IRS Penalty Assessment Procedural Requirements

IRC section 6751(a), related to IRS civil penalty assessment procedures, requires the IRS to include with each penalty notice (1) the name of the penalty, (2) the section under which the penalty is asserted, and (3) a computation of the penalty.¹ 

IRC section 6751(a) imposes civil tax penalties on taxpayers who fail to timely file tax returns, pay taxes that are otherwise due or other non-criminal tax offenses.

IRC section 6751(b), related to approval of assessment, provides “No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.”

Exceptions to the immediate supervisor approval requirement generally include the following penalties: (1) failure to file, (2) failure to pay, (3) failure to pay estimated tax, and (4) a penalty automatically calculated through electronic means.  

A penalty automatically calculated through electronic means qualifies as such if it is assessed free of any independent determination by an IRS employee as to whether it should be imposed.² 

Tax Controversy Litigation

During the past several years, there has been tax controversy litigation between taxpayers and the IRS over the meaning and interpretation of specific terms in the statutory language of IRC section 6751(b).  For example, section 6751(b) does not define terms such as “initial determination of such assessment,” “immediate supervisor,” or “personally approved (in writing).”³  

The litigation has resulted in inconsistent judicial treatment among the U.S. Tax Court and splits between federal Circuit Courts of Appeal over the preceding terms which includes (1) the definition of “initial,” (2) the legal meaning of “assessment,” and (3) the timing of obtaining written supervisory approval “in writing.” 

IRS Proposed Regulations

To resolve litigation between taxpayers and the IRS and disagreements among the U.S. Tax Court and Circuit Courts of Appeal, the IRS filed on April 10, 2023 in the Federal Register a Notice of Proposed Rulemaking (“Notice”).⁴ The IRS proposed regulations regarding supervisory approval of certain penalties assessed by the IRS.  The Notice was published in the Federal Register on April 11, 2023.

The IRS stated in its Notice of Proposed Rulemaking “The proposed regulations are necessary to address uncertainty regarding various aspects of supervisory approval of penalties that have arisen due to recent judicial decisions.  The proposed regulations affect the IRS and persons assessed certain penalties by the IRS.”⁵   

The IRS strongly encourages persons interested in commenting on the proposed regulations to submit comments and to attend a public hearing when it is scheduled.

Explanation of Provisions

In explaining the proposed regulations, the Department of the Treasury and the IRS concluded that “it is in the interest of sound tax administration to have clear and uniform regulatory standards regarding the penalty approval requirements under section 6751(b).  In the absence of such regulatory standards, caselaw has developed rules for the application of section 6751(b).  Such judicial holdings are subject to unanticipated but frequent change, making it difficult for IRS employees to apply them in a consistent manner.  The difficulty in applying or anticipating how courts will construe these rules has resulted in otherwise appropriate penalties on taxpayers not being sustained and has undermined the efficacy of these penalties as a tool to enhance voluntary compliance by taxpayers.  In addition, the evolving standards regarding interpretations of section 6751(b) have served to increase litigation, which consumes significant government resources…The proposed regulations are intended to clarify the application of section 6751(b) in a manner that is consistent with the statute and its legislative history, has nationwide uniformity, is administrable for the IRS, and is easily understood by taxpayers.”⁶ 

Timing Issues

The IRS has proposed to adopt three rules regarding the timing of supervisory approval of penalties under section 6751(b) “that are based on objective and clear standards.”⁷ 

A. Penalties subject to pre-assessment review in the Tax Court

With respect to penalties that are included in a pre-assessment notice subject to the Tax Court’s review, such as a statutory notice of deficiency, “proposed §301.6751(b)-1(c) provides that, for penalties that are included in a pre-assessment notice issued to a taxpayer that provides the basis for jurisdiction in the Tax Court upon timely petition, supervisory approval may be obtained at any time before the notice is issued by the IRS.”⁸   

Accordingly, the Treasury Department and the IRS believe the deadline for providing approval for penalties appearing in a pre-assessment notice that entitles a taxpayer to petition the Tax Court should be no earlier than the issuance of a statutory notice of deficiency.

B. Penalties raised in the Tax Court after a petition

With respect to penalties raised in the Tax Court after a petition, “proposed §301.6751(b)-1(d) provides that, for penalties raised in the Tax Court after a petition, supervisory approval may be obtained at any time prior to the Commissioner requesting that the court determine the penalty.”⁹ 

Accordingly, the Treasury Department and the IRS believe the proposed rule is consistent with the statutory framework in both sections 6214¹⁰ and 6751(b)(1) because once a penalty is raised, the Tax Court decision will control whether it is assessed.

C. Penalties not subject to pre-assessment review in the Tax Court

With respect to penalties not subject to pre-assessment review in the Tax Court, “proposed §301.6751(b)-1(b) provides that supervisory approval for penalties that are not subject to pre-assessment review in the Tax Court may be obtained at any time prior to assessment.”¹¹ 

Accordingly, the Treasury Department and the IRS believe the proposed rule is consistent with the language of section 6751(b), supervisory approval can be made at any time before assessment without causing any tension in the statutory scheme for assessing penalties.

Exceptions

Proposed §301-6751(b)-1(a)(2) provides a list of penalties excepted from the requirements of section 6751(b) which includes those penalties listed in section 6751(b)(2)(A),¹² along with penalties imposed under section 6673¹³ of the code which is intended to deter bad behavior in litigation and conserve judicial resources.

Definitions

A. Immediate supervisor and designated higher level officials

Section 6751(b) does not define the term “immediate supervisor.”  Proposed §301.6751(b)-1(a)(3)(iii) defines the term “immediate supervisor” as “any individual with responsibility to approve another individual’s proposal of penalties without the proposal being subject to an intermediary’s approval…..the term is better understood to refer to any person who, as part of their job, directly approves a penalty proposed by another.  This includes acting supervisors operating under a proper delegation of authority.  This approach is consistent with the intent of Congress to prevent IRS examining agents from operating alone.  The proposed rule further ensures that the person giving the approval has appropriate supervisory responsibility with respect to the penalty.”¹⁴ 

Proposed §301-6751(b)-1(a)(4) designates as a higher level official authorized to approve an initial penalty determination for purposes of section 6751(b)(1) “any person who has been directed via the IRM¹⁵ or other assigned job duties to approve another individual’s proposal of penalties before they are included in a notice prerequisite to Tax Court jurisdiction, an answer to a Tax Court petition, or are assessed without need for such inclusion.  Proposed §301.6751(b)1(a)(4) defines a higher level official as any person designated as such under proposed §301.6751(b)-1(a)(4).  

B. Personally approved (in writing)

Section 6751(b)(1) requires that the immediate supervisor “personally approve (in writing)” the initial determination to assert a penalty.  

Proposed §301.6751(b)-1(a)(3)(v) provides that “personally approved (in writing)” means any writing, including in electronic form, that is made by the writer to signify the writer’s assent and that reflects that it was intended as approval.¹⁶

C. Automatically calculated through electronic means

Section 6751(b)(2) exempts from the penalty approval requirements penalties under sections 6651, 6654, 6655, 6662(b)(9), and 6662(b)(10)¹⁷ and “any other penalty automatically calculated through electronic means.”  The term is not defined in the statute and the legislative history only provides that approval is required of “all non-computer-generated penalties.”

Proposed §301.6751(b)-1(a)(3)(vi) provides that a penalty is “automatically calculated through electronic means” if it is proposed by an IRS computer program without human involvement.  It provides that a penalty is no longer considered “automatically calculated through electronic means” if a taxpayer responds to a computer-generated notice proposing a penalty and challenges the penalty or the amount of tax to which the penalty is attributable, and an IRS employee works the case.

Proposed Applicability Dates

The proposed rules apply to penalties assessed on or after the date of publication of the Treasury decision adopting the proposed rules as final regulations in the Federal Register.

Conclusion

The effect of the proposed rulemaking is to clarify and define relevant procedural requirements imposed on the IRS when applying section 6751(b).  The fundamental effect of the proposed rulemaking is to ensure IRS examiners and auditors and their respective supervisors carry the burden of proof and production when applying civil tax penalties by showing compliance with section 6751’s written supervisory approval requirements.

¹IRC § 6751 was added to the Internal Revenue Code by section 3306 of the Internal Revenue Service Restructuring and Reform Act of 1998, Public Law 105-206, 112 Stat. 685, 744 (1998).
²IRS Service Center Advice 200211040
³See Graev v. Commissioner, 147 T.C. 460, 477-81 (2016), superseded by 149 T.C. 485 (2017), Chai v. Commissioner, 851 F.3d 190, 218-19 (2d Cir. 2017), Clay v. Commissioner, 152 T.C. 223, 249-50 (2019), Belair Woods, LLC v. Commissioner, 154 T.C. 1, 13 (2020), Beland v. Commissioner, 156 T.C. 80 (2021), Kroner v. Commissioner, T.C. Memo. 2020-73, rev’d 48 F. 4th 1272 (11th Cir. 2022), Carter v. Commissioner, T.C. Memo. 2020-21, rev’d 2022 WL 4232170 (11th Cir. Sept. 14, 2022), Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F. 4th  1066 (9th Cir. 2022), Minemyer v. Commissioner, Nos. 21-9006 & 21-9007, 2023 WL 314832 (10th Cir. Jan. 19, 2023, Simpson v. Commissioner, T.C. Memo 2023-4, Castro v. Commissioner, T.C. Memo 2022-120, Sand Investment Co. v. Commissioner, 157 T.C. 136 (2021), PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018, Grajales v. Commissioner, 156 T.C. 55 (2021), aff’d 2022 WL 3640274 (2d Cir. 2022), and Walquist v. Commissioner, 152 T.C. 61 (2019).
⁴FR Doc. 2023-07232
⁵Notice Summary, page 1
⁶See FN #4, Explanation of Provisions
⁷See FN #4, Explanation of Provisions
⁸§301.6751(b)-1(c) 
⁹§301.6751(b)-1(d)
¹⁰IRC §6214 pertains to Determinations by Tax Court
¹¹§301.6751(b)-1(b)
¹²IRC §§6651 Failure to file tax return or pay tax, 6654 Failure by individual to pay estimated income tax, 6655 Failure by corporation to pay estimated income tax, 6662 Imposition of accuracy-related penalty on underpayments (but only with respect to an addition to tax by reason of paragraph (9) or (10) of subsection (b) thereof) 
¹³IRC §6673 Sanctions and costs awarded by courts.
¹⁴§301.6751(b)-1(a)(3)(iii)
¹⁵Internal Revenue Manual
¹⁶§301.6751(b)-1(a)(3)(v)
¹⁷FN #12

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