TC 320: Civil Fraud Penalty Assessed

What the code actually does

TC 320 assesses the civil fraud penalty. IRS Document 6209, Section 8A (the IRS’s reference guide to its data-processing codes) titles it “Fraud Penalty” and describes it in three words — “assesses Fraud Penalty” — while IRM 20.1.5.19.7 states that “the total civil fraud penalty amount will be assessed to MF [Master File, the IRS’s central account-processing system] with TC 320,” through Form 5344, Form 5403 or Form 5599 depending on whether Examination, Appeals or TE/GE closed the case.

The statute is IRC 6663 and the rate is severe: IRM 20.1.5.4.3 records that “the amount of the IRC 6663 penalty is 75 percent of the underpayment due to fraud.” That is one and a half times the harshest accuracy-related rate on the books — the same subsection’s own penalty-reference-number table tops out at 50 percent, for overstated qualified charitable contributions — and nearly four times the standard 20 percent rate. It is why misidentifying this code is not a pedantic error.

It is not the accuracy-related penalty

This is the most consequential misreading of TC 320, and there is a clean structural test for it. The accuracy-related penalty under IRC 6662 is assessed by penalty reference number: IRM 20.1.5.4.3 directs the examiner to “enter the PRN listed below to assess the applicable penalty,” with 786 for negligence or disregard of rules and regulations and 787 for substantial understatement, among others. Those post under the miscellaneous civil penalty codes rather than under a code of their own.

The civil fraud penalty is the exception, and the IRM flags it as such in a note: “the civil fraud penalty is asserted using TC 320 with no PRN.” So a TC 320 with no reference number beside it is the fraud penalty, and an accuracy-related penalty will never appear as a TC 320. A practitioner who reads a client’s transcript as showing a 20 percent accuracy penalty when it shows a 75 percent fraud penalty has misjudged the exposure, the burden of proof, and the seriousness of the case at once — and a fraud determination carries a burden on the government, by clear and convincing evidence (IRC 7454(a); Tax Court Rule 142(b)), that IRC 6662 does not.

What sits alongside it

Two structural features shape how a TC 320 behaves on an account. First, penalties in this family do not stack. IRM 20.1.5.4.3 states that “stacking of IRC 6662, IRC 6663, IRC 6662A, and IRC 6676 penalties is not permitted,” though it adds that other penalties “should be developed and documented as alternative positions when appropriate.” So a fraud penalty and an accuracy-related penalty will not both be charged on the same portion of an underpayment — but the alternative position may be sitting in the file, ready if the fraud determination fails.

Second, Doc 6209 records that on both BMF and IMF the code “restricts FTP penalty on Fraud Penalties assessed under IRC 6653(b) for returns due before 1/1/1989” — a legacy provision tied to the predecessor statute IRC 6663 replaced, though a separate table in the same Doc 6209 publication states the same restriction with a different cutoff and, on IMF, no date cutoff at all. See TC 321 for that inconsistency in full; the short version is that it is not worth planning around on a current account either way. More usefully for current accounts, a fraud determination excludes the module (the record for one tax type and period) from relief that would otherwise apply automatically: IRM 20.1.1.3.3.2.3 lists fraud modules, identified in part by TC 320, among those excluded from the systemic failure-to-pay waiver granted for 2020 and 2021 — the waiver that posts elsewhere as TC 277. A client carrying a TC 320 is outside relief that reached most other taxpayers.

What people mistake TC 320 for

People confuse TC 320 with the accuracy-related penalty for the reason above — both arrive out of an examination, both are described loosely as “the penalty they added,” and a transcript shows a code rather than a statute. The test is the reference number: a TC 240 with an accuracy-related penalty reference number (such as 786 or 787, not 686, which is the IRC 6651(f) fraud penalty) means IRC 6662; a bare TC 320 means the civil fraud penalty: IRC 6663 at 75 percent, or IRC 6653(b) on a return due on or before 12/31/1989. Establishing which one the IRS assessed should precede any conversation with the client about what the case is, and the same distinction governs how any later reduction posts as TC 321.

It is also confused with the criminal fraud exposure that can accompany it. They are separate proceedings under separate standards, and IRM 20.1.5.19 maintains that separation across its own subsections on civil and criminal fraud and on fraud development. A TC 320 is a civil assessment; it neither establishes nor forecloses anything criminal, and it is not, by itself, evidence that a criminal referral was made. Treating it as either is a serious error to make in front of a client.

What to do next

Confirm the statute before advising. A bare TC 320 is the 75 percent fraud penalty; a TC 240 with an accuracy-related reference number points to IRC 6662 instead, and the two cases are not comparable.

Recognize that this is outside routine penalty-relief practice. Neither First-Time Abate nor the administrative waiver reaches it. IRC 6664(c)(1) does extend the reasonable-cause-and-good-faith exception to IRC 6663, portion by portion, but a taxpayer rarely shows good faith on a portion the IRS has proved fraudulent, so the working arguments are the fraud finding itself and the IRC 6663(b) allocation. A case at this level generally warrants counsel rather than an abatement request.

Establish which portion of the underpayment the penalty was computed on: once the IRS establishes fraud on any portion, IRC 6663(b) treats the entire underpayment as fraud unless the taxpayer proves by a preponderance of the evidence which portion is not, and that allocation is frequently where the real argument is.

Check whether an alternative accuracy-related position was documented in the file, because it is what remains if the fraud determination does not hold.

Verify what else the assessment did to the account — including any relief the client was excluded from — and reconstruct the sequence with the IRS Transcript Decoder before relying on the balance.