed under IRC 6663.
2. IRC 6662A does not apply to any portion of an understatement on which a gross valuation misstatement penalty under IRC 6662(h) is imposed.
3. IRC 6662A does not apply to any portion of an understatement on which an IRC 6662 penalty is imposed at the increased rates determined under IRC 6662(i) for nondisclosed, noneconomic substance transactions.

Fraud Penalty, IRC 6663

1. IRC 6663 imposes a fraud penalty at the rate of 75% on the portion of any underpayment attributable to fraud for returns due after 12/31/89 (without regard to extensions). This penalty only applies to filed returns.

Note:

The accuracy-related penalty, IRC 6662, cannot apply to any portion of an underpayment on which the fraud penalty is imposed.

1. The prepayment credit and frozen refund discussion in paragraph (5) of IRM 8.17.7.9 also applies to the IRC 6663 penalty.
2. When computing the IRC 6663 penalty, RGS will reduce a deficiency by a frozen refund to get the underpayment subject to IRC 6663.

Computation of Failure to File Penalty After Tax Adjustment, with Previously Assessed Failure to Pay Penalty

Penalty Reference Chart