The denial letter and the deadline
Every denial must be in writing with appeal rights. IRM 20.1.1.3.5.3 requires employees who deny relief before or after assessment to notify the taxpayer in writing of the denial and of the right to appeal, whether the request came in person, by phone or in writing, and to include “A complete explanation of the IRS’s decision and the basis for denial”, the appeal procedures, and power of attorney information. The common letters are Letter 854C (campus), Letters 852C (business) and 853C (individual) generated through the Reasonable Cause Assistant, and Pattern Letter 2413(P) used by Collection.
The IRS penalty appeal page says taxpayers “generally have 30 days from the date of the rejection letter to file your request for an appeal” and tells them to check the letter for the specific deadline. Calendar the date from the letter date, not the date it arrived.
Who can appeal: per the IRS page, the taxpayer must have received a penalty notice, sent a written request to remove the penalty, received a written denial, and been given appeal rights. Appeals review is not automatic (IRM 20.1.1.4.1): Appeals reviews a penalty only after an IRS employee has denied relief and the taxpayer asks for an appeal.
Reconsideration or Appeals?
IRM 20.1.1.3.5.1 tells employees how to handle a second request after a denial that Appeals has not yet considered, and the table is a useful decision tool:
| What you send | What the IRS does |
|---|---|
| New information that meets the relief criteria | Abates the penalty |
| New information that does not meet the criteria | Says relief cannot be granted and refers back to the original denial letter |
| New information that does not meet the criteria, plus a request to appeal | Transfers the case to Appeals and tells you the new information was not enough |
| No new information, no appeal request | Tells you the request cannot be considered |
| No new information, with an appeal request | Transfers the case to Appeals |
Two practical conclusions follow. If you have documents the first reviewer never saw, send them with an express request that the case go to Appeals if they do not change the result; you lose nothing. If you have nothing new, ask for Appeals, because a bare second request is simply closed. If the penalty was already considered by Appeals, a new request goes back to Appeals rather than to the campus.
What to file
Send the appeal to the address on the denial letter, signed by the taxpayer or an authorized representative. Publication 5 sets the format by amount:
- Small case request. If the total tax and penalties for each tax period in the letter is $25,000 or less, a brief written statement of the disputed issues and why you disagree is enough, or the appeal form included with the letter, or Form 12203. See the small case request guide and Form 12203.
- Formal written protest. Required if any tax period exceeds $25,000 (and then for all periods), and Publication 5 lists “Partnership and S Corporation cases regardless of the dollar amount.” A late-filing penalty appeal for a partnership or S corporation under IRC 6698 or 6699 therefore calls for a formal protest even when the penalty is small. See the formal protest guide and the protest template.
Publication 5 lists what a formal protest includes: the taxpayer's name, address and a daytime telephone number; a statement that the taxpayer wants to appeal; a list of all disputed issues, tax periods, proposed changes and the reasons for disagreeing; the facts and the law supporting the position on each issue; and the penalties of perjury statement, signed. Publication 5 gives representatives separate declarations depending on whether they have personal knowledge of the facts. For a penalty appeal, the core of the protest is the reasonable cause narrative tied to dates, the documents, and an explanation of why the first reviewer was wrong.
Make sure the authorization is right. IRM 20.1.1.3.5.1 requires the appeal request to be signed by the taxpayer or a POA shown by a valid Form 2848, and notes: “Form 8821, Tax Information Authorization, or Form 2848, Level H (unenrolled return preparer), is not considered an authorized POA.” Publication 4576 says representatives before Appeals must be an attorney, CPA or enrolled agent authorized to practice. See Form 2848 versus Form 8821.
What the IRS sends to Appeals
A penalty appeals coordinator in the function that denied relief assembles the file and transmits it electronically. IRM 20.1.1.3.5.1 lists what must go: the signed appeal request and Form 2848, documentation of written supervisory approval where IRC 6751(b) requires it, a copy of the denied request, a copy of the disallowance letter, and anything else Appeals needs to consider the penalty fully. Cases sent without the required documents “will be returned by Appeals as premature referrals with jurisdiction released.” If you are appealing a penalty that needed supervisory approval, ask whether the approval is in the file and whether it was timely under the circuit's rule or, in the Tax Court, Clay v. Commissioner, 152 T.C. 223 (2019); see supervisory approval under IRC 6751(b).
How Appeals decides a penalty appeal
Post-assessment penalty appeals are controlled as PENAP cases. IRM 8.11.4.2 says campus-sourced PENAP cases are centralized primarily in the Ogden Campus Appeals office, field-sourced cases are generally worked in field Appeals offices, and conferences are usually by telephone or correspondence (an in-person conference can be requested). Campus-sourced cases are to be resolved “as expeditiously as possible, generally within 90 days of receipt.”
Appeals considers reasonable cause, statutory exceptions, administrative waivers, IRS error, and hazards of litigation, and it can decide that the taxpayer did not commit the failure at all. IRM 8.11.1.2.7.1 lists the questions an Appeals officer asks, including whether the explanation relates directly to the penalty, whether the dates coincide, whether the failure could have been anticipated or prevented, and whether there is a history of the same penalty. Appeals “has the authority to settle penalties for less than the full amount based on hazards of litigation” (IRM 20.1.1.4.1), but it will not trade a penalty for a concession elsewhere: “Appeals will not concede penalty issues to obtain a concession on other issues in the case.” See hazards of litigation settlements.
Appeals takes a judicial approach. IRM 8.11.4.2.6 tells Appeals officers to provide general guidance on establishing reasonable cause but “Do not request specific documents or develop the taxpayer’s position.” Bring the complete package; Appeals will not build the case for you. New information that needs investigation can cause Appeals to release jurisdiction and return the case to the originating function, though IRM 8.11.4.2.6 notes that most documents in penalty appeals are not voluminous and simply corroborate testimony. The outcome is sustained, fully abated or partially abated (closing codes 14, 15 and 16), and Appeals explains the basis in writing. More on the office generally: IRS Independent Office of Appeals.
Collection while the appeal is pending
When the case is transferred, IRM 20.1.1.3.5.1 has the IRS input a TC 470 with a closing code on modules with a balance, specifically “to prevent additional collection notices”. Interest and any accruing penalties continue, and Publication 4576 notes that a payment at any time stops interest from accruing on the amount paid. A client who can pay may prefer to pay and keep appealing; the appeal then effectively becomes a refund claim. If collection action is already under way, see the Collection Appeals Program.
If Appeals sustains the penalty
Most penalties covered by PENAP have no Tax Court route. IRM 8.11.1.2.2 says PENAP penalties “are not subject to deficiency procedures and do not have Tax Court protest rights.” Publication 4576 states the next step: a refund suit in the U.S. District Court or the U.S. Court of Federal Claims, noting that “Most penalties must be paid in full before filing suit.”
That means paying the penalty and filing a refund claim within the IRC 6511 period, waiting for a disallowance or six months, and filing suit within two years of a certified notice of disallowance under IRC 6532(a). The full sequence is on refund claims for paid penalties and refund suits and claims. Appeals generally will not reconsider a penalty it already considered before assessment (IRM 20.1.1.4.1.1), though it may if new evidence warrants, and a later refund claim on that penalty can be transferred to Appeals if the campus denies it. If the case is stuck, a Form 911 request to the Taxpayer Advocate Service is an option (Form 911).
Questions practitioners ask
How long do we have to appeal a Letter 854C?
The IRS says generally 30 days from the date of the letter, and that the letter states the specific deadline. Use the letter's date and deadline.
Can we appeal by phone?
No. IRM 20.1.1.4.1.2 tells employees that if a taxpayer orally requests an appeal of a decision, they should instruct the taxpayer to submit the request in writing.
Our client's 6698 penalty is $3,060. Is a short statement enough?
Publication 5 requires a formal written protest for partnership and S corporation cases regardless of the dollar amount. Prepare a formal protest with facts, law and the penalties of perjury declaration.
Can an unenrolled preparer with a Level H Form 2848 handle the appeal?
Not for the transfer to Appeals. IRM 20.1.1.3.5.1 says Form 8821 and a Form 2848 for an unenrolled return preparer (Level H) are not considered an authorized POA for the appeal request.
Will Appeals tell us what documents to send?
Only generally. IRM 8.11.4.2.6 tells Appeals officers not to request specific documents or develop the taxpayer's position. Send a complete package with the protest.
Appeals sustained the penalty. Can we go to Tax Court?
Generally not for penalties outside deficiency procedures. The route is to pay, file a refund claim, and bring a refund suit in district court or the Court of Federal Claims. Penalties tied to an income tax deficiency are different and go through the notice of deficiency.