Imagine the IRS flags your tax return, and the agent looking at it wants to impose a tax due, an interest, and penalties on you. But luckily for you, that agent’s supervisor reviews your case and decides penalties are not appropriate. So when you get your notice of deficiency in the mail, it doesn’t mention penalties. You go to Tax Court to contest the deficiency, and since penalties haven’t been mentioned, you don’t contest penalties. But alas, the IRS attorney arguing against you decides penalties are appropriate, and their attorney supervisor agrees. Does this meet the law’s requirement that penalties cannot be imposed on taxpayers unless approved by the “immediate supervisor” of the person making the “initial determination”? Yes, if the IRS gets its way under a new regulation they have proposed. Shocked? You should be. Under 26 U.S.C. § 6751(b), IRS personnel must obtain a supervisor’s approval of the “initial determination” of a penalty. If that does not happen, then you do not have to pay a penalty. Two people agreeing that a penalty is appropriate, rather than just one, reduces the risk of penalties being wrongfully imposed for erroneous or vindictive reasons.
The IRS’s proposed regulations broadly interpret section 6751 so that every advantage is given to the IRS and little is left for taxpayers. Instead of following the statutory rule of “no supervisory signatory, no penalties,” the IRS is now proposing no supervisory signatory, maybe no penalties.
To give just one example of how these proposed regulations favor the IRS, the IRS proposes a new definition of “immediate supervisor” as “any person who, as part of their job, directly approves a penalty of another.” Common sense says a supervisor is the individual who oversees the employee and has the power to hire or fire them. The IRS suggests anyone who approves a penalty can be a supervisor. That’s outrageous. The IRS’s logic in the proposed regulation is circular. Instead of following the statute which requires the immediate supervisor to personally approve the initial determination of a penalty, the IRS is now saying anybody can propose any penalty at any time.
The draft regulation also proposes that some taxpayers will get the protection of a supervisory signature, while others won’t. Instead of every initial determination of a penalty requiring a supervisor’s approval, the IRS envisions supervisory approval only being required if the taxpayers who have an immediate right to petition the Tax Court for review. This means taxpayers must determine if they have jurisdiction to appeal to the Tax Court, negotiate the penalty with the IRS, and when they receive their final penalty notice, only then must the IRS supervisor approve.
On Monday, we filed comments on the IRS’s proposed regulation, criticizing it where we think it is confusing, conflicting with the law, or harming American taxpayers. We explain that the purpose of section 6751 is that taxpayers know why a penalty was being imposed and to prevent the IRS from using the penalty as a “bargaining chip.” We also emphasize the IRS must obtain a supervisor’s approval as soon as it decides to communicate a penalty to the taxpayer, not just before assessment. We criticize the IRS’s broad interpretation of “automatically calculated penalty,” arguing that a penalty should be exempt from supervisory approval only if it is a simple “true/false” computation, which is a simple computation based off of a standard set of questions. In practice, the IRS allows computers to approve penalties which require fact specific analysis on a case-by-case basis. It allows computers to do a human’s job in order to avoid obtaining supervisory approval. The taxpayers are the ones burdened with fixing any errors arising from these automatic computations.
Our comment includes alternatives that the IRS should consider, such as a clearer, common sense definition of “supervisor” as meaning only the employee’s immediate supervisor who has hiring and firing power. Also, we suggest the supervisor should sign a statement to indicate they have approved the penalty, similar to the statement that every taxpayer must sign when they file their 1040 forms.
We also noted that Congress is working to clarify any ambiguity in the statute, with Sen. Tim Scott (R-SC) and eight others sponsoring the IRS Accountability and Taxpayer Protection Act. We wrote that the IRS should defer to this congressional bill instead of adopting a convoluted regulation at odds with it.
Our comment has been posted as ID No. IRS-2023-0016-0007, and we are waiting for a confirmation of the hearing date. NTU’s comment joins those filed by the Tax Section of the State Bar of Texas, GBX Group LLC’s Director of Tax Controversy, attorneys with Fox Rothschild, the Section of Taxation of the American Bar Association, the Law Offices of Daniel N. Price, PLLC, and the Tax Clinic of the University of Minnesota Law School.