rp-12-43.pdf

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26 C.F.R. 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.

Rev. Proc. 2012-43

SECTION 1. PURPOSE
Section 6702(d) of the Internal Revenue Code authorizes the Internal Revenue
Service (IRS) to reduce the amount of the frivolous tax submission penalty assessed
under section 6702(a) or (b) if the IRS determines that a reduction would promote
compliance with and administration of the Federal tax laws. This revenue procedure
describes the limited circumstances in which a person may be eligible for a one-time
reduction of any unpaid section 6702 penalty liabilities. This revenue procedure also
prescribes how a person may request a reduction and the eligibility requirements for
reduction. Generally, if a person satisfies all eligibility criteria of section 4 of this
revenue procedure, including filing all tax returns and paying all outstanding taxes,
penalties (other than under section 6702) and related interest, the IRS will reduce all
unpaid section 6702 penalties assessed against that person to $500. After experience
with the application of this revenue procedure, the IRS and the Treasury Department
plan to assess whether the revenue procedure is successfully promoting compliance

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with and administration of the Federal tax laws and may revise this revenue procedure
as necessary to further those goals.
SECTION 2. BACKGROUND
.01 Section 326(a) of the Tax Equity and Fiscal Responsibility Act of 1982, Pub.
L. No. 97-248 (96 Stat. 324, 617), added section 6702 to the Code to provide for a civil
penalty for frivolous income tax returns. Specifically, section 6702(a) imposed a penalty
in the amount of $500 against any individual who files what purports to be a return of
income tax if (1) the purported return does not contain information on which the
substantial correctness of the self-assessment may be judged or contains information
that on its face indicates that the self-assessment is substantially incorrect, and (2) the
filing of the purported return is due to either a position that is frivolous or a desire (which
appears on the purported return) to delay or impede the administration of Federal
income tax laws. Section 6702(b) provided that the penalty was in addition to any other
penalty provided by law.
.02 Section 407(a) of Division A of the Tax Relief and Health Care Act of 2006,
Pub. L. No. 109-432 (120 Stat. 2922, 2960), amended section 6702(a) by increasing the
amount of the penalty from $500 to $5,000, changing its application from “individual[s]”
to “person[s],” expanding its scope from “purported income tax returns” to “purported
returns of tax,” and substituting the term “a position which the Secretary has identified
as frivolous” for “a position which is frivolous” as one of the bases for conduct subject to
the penalty.

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.03 The 2006 amendments also added the following provisions to section 6702:
(1) Revised section 6702(b) imposes a $5,000 penalty on any person who
submits a “specified frivolous submission.” (The prior version of 6702(b) was re-
designated as section 6702(e).) A “specified frivolous submission” is defined as a
“specified submission” that is based on a position that the IRS has identified as frivolous
or that reflects a desire to delay or impede the administration of the Federal tax laws. A
“specified submission” means a request for a collection due process hearing under
section 6320 or 6330 or an application for an installment agreement under section 6159,
an offer-in-compromise under section 7122, or a taxpayer assistance order under
section 7811.
(2) New section 6702(c) requires the IRS to prescribe and periodically revise a
list of positions that the IRS has identified as frivolous for purposes of the penalty under
section 6702(a) or (b).
(3) New section 6702(d) provides discretionary authority to the IRS to reduce the
amount of a penalty imposed under section 6702(a) or (b) if the IRS determines a
reduction would promote compliance with and administration of the Federal tax laws.
As authorized by Congress, this revenue procedure describes the limited circumstances
in which a person may be eligible for a one-time reduction of any unpaid section 6702
penalty liabilities. To be eligible for the one-time penalty reduction, a person must
abandon any frivolous positions regarding the Federal tax laws and must meet the
specific eligibility requirements detailed in section 4 of this revenue procedure, which
include filing all tax returns and paying all outstanding taxes, penalties (other than those

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under section 6702) and related interest. Consistent with section 6702(d) and the IRS’
published policy statement on penalties (Policy Statement 20-1), these requirements will
promote voluntary compliance with and administration of the Federal tax laws.
.04 The 2006 amendments apply to submissions made and issues raised after
March 16, 2007, the date the IRS issued Notice 2007-30 (2007-1 C.B. 883) prescribing
a list of frivolous positions under section 6702(c). The IRS subsequently revised the list
in Notice 2008-14 (2008-4 I.R.B. 310), effective January 15, 2008, and Notice 2010-33
(2010-17 I.R.B. 609), effective April 8, 2010. The IRS may make additional updates to
the list in the future.
SECTION 3. SCOPE
This revenue procedure applies to any person who has not fully paid a $5,000
penalty assessed by the IRS under section 6702 and who seeks a reduction of that
penalty pursuant to section 6702(d). This revenue procedure does not apply to persons
who seek to challenge the merits of a section 6702 penalty assessment. Other
procedures may be available to challenge the merits, such as paying the penalty and
filing a refund claim or raising the issue in a Collection Due Process hearing.
SECTION 4. ELIGIBILITY
.01 A request for reduction must comply with the requirements of this section. A
person whose request does not comply with these requirements will not be eligible for a
reduction of a section 6702 penalty.
(1) Form of request
. A person must make a written request for reduction on IRS
Form 14402, “IRC 6702(d) Frivolous Tax Submissions Penalty Reduction,” (or

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successor form) or as prescribed by the Form’s instructions. The person must also sign
the form or written statement under penalties of perjury, and file it with the IRS in
accordance with instructions to the form or other guidance. A person may file a single
Form 14402 or written statement to request reduction of more than one section 6702
penalty.
(2) Partial payment
. The IRS will reduce an eligible person’s total outstanding
section 6702 liabilities to $500, regardless of the number of section 6702 penalties
assessed. A person must pay this $500 balance in one of two ways:
(a) Payment submitted with request for reduction
. Except as provided in
section 4.01(2)(b), a person must submit a payment of at least $250 with the request for
reduction even if that person has, prior to filing a request for reduction, paid either
voluntarily or by an overpayment offset, a portion of the section 6702 penalty liabilities
that are the subject of the request. This payment will be applied to the person’s
assessed section 6702 penalty liabilities without regard to whether the IRS grants the
reduction request. A person who chooses to pay $250 or more but less than $500 and
who is granted the penalty reduction will remain liable for the remaining balance of the
reduced penalties (i.e.
, the difference between the amount of the payment and $500)
until the balance is satisfied, but this remaining liability will not preclude the requested
reduction of the assessed and unpaid section 6702 penalties. If the person pays $250
or more but less than $500, interest will continue to accrue on the remaining balance of
the reduced penalties from the date the IRS assessed the earliest unpaid section 6702
penalty falling under these procedures. The person granted the penalty reduction must

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pay the remaining balance of the reduced penalties (plus interest); if the person granted
the penalty reduction fails to pay the remaining balance, the IRS may use any available
remedy to collect the balance (plus interest). If a person chooses to submit the full $500
with the request for reduction and the IRS grants the request, any interest that has
accrued on the outstanding section 6702 liabilities will be abated.
(b) Installment agreement
. If a person has entered into and is in compliance
with an approved full payment installment agreement with the IRS under section 6159
for all assessed Federal tax liabilities not fully paid and for which the period for
collection under section 6502 remains open, then the person may pay the reduced
section 6702 penalty of $500 as part of the installment agreement. If, at the time the
IRS receives a request for reduction, the person has already paid more than $500
towards the section 6702 penalty under the installment agreement, that person will not
be required to pay any additional amount towards the section 6702 penalty in order to
become eligible. If the person pays the $500 penalty as part of an installment
agreement, any interest that has accrued on the outstanding section 6702 liabilities will
be abated.
.02 Time limits
. A person must file a request for a reduction before the United
States files suit against the person either for collection of the penalty or to reduce any
assessment of the penalty to judgment.
The IRS will deny any request for reduction of a section 6702 penalty that does
not meet these time limits. If a request seeks reduction of multiple penalties but the
request falls within the time limits with respect to only some of the penalties, the IRS will

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treat the request as timely only for those penalties. Any person who has voluntarily paid
a portion of any section 6702 penalty liabilities will be eligible for reduction of the
remaining amount of those liabilities. Similarly, any person who has had an
overpayment offset against any section 6702 penalty liabilities will be eligible for a
reduction of the remaining amount of those liabilities, if any.
.03 Full compliance with all Federal tax filing and payment requirements
.
(1) In general. Prior to requesting a reduction, a person must have filed all tax
returns due and paid (or arranged to pay, as described in paragraph (3) of this
subsection) all taxes due, other than the section 6702 penalty or penalties for which
reduction is requested. Unless these filing and payment requirements have been met,
reduction of a section 6702 penalty would not promote compliance with and
administration of the Federal tax laws and the request for reduction will be denied.
(2) Filing compliance
. A person requesting reduction must file with the IRS valid
tax returns required to be filed under the Code for any type of tax and for all taxable
periods for six years before the date of the request. This requirement means a person
must file all individual returns and all returns for any entity in which the person has a
controlling interest. This includes, for example, any returns of a partnership or limited
liability company for which the person is a general partner or managing member, any
returns of a subchapter C or subchapter S corporation in which the person holds a
greater than 50 percent interest, and any returns of a trust for which the person serves
as trustee. A document other than a return that permits assessment of Federal income
tax will not satisfy the requirements of this section.

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(3) Payment compliance. A person requesting reduction must either:
(a) have fully paid all assessed tax liabilities, including interest, penalties
(other than the section 6702 penalty or penalties that are the subject of the request),
and additions to tax for all types of tax and for all taxable periods for which the period for
collection under section 6502 remains open (for purposes of this subsection, the
granting of relief under the provisions of section 6015 or section 66(c) will be considered
payment of an assessed tax liability to the extent of the granted relief); or
(b) have entered into and be in compliance with an approved full payment
installment agreement with the IRS under section 6159 for all assessed Federal tax
liabilities not fully paid and for which the period for collection under section 6502
remains open.
.04 Deposit requirements
. If the person requesting reduction is an employer,
that person must, at the time of filing the request, have made all required deposits of
Federal employment taxes under subtitle C of the Code for the current quarter and the
prior two quarters.
.05 Disqualifying events
.
(1) Prior reduction
. Any person who previously received a reduction of a
section 6702 penalty is ineligible for another reduction of a section 6702 penalty.
(2) Offer-in-compromise
. Any person who has submitted an offer-in-
compromise to the IRS under section 7122 that includes any section 6702 penalty is
ineligible for a reduction of the penalty unless the person has withdrawn the offer in
writing, the IRS has returned the offer to the taxpayer without accepting it, or the offer

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was rejected by the IRS and the taxpayer is not pursuing an administrative appeal of the
rejection. All of a person’s outstanding Federal tax liabilities, including any outstanding
section 6702 penalties, will be considered as part of the offer-in-compromise
determination.
(3) Partial payment installment agreements
. Any person who has entered into
a partial payment installment agreement with the IRS under section 6159 is ineligible for
a reduction of any section 6702 penalty included in the partial payment installment
agreement because the person will be paying less than the full amount of Federal tax
liabilities.
(4) Closing agreement
. Any person who has entered into a closing agreement
with the IRS under section 7121 is ineligible for a reduction of any section 6702 penalty
included in the closing agreement.
(5) New frivolous filing
. Any person who files a frivolous return or makes a
frivolous submission after filing a request for reduction but before the IRS grants the
reduction is ineligible for reduction of a section 6702 penalty whether or not the person
withdraws the frivolous return or submission.
(6) Bankruptcy
. A person is ineligible for a reduction of any section 6702
penalty under this revenue procedure if the penalty is dischargeable under an open
bankruptcy case. Furthermore, a person is ineligible to apply for any penalty reduction
while a bankruptcy case is open, regardless of whether the person is seeking discharge
of the penalty for which reduction is sought.

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SECTION 5. CONSIDERATION OF REDUCTION REQUEST
.01 Generally, if a person satisfies all eligibility criteria of section 4 of this
revenue procedure, the IRS will reduce all section 6702 penalties assessed against that
person to $500. If the person submitted $500 with the request for reduction, the IRS will
abate any remaining unpaid amount of those penalty liabilities, including interest. If the
person has submitted at least $250, but less than $500, with the request for reduction,
the IRS will apply the amount submitted against the section 6702 penalty or penalties
that the person seeks to reduce and will abate all but the difference between the
payment submitted and $500 (i.e.
, the remaining unpaid amount of those penalty
liabilities). If the person granted the reduction fails to pay the remaining balance of the
$500 reduced penalty (plus interest as described above), the IRS may use any available
remedy to collect the balance. The IRS will not refund any portion of the section 6702
penalty or penalties paid prior to the date the IRS received the request for reduction. In
the case of a person who has entered into a full payment installment agreement, the
section 6702 penalty or penalties will be reduced only upon completion of all payments
required to satisfy all outstanding tax liabilities other than the section 6702 penalties that
are the subject of the request for reduction. If the person defaults on the installment
agreement, the section 6702 penalty or penalties will not be reduced.
.02 If a person fails to satisfy any of the eligibility criteria of section 4 of this
revenue procedure, the IRS will deny the request for reduction. The IRS will apply any
payment received with the request for reduction against unpaid section 6702 penalties
before applying any remaining portion of the payment to any other outstanding tax

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liabilities of the person. A person may not designate the manner in which the IRS will
apply the payment.
.03 The IRS will give a person written notice of whether the person’s request has
been granted or denied. The IRS’s denial of a request for any reason will not be subject
to an administrative appeal.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective November 5, 2012, the date this revenue
procedure was released to the public.
SECTION 7. DRAFTING INFORMATION
The principal author of this revenue procedure is Skyler K. Bradbury of the Office
of the Associate Chief Counsel, Procedure and Administration. For further information
regarding this revenue procedure, contact Elizabeth Cowan at (202) 622-4940 (not a
toll-free call).