What Letters 1277 / 1278 is
The closing letters from the IRS Independent Office of Appeals on an assessed-penalty appeal, which is where a 972CG penalty goes after Letter 854-C. Letter 1278, Penalty Appeal Abatement, when fully granted; Letter 1277, Penalty Appeal Decision, when sustained or partially abated, with a narrative reason (IRM 8.11.4.2.7(6)). Appeals may split a penalty on hazards of litigation, which the campus cannot.
The deadline
Administrative end of the line. A refund suit requires payment, a claim, and suit within two years of a certified disallowance (Letters 1363/1364).
What to do
Read the narrative in a 1277 for the reason; a partial abatement posts penalty by penalty and period by period. Check the CP 210 that follows against the letter.
What Appeals does with a penalty case
The IRS Independent Office of Appeals is separate from the campus unit that assessed the penalty and from the examiner who denied the waiver. Its job is to settle disputes without litigation, and it has a tool the campus does not: it may weigh the hazards of litigation, meaning the chance that the IRS would lose if the case went to court, and settle for a percentage. A 972CG penalty reaches Appeals after a Letter 854-C denial, usually through a written protest, and is worked by an Appeals officer who reviews the file, may hold a conference by phone, and considers new information if you bring it. Appeals does not take a case to develop facts the examiner never saw; it expects the record to be substantially complete, and if you present new material it may send the case back to the campus for comment. The closing letters are the decision: Letter 1278 when the penalty is removed in full, Letter 1277 when it is sustained in whole or in part, with a narrative explaining why.
After the decision
A 1278 is the end: check the transcript for the reversal of the penalty and its interest, and the refund of any prepayment. A 1277 that sustains part of the penalty is applied line by line, penalty type by penalty type and year by year, and the CP 210 or CP 220 adjustment notice that follows should match the letter; compare them, because partial abatements posted by hand do go wrong. A 1277 that sustains the penalty in full is the end of the administrative road. The remaining remedy is judicial: pay the penalty, file a Form 843 claim for refund, and if the claim is disallowed (by certified Letter 1363 or 1364 from Appeals, or a Letter 105-C), sue in the district court or the Court of Federal Claims within two years of the disallowance. For most information return penalties the amount does not justify a suit, and the practical value of the 1277 is its narrative, which tells you what to fix so the next year's 972CG does not arrive. The Appeals guide covers the process from protest to decision, and the after-the-denial guide covers the routes that lead there.
Questions about Letters 1277 / 1278
Who receives Letters 1277 / 1278?
Payer. The closing letters from the IRS Independent Office of Appeals on an assessed-penalty appeal, which is where a 972CG penalty goes after Letter 854-C.
What is the deadline on Letters 1277 / 1278?
Administrative end of the line. A refund suit requires payment, a claim, and suit within two years of a certified disallowance (Letters 1363/1364).
What should I do when Letters 1277 / 1278 arrives?
Read the narrative in a 1277 for the reason; a partial abatement posts penalty by penalty and period by period. Check the CP 210 that follows against the letter.
Is Letters 1277 / 1278 about my own income tax?
No. This decoder covers information reporting and withholding: the notices a payer, filer or payee sees because of Forms 1099, W-2, 945 and the TINs on them. Individual income-tax notices follow a different track.
Have a different notice? The IRS notice decoder lists all 77 in the order they tend to arrive.