K. Applicable Penalties

(1) For a complete overview of the penalties that apply to private foundations, see

IRM 20.1.8, Employee Plans and Exempt Organizations Miscellaneous Civil Penalties.

(2) As the Form 990-PF is both an information return and an excise tax return for

purposes of Section 4940, foundations are subject to several sets of penalties:

a. Section 6652(c) - daily delinquencies (Section 6652(c)(1)(A) - failure to file

return or show correct information), public inspections (Section 6652(c)(1)(C) and (D)) and prohibited tax shelters (Section 6652(c)(3)).

b. Section 6651(a), Section 6655, and Section 6662(c) - failure to file, failure to

pay, estimated tax (Section 6655(b)(3)(B)), and accuracy-related due to negligence penalties. See IRM 20.1.2, Failure To File/Failure To Pay Penalties, IRM 20.1.3, Estimated Tax Penalties and IRM 20.1.5, Return Related Penalties.

Note: The daily delinquency penalty of Section 6652(c)(1)(A) is computed on the number of days late. The failure to file penalty of Section 6651(a) is computed as a percentage of the Section 4940 tax due. A late filed Form 990PF can be subject to both penalties. Both are normally automatically computed and assessed when the return is posted to BMF.

(3) Regarding the filing requirements for private foundations, for tax years beginning

on or after July 2, 2019, section 3101 of P.L. 116-25 (Taxpayer First Act of 2019) requires that returns by exempt organizations be filed electronically. See Section 6033(n). If an organization is filing Form 990-PF, Return of Private Foundation or

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Section 4947(a)(1) Trust treated as Private Foundation, for a tax year beginning on or after July 2, 2019, the organization must file the return electronically. Limited exceptions apply. Electronic filing requirements have not changed for Form 990-PF filers with tax years beginning before July 1, 2019 (which includes calendar year 2019 Forms 990-PF). Required electronic filing for calendar year filers will apply for tax years beginning in 2020 or later. In addition, private foundations must file Form 4720 electronically for returns due on or after July 15, 2021. A limited exception applies for 2020 Form 4720 returns due on or after July 15, 2021, that are submitted on paper and bear a postmark date on or before June 16, 2021.

(4) Foundations can also be subject to the criminal penalties of Section 7203,

Section 7206, and Section 7207, as well as the civil fraud penalty of Section 6663. See IRM 9.1.3, Criminal Statutory Provisions and Common Law and 20.1.5, Related Return Penalties.

(5) Foundations, individuals, and taxable entities who file (or are required to file but

do not file) Form 4720 may be subject to failure to file, failure to pay, estimated tax, negligence, and civil fraud penalties.

(6) Any entity or individual previously liable for a Chapter 42 tax may be subject to a

100% penalty. See Section 6684. This penalty may also be imposed where the act or failure to act is both willful and flagrant. In both circumstances, the act or failure to act must not be due to reasonable cause. Under Section 6684 if a person becomes liable for tax under any section of Chapter 42 and meets the criteria, then such person is liable for a penalty equal to the amount of such tax. Thus, this penalty can be imposed with respect to both first tier and second tier taxes. The penalty, which is an assessable penalty (assessed in the same manner as taxes) is not imposed with respect to Section 4940 and 4948(a) taxes. See IRM 20.1.8, Employee Plans and Exempt Organizations Miscellaneous Civil Penalties.

Note: The IRS bears the burden of proof on whether an act or failure to act was willful and flagrant. See Thorne v. Commissioner, 99 T.C. 67 (1992); Moody v. Commissioner, 69 T.C.M. (CCH) 2517 (1995).

(7) Foundations that file Form 990-T, Exempt Organization Business Income Tax

Return, may be subject to failure to file, failure to pay, estimated tax, accuracy and civil fraud penalties.

(8) The officers, directors, trustees, and employees of a foundation may be subject to

the public inspection compliance penalty of Section 6685 on the responsible party. See IRM 20.1.8, Employee Plans and Exempt Organizations Miscellaneous Civil Penalties.

(9) When computing penalties under Section 6651(a)(1) and (2), 6651(f), 6662, or

6663, use the first tier tax amounts for the computations. Because the second tier taxes are not taxes that are reported (or required to be reported) on any tax return, they are not subject to those penalties. Imposition of the penalties under Sections 6662 and 6663 requires that the taxpayer file a return. If the taxpayer did

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not file a return, those penalties do not apply. An SFR does not constitute a return for the purpose of applying penalties under Section 6662 and 6663.

Example: In a report of examination issued to a disqualified person for selfdealing transactions, the agent proposes $15,000 in tax on a $150,000 payment. The agent prepared a substitute for return package (IRM 4.70.13, Executing the Examination), because the taxpayer didn’t file the late Form 4720. The agent proposes the failure to file and pay penalties. The 201312 return was due on May 15, 2014. The agent issued the report October 15, 2016. The failure to file penalty is at a 22.5% rate (4.5% x 5 months), for $3,375. The failure to pay penalty rate is at 14.5% (.5% x 29 months late), for $2,175. See Section 6651(a)(1), (a)(2), and (c)(1) (which reduces the penalty amount under Section 6651(a)(1) when both the failure to file and failure to pay penalties apply).

Note: The examination report should explain that the failure to pay computation is merely an estimate because the penalty will continue to accrue, until the initial tax is fully paid, up to a maximum rate of 25%.

(10) If proposing or recommending a failure to pay penalty for a non-filer under a

substitute for return package, the failure to pay determination must be included in the examination report. See IRM 4.70.13, Executing the Examination. In addition, the failure to pay penalty may only be asserted on a certified substitute for return. Examiners should follow the instructions on Form 13496, IRC Section 6020(b) Certification.

(11) Be aware that with some exceptions, Section 6751(b)(1) requires written

supervisory approval for penalty assessment which must be obtained prior to issuing any written communication of penalties to a taxpayer that offers the taxpayer an opportunity to sign an agreement or consent to assessment or proposal of the penalty. See IRM 20.1.5, Return Related Penalties, which outlines the requirements for securing written supervisory approval and describes the documentation required for the case file. Section 6751(b)(2) provides exceptions to this requirement for additions to tax and penalties under 6651, 6654, 6655, or 6662 (but only with respect to an addition to tax by reason of subsection (b)(9)) and any penalties automatically calculated through electronic means. See IRM 20.1.1, Introduction and Penalty Relief and 20.1.11, Excise Tax and Estate and Gift Tax Penalties.

(12) For examples of penalty computations, see Example Worksheet/Exhibits in

Section VI of this Technical Guide.