Tax Procedure Book Errata - Coordination of Return Reporting Civil Penalties; Stacking (1/2/17)

Book Outline Section	Nature of Update	Location for current editions
Ch. 8. Penalties III. Civil Penalties.    E. Accuracy Related Penalties    11. Coordination of Return Reporting Civil Penalties; Stacking.	New discussion of coordination of the return reporting civil penalties so that there is no stacking or overlap of penalties	Student Ed. P. 248 Practitioner Ed. P. 352

11. Coordination of Return Reporting Civil Penalties; Stacking.

The return reporting penalties in § 6663 (civil fraud) and § 6662 (accuracy related) provide several different penalty rates to the portion of the understatement subject to the penalty.  For example, the civil fraud penalty is 75 percent of the understatement attributable to fraud.  The conduct subject to this penalty is almost always potentially subject to the accuracy related penalties, but only the 75 percent civil fraud penalty will apply. n1157a  Similarly, if a 40 percent accuracy related penalty applies to a portion of an understatement, another 20 percent accuracy related penalty will not apply to that portion.  In other words, if a higher rate applies to a portion of the understatement, the lesser rates will not apply to that portion. n1157b  These penalties are not “stacked” so as to subject any portion to multiple penalties. This means that as to an aggregate understatement (deficiency), some portion could be subject to no penalty, some portion could be subject to a 20 or 40 percent accuracy related penalty and some portion could be subject to the civil fraud penalty, but the penalties will not overlap as to a portion of the understatement.  n1157c

Although the penalties will not overlap, in the notice of deficiency, the IRS may assert penalties in the alternative – e.g., assert the civil fraud penalty with a lesser accuracy related penalty as an alternative position if the fraud penalty is not sustained or assert a higher accuracy related penalty with a lesser accuracy related penalty if the higher penalty is not sustained. n1157d In that case, the bottom line amount of deficiency determined in the notice of deficiency will only include the higher penalty and the lesser, alternative penalty, although asserted, will not be in the bottom-line deficiency determination. n1157e

FOOTNOTES

   n1157a Regs. § 1.6662-2(a).

   n1157b Regs. § 1.6662-2(c).

   n1157c Graev v. Commissioner, 147 T.C. ___, No. 16 (2016) (reviewed opinion) (in the case of the 40 percent and 20 percent accuracy related penalties, “Only one of these penalties can apply to a given portion of a deficiency; they cannot be stacked.”).

   n1157d An illustration of how this works in conjunction with other Code requirements is Graev v. Commissioner, 147 T.C. ___, No. 16 (2016) (reviewed opinion).  In the case, the IRS asserted the 40 percent gross valuation misstatement penalty and, in the alternative, asserted the 20 percent accuracy related penalty.  Both of those penalties could not apply.  Accordingly, in the notice of deficiency, although asserting the 40 percent penalty and stating the 20 percent penalty as an alternative, the deficiency number for the deficiency included only the 40 percent penalty.  The IRS conceded the 40 percent penalty and the Court sustained the 20 percent penalty.  In doing so, the Tax Court rejected the taxpayer’s claim that stating the 20 percent penalty in the alternative without including the calculation of the 20 percent penalty (because the 40 percent penalty was calculated) violated § 6751(a)’s requirement that the penalty calculation be included in the notice.

   n1157e See Graev v. Commissioner, 147 T.C. ___, No. 16 (2016) (reviewed opinion).

Caveat, the footnote numbers above are based on  the footnote numbers in the current Practitioner Edition.  The footnote numbers will not be the same in the next Edition scheduled for publication in August 2017.

Also, in each case I have used the word percent rather than using the percent symbol because, for some reason, the blog will not save with percent symbols in the blog.  In the book texts, the percent symbols will be used.