After Letter 854-C: your 972CG penalty in IRS Appeals

How the case gets to Appeals

You do not write to Appeals. "If the taxpayer submits a written protest to an assessed penalty, Compliance forwards the case to Appeals" (IRM 8.11.4.2.2). The protest goes to the campus function that denied you, and the campus builds and forwards the file. What the campus does with a second letter is in a table in IRM 20.1.1.3.5.1: new information that meets the standard is abated; new information that does not is denied with a pointer to the original letter, and transferred to Appeals only "if the taxpayer indicates a desire to appeal"; no new information and no appeal request means "the penalty relief request cannot be considered." A second letter that repeats the first, without the word appeal, goes nowhere.

What the campus must send, and what you must sign

IRM 20.1.1.3.5.1(4) lists the package: a signed appeal request from the taxpayer or a Form 2848 representative ("Form 8821 ... is not considered an authorized POA"); the written supervisory approval where IRC 6751(b) required one; the prior denied request; and the disallowance letter. Cases sent incomplete "will be returned by Appeals as premature referrals." Uploads go through the Appeals electronic-receipts site as PDFs of 25 pages each, so attachments split at 25 pages arrive faster than one 300-page file. The IRP unit's own procedure adds that reconsideration is never suspended, an incomplete reconsideration is closed with Letter 6304-C, and the campus sends one 854-C, not several (IRM 4.19.25.17).

What a PENAP case is

"Penalty appeal (PENAP) procedures generally apply to penalties that have already been assessed" (IRM 8.11.4.2). Information return penalties are named in the identification table: "TC 240 or 246, Information Return Penalties, IRM 20.1.7" (IRM 8.11.4.2.1). Campus-sourced cases, which is what a 972CG is, are "centralized ... primarily in its Ogden Campus Appeals office" and "usually held by telephone or correspondence"; you may ask for an in-person or video conference (IRM 8.11.4.2, 8.11.4.2(3)). And the line that sets expectations: "PENAP penalties are not subject to deficiency procedures and do not have Tax Court protest rights" (IRM 8.11.1.2.2). There is no 90-day letter for a 972CG penalty. The only court is the refund court, after you pay.

The judicial approach: Appeals will not ask

The instruction to the Appeals officer, verbatim: "Use a judicial approach in deciding PENAP cases. Provide general guidance to taxpayers on establishing reasonable cause. Do not request specific documents or develop the taxpayer's position." The example: "Do not make a written request for a list of specific documents in any letter to the taxpayer" (IRM 8.11.4.2.6(7)). The campus examiner, by contrast, can send Letter 1948-C asking for what is missing. Appeals cannot. If your solicitation log, your mailing proof and your TIN Matching results are not in the file when it leaves the campus, nobody on the IRS side is going to ask for them. In a conference you may ask "what would help," and the officer may give "general guidance as to the type of information that might establish reasonable cause." That is the limit.

New information: weighed or bounced

You may bring new material. If it "requires investigative action or additional analysis," Appeals releases the case back to the campus (IRM 8.11.4.2.6(5)), with an exception for certain campus-sourced cases that the manual cross-references but does not spell out. Most penalty documents do not meet that bar, and the manual says so: "Documents received during consideration of a PENAP are generally not voluminous, don't require additional development, and in many instances, corroborate the taxpayer's testimony. Consider the probative value of any evidence that does not meet the definition of 'new information'" (IRM 8.11.4.2.6(8)). A copy of a B-Notice mailing log corroborates; a request that the IRS re-run its TIN validation investigates. Bring the first kind.

The eight questions in the Appeals memo

The Appeals Case Memorandum on a penalty must answer eight questions (IRM 8.11.1.2.7.1(2)):

1. "Do the taxpayer's explanations directly relate to the penalty that was assessed?"
2. "Do the dates and times coincide with the taxpayer's explanation?"
3. "Could the noncompliance have been anticipated and/or prevented?"
4. "Did the taxpayer make an honest mistake?"
5. "Has the taxpayer provided sufficient detail (dates, relationships, documents) to determine if ordinary business care and prudence was exercised?"
6. "Is the taxpayer an individual or third party (such as a reporting agent, accountant or lawyer)?"
7. "Is there a history of the taxpayer being assessed the same penalty?"
8. "Were there prior abatements of the same or similar penalties?"

Questions 7 and 8 are scored, and the IRS has the answer on screen before you write (see PMFOL). Question 6 is where a service-bureau or payroll-vendor story lands, and the general standard is not kind to it: relying on someone else to comply "is not a basis for reasonable cause ... that responsibility cannot be delegated" (IRM 20.1.1.3.2.2.5). Question 1 is the one most responses fail: a 972CG with penalty code 505 is two failures, late filing and bad TINs, and an explanation for one is not an explanation for the other (IRM 20.1.1.3.5(5)).

Hazards of litigation: the penalty can be split

"Unlike Compliance, Appeals may consider the hazards of litigation in attempting to reach a settlement" (IRM 8.11.1.2.7.5). Hazards are "factual, legal and evidentiary"; "lack of case law should not be considered a hazard." Appeals officers "consider settlements of appeals of assessed penalties for less than the full amount assessed" (IRM 8.11.1.2.3), and partial abatement is a formal outcome: reason code 42, closing code 16, "Partially Abated" (IRM 8.11.4.2.7). The campus decides abate or sustain. Appeals can decide 40 percent. What it will not do is trade: "Appeals will not concede penalty issues to obtain a concession on other issues" (IRM 8.11.1.2.7(2)).

A practical consequence: an argument that would lose on the whole penalty may win on part of it. If 300 of 500 penalized TINs were solicited on time and 200 were not, say so, with the split, rather than arguing all 500.

How it closes

Letter 1278, Penalty Appeal Abatement, if fully granted; Letter 1277, Penalty Appeal Decision, if sustained or split, with "the narrative section to provide the reason for denying the abatement request in full or in part" (IRM 8.11.4.2.7(6)). No contact at all is required "if the case is fully conceded based upon the information in the file" (IRM 8.11.4.2.6(1)); the first thing you hear may be the 1278. The memo records "Taxpayer's filing history, Citing case law, Hazards of litigation." The account is adjusted penalty by penalty and period by period.

After Appeals: the refund suit

"After penalties are paid, taxpayers are entitled to the claim-for-refund provisions," with suit in District Court or the Court of Federal Claims after the earlier of a disallowance or six months from the claim (IRM 8.11.1.2.2). Appeals issues its own certified disallowance letters, 1363 (partial) and 1364 (full), and is told to record them "to ensure duplicate certified letters are not issued, which may erroneously extend the two-year period to file suit" (IRM 8.11.4.2.7(3)). The two-year clock under IRC 6532 starts with the certified letter. The IRP unit's reconsideration procedure adds the other half: a barred refund is not abated even with reasonable cause, so pay-then-fight has its own deadline (IRM 4.19.25.17).

On supervisory approval: Appeals "generally" requires it and cross-references the exceptions (IRM 8.11.1.2.1), but prescribes no verification step for penalty appeals. The exception for penalties "automatically calculated through electronic means" covers a 972CG that was never answered; once you respond and an employee considers the response, the exception ends and written approval is required before the CP215 (IRM 20.1.1.2.3(5)). The package rule above says that approval travels with the file. Its absence is worth raising; it is not a guaranteed win.

Questions people ask