Taxpayers who have filed all required tax returns and paid all outstanding tax liabilities, including penalties (except for the Sec. 6702 penalty) and related interest, may qualify for a one-time reduction to $500 of any unpaid penalties that the IRS has assessed (Rev. Proc. 2012-43).
Under Sec. 6702, a $5,000 penalty is imposed for filing a frivolous tax return or for making a specified frivolous submission to the IRS, which includes a frivolous request for a collection due process hearing, an offer-in-compromise, an installment agreement, or a taxpayer assistance order. The IRS has the discretion to reduce this penalty under Sec. 6702(d).
To promote compliance with the Code, the IRS has determined that taxpayers who abandon any frivolous positions and meet these other requirements in the revenue procedure will qualify for relief, effective Nov. 5, 2012:
- The request must be made on Form 14402, IRC 6702(d) Frivolous Tax Submissions Penalty Reduction, which must be signed under penalties of perjury.
- Taxpayers must pay at least $250 of the reduced penalty with the form, except for taxpayers who have installment agreements.
- Taxpayers who are currently paying a full payment installment agreement can pay the reduced penalty as part of the agreement.
- Taxpayers must file the request before the IRS files suit to collect the full penalty or to reduce any assessment of the penalty to judgment.
- Taxpayers must be in full compliance by having filed any tax returns for any type of tax for all tax periods for six years before the request, including individual returns and returns for any entity for which the taxpayer has a controlling interest.
- Taxpayers must have either paid in full all tax liabilities, penalties, interest, and additions to tax (other than the Sec. 6702 penalty) for all types of tax and all periods for which the statute of limitation remains open or have entered into and be in compliance with a full payment installment agreement.
- Taxpayers who are employers must have made all required deposits of employment taxes for the current and prior two quarters.
The IRS will not grant penalty relief to a taxpayer (1) who previously had Sec. 6702 penalty reductions, (2) who has an offer-in-compromise pending or is currently participating in a partial payment installment agreement, (3) who has entered into a closing agreement that includes the penalty, (4) who submits a frivolous return or submission after applying for penalty relief, or (5) who is currently in bankruptcy, whether or not the penalty may be discharged in the bankruptcy proceedings.
The penalty relief does not apply to any Sec. 6702 penalty that has already been paid. The IRS must give taxpayers written notice whether their request has been accepted. If the IRS denies a request, it will not be subject to administrative appeal.