Unpaid Code Sec. 6702 Penalties
The IRS has recently enacted a process for the reduction of the $5000 penalty assessed for frivolous filed Returns to $500 if certain requirements are met. “The IRS has issued procedures outlining limited circumstances under which a frivolous tax penalty assessed under Code Sec. 6702(a) (see 40,220.10) or (b) may be reduced from $5000 to $500.”
The above is accomplished through the completion, filing and negotiation of a Form 14402 IRC 6702(d) Frivolous Tax Submissions Penalty Reduction Request. Eligibility for reduction requirements includes, (1) at least a $250 filing fee; (2) full payment of all liabilities (other than Sec. 6702 penalties) or an Installment Agreement with the IRS with respect to the same; (3) filing of all returns for the past 5 years; and (4) compliance with the IRS at the time of filing.
Notably, the Code does not limit these requests to one period of liability. “The IRS will reduce all unpaid Code Sec. 6702 penalties assessed against that person to $500, regardless of the number of penalties assessed.” Thus, if there are five periods of liability, total balances could be conceivably reduced from $25,000 to $2,500 with the successful pursuit of a 14402 Reduction Request. The IRS requires that all remaining liabilities are cleared (e.g. the remaining $2500) or entered into an Installment Agreement to allow for this reduction to be finalized.
Fully Paid Code Sec. 6702 Penalties
In a typical idiosyncratic IRS style, there is no specific procedure for refund of frivolous penalties assessed. In order to request a refund of penalties assessed and paid by a taxpayer in this particular instance, Forms 843 need to be generated and filed for each period of liability outstanding. The IRC requires that the specific years be identified and an explanation of circumstances provided with respect to each penalty paid.
The IRS maintains that reasonable cause is provided and detailed with respect to any abatement and refund request. I understand the circumstances that led to the frivolous penalties being assessed involve the fraudulent actions of a bad actor. A relevant factor that can be considered is reliance on a tax advisor’s advice (IRC6664(c)). Relevantly, case law generally supports this position in cases where there are accuracy-related issues. Thus, the accuracy-related issues created by a bad actor create a justifiable reason for abatement and refund.