One Time Relief for Frivolous Return / Submission Penalty under Section 6702 (11/6/12)

The IRS has prescribed one-time penalty relief for frivolous return and submission penalties in section 6702, here..  Rev. Proc. 2012-43, 2012-49 IRB 1, here.  For refresher, here is my Tax Procedure text as revised for this new relief provision (footnotes omitted):

H. Frivolous Returns. 

Section 6702(a) imposes a $5,000 fine for filing a frivolous tax return.  This penalty applies in addition to any other penalty that may apply.  The penalty applies where the frivolous return is based on a position identified by the IRS as frivolous or reflects a desire to delay or impeded the administration of the tax laws.  

Section 6702(b) imposes a parallel $5,000 penalty for a “specified frivolous submission”. Such submissions include various forms of relief in IRS collection activity, including applications for compromise or installment agreements and requests for a collection due process hearing.  The submission is subject to the penalty if based on a position the IRS “has identified as frivolous” or “reflects a desire to impede the administration of Federal tax laws.”  We cover these collection activities below in Ch. 14.  The penalty is $5,000.  If the IRS provides notice of the frivolous position and the taxpayer withdraws the submission within 30 days of the notice, the penalty does not apply; however, the statute does not seem to require the IRS to give the notice that is the predicate for the 30 day period.

The § 6702 penalties are not subject to the deficiency procedures.  They are assessable without a predicate notice of deficiency.  This means that they may not be litigated in the Tax Court, which historically meant that the could only be litigated in a refund suit. In order to mitigate the hardship that might attend a requirement of full prepayment under the traditional Flora rule, a special district court proceeding is allowed if the taxpayer pays 15% and files a claim for refund within 30 days and, denied a refund suit within 30 days of denial.  If the taxpayer pursues this special remedy, collection procedures on the balance will be suspended and the statute of limitations on collection will also be suspended.  

Section 6702(d) allows the IRS discretionary authority to reduce the § 6702 penalties “ if the Secretary determines that such reduction would promote compliance with and administration of the Federal tax laws.”  Under this authority, the IRS has prescribed relief on a one-time basis for outstanding unpaid § 6702 penalties upon the party’s request, provided that the party “must abandon any frivolous positions regarding the Federal tax laws” and meet certain specific eligibility requirements.  The relief is to reduce the penalties to $500. 

Congress recently enacted Collection Due Process procedures which we discuss later in the Collection Chapter.  The Tax Court has recently held that, in the Collection Due Process cases, amended § 6330(d)(1) gives the Tax Court jurisdiction to decide the merits of the IRS’s assessment of the frivolous return penalties. 

Finally, the Tax Court recently held that the § 6702 penalty has no “readily observable statute of limitations.”  We discussed above that courts might “borrow” a statute of limitations from some related provision.  For example, returns have a statute of limitations; hence, a court might be willing to borrow that statute for a frivolous return, but has not done so to date.