IRS may choose a consistent method for electronic-filing penalty calculations

Plain-English summary

Chief Counsel considered how to calculate the percentage-based penalty when a filer intentionally disregards the requirement to submit information returns electronically. Section 6721 penalties apply only to returns above the 250-return threshold, but neither the Code, regulations, nor Internal Revenue Manual specified which excess returns should supply the aggregate amount. Counsel concluded that choosing a calculation method was a policy decision for the IRS Office of Servicewide Penalties, which should apply its method consistently. Possible approaches included using returns 251 through 300, the highest-value or lowest-value excess returns, a random sample, or an average based on all returns. Counsel offered to review the selected procedure and noted that Congress's repeated penalty increases could support a method producing the highest penalty.

Ruling snapshot

• Question: How should the IRS calculate the aggregate amount used for an intentional-disregard penalty when more than 250 information returns were filed on paper?
• Outcome: The Office of Servicewide Penalties may select a consistent calculation method as a policy matter
• Key authorities: IRC §§ 6011, 6721, and 6724; Treas. Reg. §§ 301.6011-2 and 301.6721-1

Full text (IRS public release)

ID: CCA-12040531-15 [Third Party Communication:

UILC: 6011.00-00, 6721.00-00, 6724.00- Date of Communication: Month DD, YYYY]

          00

Number: 201603031
Release Date: 1/15/2016
From: -------------------
Sent: Friday, 12/4/15 5:31 PM
To: ---------------------
Cc: ---------------------
Bcc:
Subject: Re: 6721 Electronic Media Intentional Disregard Calculation

Hi -------,

We are providing this analysis in response to your question regarding the proper procedure for
computing the applicable percentage aggregate amount for a penalty to be imposed on a person who
intentionally disregards the 6011(e) electronic media filing requirement.

Internal Revenue Code (“IRC”) section 6011(e) grants the Secretary authority to prescribe regulations
determining which returns must be filed on magnetic media. However, the Secretary is generally
prohibited from requiring any person to file returns on magnetic media, “unless such person is required
to file at least 250 returns during the calendar year . . . .” Treasury Regulation section 301.6011–2
explicitly requires that persons filing more than 250 returns in a year must file the returns on magnetic
media. If a person fails to file a return on magnetic media when required to do so, that person is
deemed to have failed to file the return, and is subject to failure to file penalties.

IRC section 6721 imposes penalties on persons for each failure to timely file an information return. IRC
section 6721(e) imposes higher penalty if the failure occurs due to an intentional disregard of the filing
requirement. Under IRC section 6721(e), for returns required to be filed on or after January 1, 2016, the
penalty under section 6721(a) generally will be $520 per failure, or, if greater, a percentage of the
aggregate amount of the items required to be correctly reported. The applicable penalty and the
percentage of the aggregate amount of items required to be correctly reported depends upon the type
of return to which the failure relates.
IRC section 6724(c) provides that a penalty may be imposed under section 6721 solely because a person
failed to comply with the section 6011(e) requirement to file returns on magnetic media. Treasury
Regulation 301.6721–1 explains that the penalties imposed under section 6721 for failure to file on
magnetic media, when required to do so, are only imposed on each return filed in excess of

250. However, the IRC, Treasury Regulations, and Internal Revenue Manual are silent with regard to the
     procedure to be used for computing the applicable percentage aggregate amount of the
     penalty. Therefore, the computation of the percentage aggregate amount is a policy decision best left

                                                      2
     

to the discretion of the IRS Office of Servicewide Penalties (OSP). In doing so, however, OSP needs to
determine a method of calculation that will be applied consistently for all cases.

Several options exist for the computation of this penalty. These options include (for a person who
intentionally disregards the filing requirement in one calendar year by filing 300 paper returns), but are
not limited to, the applicable percentage of the aggregate amount of the items required to be correctly
reported: on returns 251-300; on the 50 returns with the highest amount reported; on the 50 returns
with the lowest amount reported; on 50 randomly selected returns; or on the average amount reported
on all 300 returns, multiplied by 50. The Office of Chief Counsel, Procedure and Administration, is happy
to review the procedure that OSP chooses to use in order to compute this percentage aggregation
penalty. In doing so, OSP may want to consider that the Congress’ has increased the section 6721
penalty amount multiple times in the past ten years, which may suggest that a calculation resulting in
the highest penalty amount should be imposed to deter violators.

Please contact ----------------------at -------------------if you have any questions or concerns.

------------------

------------