Tax Procedure Book Errata - Special Flora Mitigation Procedures for Certain Assessable Penalties (9/11/16)

I will revise the book to insert the following with respect to certain assessable penalties -- the return preparer penalties under § 6694 and the penalties under 6700-6703.  These penalties are assessable without predicate notice of deficiency or other such procedures permitting litigation before assessment.  Those penalties can be litigated in a traditional refund suit which will be subject to Flora's full payment rule.  The Flora full payment rule is mitigated in many contexts (included this context) by the divisible tax rule that would apply if the penalties are divisible.  There is another special Flora full payment mitigation rule applying to these penalties.  That mitigation rule is as follows:

This mitigation rule requires that (i) within 30 days of the assessment’s notice and demand, the person assessed the penalty pay 15% of the penalty and file a claim for refund and (ii) then file the refund suit in district court by the earlier of (a) 30 days from the denial of the claim or (b) 6 months and 30 days from the date the refund claim was filed.  If the taxpayer pursues this special district remedy, collection procedures on the balance will be suspended and the statute of limitations on collection will also be suspended.  [See § 6694(c) as to the preparer penalties and §§ 6703(c) as to the §§ 6700-6702 penalties.]

In addition, to the special procedure for partial payment and suit for refund, penalties subject to this special mitigation rule may be litigated in CDP procedures.

I have not yet incorporated these into the current working draft for the next version in 2017, but it will be included in that version.

I picked up the need for this revision from Taylor v. Commissioner, 2016 U.S. Dist. LEXIS 122216 (ED WA 2016), applying the rule to the § 6694 penalty.  In Taylor, the preparer timely paid the 15% and filed the claim for refund.  The denial of the claim was almost two years later.  By the time of denial of the claim, the period for filing the suit for refund for the special procedure had expired. The time for filing that suit was 6 months and thirty days after the filing of the claim for refund.

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.

Is there A Statute of Limitations for the Section 6702 Frivolous Return Penalty (9/21/12)

In Crites v. Commissioner, T.C. Memo. 2012-267, here, the Tax Court held that the frivolous return penalty in Section 6702, here, was timely.  Section 6702 penalizes a "frivolous return" and a "specified frivolous submission."  In Crites, the frivolous return penalty applied.  The taxpayer's original return was filed more than 3 years before the penalty assessment.  The amended return which was penalized was filed less than a year before the penalty was assessed.  The holding on the statute of limitations is:

Section 6501(a) does place limits on assessments. With certain limited exceptions not relevant here, the Commissioner must assess a tax liability within three years after a return is filed. Sec. 6501(a). Crites argues that because penalties are generally included within the definition of "tax", see sec. 6665(a)(2), section 6501(a) prevents the Commissioner from assessing a penalty against her under section 6702(a) more than three years from the time she filed her original return. 

We disagree. As the Commissioner observes, penalties under section 6702 do not have a readily observable statute of limitations. The section penalizes not  just frivolous "returns"—and even here Congress was careful to penalize not just returns but "what purports to be a return"—but frivolous "submissions". It would be odd if penalties keyed to "submissions" had somehow to be tied to the limitations period for tax that is supposed to be shown on a "return". 

But let us assume—and here we are expressly assuming without deciding—that Crites is right that the filing date of her "return" is the key date. She had two returns, and the one that the Commissioner wants to punish her for is the amended return that she sent the IRS in October 2008. He assessed the penalty in July 2009, well within three years of her submitting it. Crites of course would prefer that we hold that the clock for penalizing her under section 6702 began to run when she filed her original return, but she cites no authority for her implicit proposition that a statute of limitations can start running before a cause of action accrues or, in a case like hers, before a taxpayer even files a sanctionable submission.