IRC section 6651(a)(1) : The FTF penalty applies on the amount due from the return due date (or extended due date) until a return is filed or until the 25% maximum penalty rate has been applied. The FTF penalty rate is 5% a month. (See exception (2)(a) below.)

IRC section 6651(a)(2): The FTP penalty, for failure to pay amounts shown on the return as filed, applies on the amount due from the return due date to the date paid at ¹/₂% a month, not to exceed 25%.

IRC section 6651(a)(3): The penalty for failure to pay amounts not shown on the return (e.g., audit deficiencies or other subsequent adjustments) applies on the additional amount due, beginning after 21 calendar days from the notice and demand for payment (23C date) to the date paid, at ¹/₂ % a month, not to exceed 25%.

Tax on return. When the FTF penalty under IRC section 6651(a)(1) and the FTP penalty for failure to pay tax shown on the return under IRC section 6651(a)(2) both apply for the same months, the 5% FTF penalty rate under IRC section 6651(a)(1) is reduced by the ¹/₂% FTP penalty rate under IRC section 6651(a)(2).

Tax on subsequent assessments. The FTF penalty applies on subsequent assessments (deficiencies) at 5% a month for the same number of months the return was originally late, not to exceed 25%. The 5% FTF rate on subsequent assessments is not reduced by any FTP penalty rate.

Reasonable cause determinations must be made on the individual facts and circumstances of each case.

Generally, the taxpayer must pay the tax due before the Service will abate a FTP penalty for reasonable cause. The penalty continues to accrue until the tax is paid. The taxpayer may have reasonable cause for some months, but not for others. A final determination cannot be made until after the tax is paid. FTP abatements on accounts with unpaid tax compound re-computations and require adjustments to the 25% maximum applicable rate, increasing the possibility of an incorrect penalty assessment. The Service is not denying the taxpayer's statutory right to reasonable cause consideration; the Service is defining the pre-conditions for administering the provision. There is no statutory requirement that the tax has to be paid in full before a FTP abatement request can be considered or can in fact be made. In the same way, there is no statutory requirement that the Service has to consider a FTP penalty abatement before the tax is fully paid. Thus, this guideline is decided per administrative discretion in the interests of the taxpayer and the Service. It is not in the taxpayer's interest for the Service to consider or effect FTP penalty abatements on accounts with outstanding tax due, as the penalty continues to accrue and often leads to the taxpayer having to make a second request for abatement. As a further example, if the Service were to consider and allow an abatement of FTP on a return filed five months late with unpaid tax, and the ¹/₂% FTP is abated for the first five months, the FTF rate goes from 4¹/₂% to 5%, effectively transferring the decreased FTP amount over to an increased FTF amount, creating a wash, while the maximum applicable FTP rate that had gone down to 22¹/₂% is re-started once again at 25%. These type scenarios do not provide quality taxpayer relations and only serve to multiply confusions. See IRM 20.1.1.3.5.1 for first-time-abate/clean-compliance-history provisions.

The reasonable cause exception for FTF and FTP penalties under IRC section 6651(a)(1) and IRC section 6651(a)(2) requires the taxpayer to satisfy the burden of proving that the failure to timely file a return and pay tax was in fact due to reasonable cause and not willful neglect. Reasonable cause requires the taxpayer to demonstrate that he exercised ordinary business care and prudence but was nevertheless unable to file/pay within the prescribed time. Willful neglect involves a conscious, intentional failure or reckless indifference. See United States v. Boyle, 469 U.S. 241, 245 (1985), E. Wind Indus., Inc. v. United States, 196 F.3d 499, 504 (3d Cir. 1999), and Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).

FTF can be subject to abatement before the tax is fully paid because, once the return is filed, the penalty is a fixed amount and does not continue to accrue on the unpaid tax like the FTP penalty does.

A TC 271 input without RC 062 restricts subsequent computation of the penalty.

Input TC 272 with a zero amount to remove the manual restriction on the FTP penalty when a module has been restricted in error.

See LEM 20.1.2 .

On BMF SFRs with a "6020B" indicator, the tax shows as the TC 150 amount and FTP is systemically calculated from the return due date as it would be with any regular TC 150. However, PC 2 and PC 9 are not currently programmed to start the FTP calculation on a subsequently received delinquent return from return due date and the FTP calculation from return due date has to be done manually until a change is implemented. (See IRM 21.7.9.4.9.4 .)

Inputting PC 5 with a TC 290 for zero recomputes interest and FTP from the return due date.

See IRM 4.4.9.6 and IRM 4.4.12.4.19.6.1 .

Background: In two tax court cases in 2003, the judge denied the Service the assessment of the FTP penalty on an SFR because the requirements for a valid IRC section 6020(b) return were not met. In conjunction with Chief Counsel, Form 13496 , IRC section 6020(b) Certification, was conceived to ensure that FTP penalties on BMF and IMF SFRs would be sustained in future court cases.

AIMS is now programmed to provide systemic input for SFR TC 150s on IMF and BMF returns. All SFRs for BMF MFTs that are valid on AIMS can be processed systemically. (See IRM 4.4.9.) This effectively obsoletes prior guidelines for use of a hardcopy "dummy" return in establishing an SFR account on Master File.

SFRs relating to returns of tax that follow deficiency procedures with FTP applied under IRC section 6651(g) must follow Form 13496 certification procedures.

For SFRs showing tax that does not follow deficiency procedures (e.g., employment and excise), whether or not AIMS is set up to be able to generate the SFR TC 150, examiners can complete the certification guidelines with Form 13496 or sign their names on the taxpayer's signature line on the hardcopy of the return followed by the words: " This return was prepared and signed under authority of IRC section 6020(b)." Follow established SFR processing.

Complete Form 13496 with a live signature or a computer facsimile signature. Prepare and date the certification after the 30-day letter (or revised 30-day letter) so that the date of the certification is identical to, or later than, the 30-day letter. Attach the certification to the Form 4549 / Form 886-A. The date on the certification should be the same as, or later than, the date on the Form 4549 / Form 886-A. Anyone authorized to prepare and issue reports of proposed tax adjustments is authorized to sign the certification. (See D. O. 182 in IRM 1.2.44.5.) Whenever the examiner (or a subsequent reviewer) revises a report of proposed adjustments (without regard to whether or not the revised report is re-issued to the taxpayer), a re-certification is required on another Form 13496 dated on (or after) the same day as the revised report. A Form 13496 may not be prepared or dated after the date of the 90-day letter. Form 13496 (Rev. 10-2005) is available in fillable format on http://publish.no.irs.gov.

When the report of proposed adjustments involves more than one tax year, create a separate Form 13496 for each year and attach each one to a photocopy of the report for each year.

Example 1: Taxpayer filed 2004 Form 1040 on July 18, 2005 (four months late) showing a refund of $500. No FTF/FTP applies. The return is audited June 20, 2006, and a tax deficiency of $1,200 is agreed. FTF applies at 5% a month on $700 ($1,200 deficiency less the original $500 overpayment) times the same four months the return was originally late = $140. The FTP penalty would first apply at ¹/₂% a month under IRC section 6651(a)(3) on any amounts unpaid after 21 days from assessment (the 23C date.)

Example 2: Taxpayer filed 2004 Form 1040 on July 18, 2005 (four months late) paying $1,400 amount due in full with return. FTF and FTP were assessed. The return is audited in June 2006 and results in an overpayment (refund) of $900. FTF penalty is recalculated on $500 ($1,400 original underpayment less $900 overpayment from audit) at 4¹/₂% a month for four months from the return due date. The FTP penalty is also recalculated based on $500 for four months at ¹/₂% a month.

After January 2002, TC 971 AC 262 will generate when the maximum FTP penalty rate has been applied. When the account drops from IDRS, TC 971 AC 262 will appear on CFOL (BMFOL or IMFOL.) When figuring FTP manually, TC 971 AC 262 can be input manually.

A taxpayer's return has tax of $1,000, withholding of $1,800, and was refunded $800.

If the withholding of $1,800 is reduced to $1,100 (TC 807 for $700), the FTP penalty is not asserted because the remaining allowable withholding ($1,100) still exceeds (or is enough to cover) the tax of $1,000.

If the withholding of $1,800 is reduced to $600 (TC 807 for $1,200), the FTP penalty is asserted on $400 because the allowable withholding ($600) does not exceed (or, is not enough to cover) the original tax due of $1,000.

A taxpayer's return has tax of $2,000, withholding of $1,800 and EIC of $800.

The refund of $600 is frozen pending EIC verification.

If the EIC of $800 is fully disallowed, the taxpayer has an amount due of $200. The FTP penalty applies under IRC section 6651(a)(3) on $200 after 21 days from the notice and demand for payment until full paid or until the maximum 25% rate has been applied.

If $500 of the $800 EIC is disallowed, the taxpayer's $600 refund is reduced to $100, and no FTP penalty applies.

The taxpayer's return, due April 15, 2004, was filed on August 2, 2004 with tax of $2,000, EIC of $800, and withholding of $1,800. The $600 refund is issued.

The return is subsequently audited, the EIC of $800 is disallowed and a deficiency of $800 is assessed on June 22, 2005. The amount is full paid on November 27, 2005.

Since the original $600 refund constitutes an amount of tax paid (whether by withholding, estimated payments or any credits) before the return due date (without regard to extensions), the $800 EIC audit adjustment is reduced by the $600 refund and the FTF penalty is calculated on $200: 5% a month times four months times $200 = $40.

The taxpayer is assessed FTP under IRC section 6651(a)(3) beginning on July 14, 2005 (i.e., 21 calendar days after assessment) at ¹/₂% a month, times five months, times $800 = $20.

FTP begins after 21 calendar days from assessment on any unpaid amount under IRC section 6651(a)(3), and

FTF at 5% a month applies on the deficiency attributable to the adjustment for the same number of months it originally applied and is asserted on the 30–day and 90-day letters.

FTP begins after 21 calendar days (or after 10 business days if the total amount due is $100,000 or more) from assessment on any unpaid amount under IRC section 6651(a)(3), and

FTF at 5% a month applies on the deficiency attributable to the adjustment for the same number of months it originally applied and is asserted on the 30–day and 90-day letters.

FTP applies from return due date on the amount of the adjustment under IRC section 6651(a)(2), and

the adjustment increases the amount on which any FTF penalty was calculated on the return as originally filed and is assessed separately from any exam deficiency. See IRM 4.19.1.6.33.3.

FTP begins after 21 calendar days from assessment of the unpaid amount under IRC section 6651(a)(3), and

FTF at 5% a month applies on the deficiency attributable to the adjustment for the same number of months it applied on the return as originally filed and is asserted on 30–day and 90-day letters.

Example: The 2004 Form 1120 was due March 15, 2005, but was filed four months late on June 27, 2005, with tax of $50,000, prepayment credits of $43,000 and balance due of $7,000 paid in full with the return. FTF and FTP were assessed. An allowable NOL (TC 295) of $60,000 from TY 2005 was subsequently carried back to TY 2004. The FTF/FTP penalties originally assessed on TY 2004 are not recalculated on the decreased tax, even though the carryback removed the tax of $7,000 on which the FTF/FTP was originally calculated.

In the example above, if the refunded NOL is subsequently audited and disallowed, the FTP penalty would only apply under IRC section 6651(a)(3) after 21 calendar days (or 10 business days when the total amount due is $100,000 or more) from assessment. Since the FTF penalty was not re-calculated/reduced in proportion to the original NOL refund, it is not applied on the portion of any tax deficiency attributable to the NOL disallowance.

See Rev. Rul. 72-484for FTP as it relates to carrybacks.

Example: The 2005 Form 1120 was due March 15, 2006, but filed four months late showing tax of $50,000 paid in full with the return. FTF (4¹/₂% a month times four months times $50,000 = $9,000) and FTP (¹/₂% a month times four months times $50,000 = $1,000) were assessed. If Form 1139 is filed to carry an allowable NOL forward from TY 2004 to TY 2005, the FTF/FTP penalties are recalculated on the reduced tax.

Example 1. Taxpayer timely files TY 2004 Form 1040 showing a refund of $500. The Service makes a math error adjustment of $900 and the taxpayer is sent a notice in the amount of $400 on May 21, 2005. FTP will first apply under IRC section 6653(a)(3) on $400 (or any unpaid portion of it) after June 11, 2005.

Example 2. Taxpayer files three months late on July 6, 2005, showing a refund of $1,000. The Service corrects a $2,200 math error, the $1,000 is not refunded and the taxpayer receives a notice on July 10, 2005 to pay additional tax of $1,200. FTF applies at 5% a month, times three months, times $1,200.

Example 3. Taxpayer files five months late on August 18, 2005, showing balance due of $1,400 paid in full with the return. The Service corrects a $600 math error and sends a notice for that amount on September 1, 2005. FTF applies on $2,000 at 4¹/₂% a month for five months. FTP under IRC 6651(a)(2) applies on $1,400 at ¹/₂% a month for five months. FTP under IRC section 6651(a)(3) will first apply on $600 (or any unpaid portion of it) after September 22, 2005.

Under IRC section 6213(b)(2)(A) the taxpayer may request in written form an abatement of the additional tax assessed due to a math error. The Service must abate the additional tax—without the taxpayer having to first pay the amount—and reassess following deficiency procedures.

Use PRC 045 for Service math errors in penalty computations.

The FTP penalty, with respect to a subsequent deficiency (TCs 290/300) or an amount showing due on an amended return, applies under IRC section 6651(a)(3) on unpaid amounts after 21 calendar days or (if the total balance due is equal to or more than $100,000) 10 business days from assessment (23C date.)

The FTF penalty, with respect to a subsequent deficiency (TCs 290/300) or an amount showing due on an amended return, applies under IRC section 6651(a)(1) at 5% a month for however many months the return was originally late. When the return was delinquent, the FTF penalty originally applied, and the examiner finds reasonable cause exception for not asserting it on the deficiency, the originally assessed FTF penalty must be correspondingly abated.

When an overpayment or reduction in tax applies to an allowed amended return or an audit determination, any FTF and FTP penalty that was originally assessed is re-calculated on the amount of reduced tax and the proportionate amount of FTF and FTP is abated.

For an allowable amended return or an audit adjustment showing a decrease in tax in relation to an original return on which FTF and FTP penalties were assessed, recalculate FTF/FTP on the decreased tax and abate these penalties accordingly.

The penalty period extends from the return due date (or extended due date) for each month or part of a month the return is late, not to exceed five consecutive months.

The FTF penalty does not apply during the period covered by a valid extension of time to file. TC 460 and TC 620 identify extensions.

When a return is filed (i.e., postmarked) or a payment is made by a prescribed due date of, for example, April 15, but is not received until April 24, the "timely mailing-timely filing" rule of IRC section 7502 applies and FTF/FTP penalties are not assessed. However, a return filed (i.e. postmarked) or a payment made after the prescribed due date, for example, on April 16, received on April 24, is not deemed filed/paid until actually received and FTF/FTP penalties will be computed and assessed according to the date of receipt.Sanderling, Inc v Commissioner (1976) 66 TC 743. In other words, a return due April 15, postmarked July 13, received July 17, is assessed four (not three) months FTF and FTP penalties. See LEM 20.1.2.1.2.4.

A return due date, extended under IRC section 7503 by virtue of falling on a Saturday, Sunday or legal holiday, does not affect the FTF/FTP penalty computation start date. For example, when April 15 falls on a Saturday, the return due date is extended to Monday, April 17. A taxpayer's return (with tax paid in full with the return), received on June 16, is assessed FTF and FTP for three (not two) months. Label-Matic, Inc. v United States (1974, ND Cal) 74-1 USTC P 9380, 33AFTR 2d 1181. See LEM 20.1.2.1.2.4.

Generally, the FTF penalty is 5% of the net amount due per month (or part of a month) not to exceed five months.

When the FTF penalty and the FTP penalty under IRC section 6651(a)(2) apply at the same time, the 5% FTF penalty rate is reduced by the ¹/₂% FTP penalty rate under IRC section 6651(a)(2). In other words, FTF is then assessed at a rate of 4¹/₂% a month and FTP at ¹/₂% a month. When both FTF and FTP apply for five months, the maximum FTF penalty rate is 22¹/₂%.

The FTF penalty rate is only reduced by the ¹/₂% FTP penalty rate under IRC section 6651(a)(2)--regarding unpaid amounts shown due on the return. The ¹/₂% FTP penalty under IRC section 6651(a)(3) --regarding unpaid amounts subsequently assessed, e.g., TC 290 and TC 300--does not reduce the 5% FTF penalty rate.

When a delinquent return is later assessed an additional tax (e.g., TC 290/300), the FTF penalty is calculated from the return due date (or extended due date) on the deficiency at 5% a month for each month the return was originally past due. This includes underpayment amended returns.

When a delinquent return has the original tax reduced (e.g., TC 291/301), the FTF penalty is re-calculated from the return due date (or extended due date) on the reduced amount of tax using the rate originally applied for the same number of months.

Caution: When the return is filed and tax paid three months late, FTF applies at 4¹/₂% and FTP applies at¹/₂%. If FTP is subsequently abated in full, FTF is recalculated at 5% for three months, effectively creating a wash.

An individual taxpayer files the TY 2004 return on June 19, 2005 with a tax liability of $700 paid in full with the return. Since the FTF and the ¹/₂% FTP penalty under IRC 6651(a)(2) apply at the same time, the 5% FTF penalty is reduced to 4¹/₂%. The FTF penalty rate of 4¹/₂% a month, times three months, times $700 = $94.50.

The same taxpayer is subsequently audited and a deficiency of $1,200 is assessed on February 19, 2006. The FTF penalty applies at a rate of 5% a month, times three months, times $1,200 = $180. This amount is in addition to any prior FTF penalty that was previously imposed. The 5% FTF penalty rate on a subsequent assessment (deficiency) is not reduced by any FTP penalty rate.

A TY 2004 return is filed four months late on July 21, 2005, claiming a $400 refund. The return is subsequently audited and a deficiency of $1,200 is assessed. Since the $400 refund constitutes an amount of tax paid (whether by withholding, estimated payments or any credits) before the return due date (without regard to extensions), the $1,200 audit deficiency is reduced by the $400 refund and the FTF penalty is calculated on $800: 5% times four months, times $800 = $160.

The TY 2005 return is filed on June 17, 2006 with the amount due of $5,200 paid in full with the return. The FTP penalty under IRC section 6651(a)(2) applies from return due date (April 15, 2006) for three months at ¹/₂% per month on $5,200= $78.

The TY 2004 return (due April 15, 2005) is filed October 28, 2005 with $7,000 due. Two thousand ($2,000) is paid with the return. The remaining $5,000 is paid on May 3, 2006. FTP penalty applies to $7,000 from return due date at ¹/₂% a month for seven months = $245. Plus: FTP penalty on $5,000 from November 15, 2005 at ¹/₂% a month for six months = $150.

Determine the number of months (including a part of a month) from the date that is 21 calendar days after notice and demand for payment (10 business days if the total balance due equals or exceeds $100,000).

The penalty applies until the tax is paid in full or the maximum 25% rate has been applied.

For subsequent tax assessments after December 31, 1996, the FTP penalty under IRC section 6651(a)(3) begins 21 calendar days (or 10 business days if the total balance due equals or exceeds $100,000) after assessment (23C date.) For notices first issued before January 1, 1997, the FTP penalty began 10 days after assessment.

Example 1: Taxpayer timely filed a TY 2004 return with a refund. Taxpayer was audited and assessed a deficiency (TC 300) of $2,500 on February 5, 2006. Full payment is received April 30, 2006. FTP penalty is calculated at ¹/₂% a month beginning after 21 days from assessment, i.e., from the start date of February 27, 2006: $2,500 times ¹/₂% times three months = $37.50.

Example 2: Taxpayer filed a TY 2004 return four months late on July 19, 2005 with $3,000 balance due paid in full. (FTF at 4¹/₂% a month times four months times $3,000 = $540 plus FTP at ¹/₂% a month times four months times $3,000 = $60. Both penalties are assessed and paid.) Taxpayer is later audited and a deficiency (TC 300) of $4,500 is assessed on January 4, 2006. Taxpayer pays in full five months later on June 7, 2006. FTF applies from return due date at 5% a month times four months times $4,500 = $900. FTP applies from January 26, 2006 at ¹/₂% a month times five months times $4,500 = $112.50.

The 1% FTP rate begins on the month beginning after the 10th day after the notice of intent to levy, or the day notice and demand for immediate payment is given on a jeopardy assessment.

The CP 504 is a notice of intent to levy for IRC section 6651(d) purposes. Master File Status 58 provides the same indication. Whenever Status 58 is by-passed and either ACS Letter 11 or DO Letter 1058 is issued, the Master File indicator is TC 971 with AC 35 or 69.

Taxpayer filed TY 2004 Form 1040 timely with unpaid amount due.

FTP under IRC section 6651(a)(2) applied at ¹/₂% per month beginning on April 16, 2005 and on the 16th of each following month.

CP 504 is issued October 11, 2005.

From October 11, 2005 add 10 days to get October 21, 2005.

From October 21, 2005 go to the beginning of the next monthly accrual period established under IRC section 6651(a)(2), i.e., November 16, 2005.

The 1% FTP rate first applies on November 16, 2005.

Individuals (excluding nonresident aliens),

C corporations, or

Estates of deceased partners.