Given how much power and responsibility the IRS has, taxpayers expect significant oversight ensuring that assessed penalties are fair and justified. Unfortunately, in recent years the IRS has chafed at leashes intended to protect taxpayers against rogue agents, insisting that it needs ever-more tools and resources in its enforcement arsenal — even after Congress forked over a budget windfall amounting to $80 billion with an emphasis on funding for enforcement.
A particular irritant for the IRS has been the law that requires its agents receive approval from a supervisor before they are allowed to assess penalties on taxpayers. Though crucial for ensuring internal oversight over penalty assessments and guarding against draconian or unjustified penalty assessments, the IRS keeps trying to cast off this chain.
Much of the reason that the IRS has found this requirement so objectionable is that its agents keep ignoring it and then facing consequences down the road. The IRS is currently facing multiple court cases in which penalty assessments are being challenged over agents’ failure to receive supervisor approval before assessing penalties. In one of these cases, IRS agents, including the supervisor, even appear to have fraudulently backdated the penalty approval documents in an attempt to obfuscate their failure to adhere to this requirement.
While taxpayers might hope that such scandalous malfeasance coming to light at the IRS would trigger a top-down rethink of how they operate, the IRS is instead doubling down. This week, the IRS conducted a hearing on its proposed regulations to 26 U.S.C. § 6751(b), a statute requiring the IRS to obtain supervisory approval before its initial determination to assess a penalty. In short, as we previously noted, the IRS’s proposed reforms would so thoroughly defang the supervisory approval requirement that “that every advantage is given to the IRS and little is left for taxpayers.”
Fortunately for taxpayers, NTU President Pete Sepp and NTUF Attorney Lindsey Carpenter were present at the hearing to fight for taxpayer rights. At the hearing and in comments submitted beforehand, NTU and NTUF discussed at length the IRS’s proposals and the negative impact these proposed regulations would have on taxpayers.
Under the IRS’s proposed regulations, the IRS would be given the power to obtain a supervisor’s approval anytime before assessment occurs, ignoring the supervisory approval requirement for any penalties calculated only by a computer, excluding certain groups of taxpayers from section 6751 altogether, and broadly interpreting the terms “initial determination” and “supervisor.”
NTU urged the IRS to protect taxpayers rights by requiring IRS personnel to obtain a supervisor’s approval on a penalty it intends to communicate to the taxpayer. Pete Sepp stressed the importance of section 6751 for protecting taxpayers’ rights, explaining,
I staffed our representative[] . . . on the National Commission on Restructuring the IRS back in 1996-97, and I can attest that even back then, penalty administration and maladministration was a very controversial topic[] . . . One of the things that was conceived under section [6751(b)] . . . was not just that this was to protect taxpayer rights in the process, but to save the IRS resources.
NTU also noted that section 6751(b) provides “a preventative, rather than a reactive, tool for taxpayers rights and good tax administration.” NTU also highlighted the broad concern that fellow commentators had about the proposed regulations,concluding each commentator has stated “strong words and [a] fairly unanimous consensus that we need a different direction with this rulemaking, one that establishes fundamentally different definitions. To strengthen this section of law.”
NTUF Attorney Lindsey Carpenter pointed out some other concerns NTUF had with the proposal, including the proposed ability for the IRS to exempt any penalty calculated through a computer from the supervisory approval requirements. Although section 6751 allows automatically calculated penalties to be exempt, such exempted penalties should only be those that require a True/False analysis. NTUF also encouraged the IRS to adopt definitions that allow far less room for interpretation and are more “common sense.” Unclear regulation often leads to unexpected interpretations.
Should the IRS fail to heed NTU’s warnings, taxpayers can only expect more arbitrarily-assessed penalties coming their way. And while the IRS has framed such enhanced enforcement tools as giving it the power to go after tax cheats, it’s not tax cheats who benefit from procedural safeguards — after all, an agent would have no problem receiving supervisor approval for a penalty assessed on an obvious tax cheat. Rather, taxpayers who do their best to follow the law and file their taxes properly have the most to fear from arbitrary assessments.
A full transcript of the hearing and our testimony can be found here. We will continue to monitor the IRS’s activity concerning section 6751(b) and advocate for the protection of taxpayers’ rights.