When Must an IRS Supervisor Approve a Penalty Assessment?

When Must an IRS Supervisor Approve a Penalty Assessment?

IRS Supervisor Approval of a Penalty Assessment

One of the biggest complications involving tax penalties (such as international information return penalties) being assessed by the IRS involves 26 USC 6751 of the Internal Revenue Code. The code section refers to penalty assessments and specifically, language involving supervisory approval and the electronic computation exception. In general, when certain penalties are assessed, they require supervisor approval. The key issue being litigated is whether the supervisor’s approval has to come before the initial notice is sent to the Taxpayer or is it sufficient as long as it occurs at some point before the assessment takes place (and the Supervisor has not yet lost discretion to assess the penalties). This issue of ‘Supervisory Approval’  has been litigated in several different circuits. Let’s take a look at the Ninth Circuit Ruling in Laidlaw — which reversed the Tax Court ruling that was in favor of Taxpayers.

26 USC 6751

        • (a) Computation of penalty included in notice

          The Secretary shall include with each notice of penalty under this title information with respect to the name of the penalty, the section of this title under which the penalty is imposed, and a computation of the penalty.

      • (b) Approval of assessment

        • (1)  In general

          • 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.

      • (2) Exceptions Paragraph (1) shall not apply to—

        • (A) any addition to tax under section 6651, 6654, 6655, or 6662 (but only with respect to an addition to tax by reason of subsection (b)(9) thereof); or

        • (B) any other penalty automatically calculated through electronic means.

      • (c) Penalties

        • For purposes of this section, the term “penalty” includes any addition to tax or any additional amount.

Laidlaw 9th Circuit

In Laidlaw, the Ninth Circuit, the Court of Appeals in the case of Laidlaw takes the position that the supervisor’s approval must come before the penalty is formally assessed, but not necessarily before the first notice of penalty (30-day pre-assessment penalty) is issued to the Taxpayer. In other words, when a taxpayer is first placed on notice of a penalty (before it is formally assessed) supervisory approval is not required.

As provided by the Court of Appeals (9th Circuit)

Tax Court Rules in Favor of the Taxpayer

      • The RA so notified taxpayer by issuing a “30-day letter.” Although the letter stated that if the taxpayer took no action by the 30-day response date, “we will assess the penalty and begin collection procedures,” no supervisor had yet provided the written approval for the penalty as required by § 6751(b).

      • The RA’s immediate supervisor provided the written approval after the 30-day period had expired, and after taxpayer had submitted a letter protesting the proposed penalty.

      • Taxpayer’s administrative appeal was unsuccessful, the IRS assessed the penalty, then issued a notice of intent to levy.

      • After a collection-due-process (CDP) hearing, taxpayer filed a petition in the Tax Court challenging the Appeals Office’s notice of determination from the CDP

      • Following a remand for the Appeals Office to consider certain issues not raised in this appeal, and a supplemental notice of determination, the Tax Court agreed that the IRS had not complied with the written supervisory requirement in § 6751(b), and granted summary judgment in favor of taxpayer.

 Ninth Circuit Reverses the Tax Court

      • Accordingly, we hold that § 6751(b)(1) requires written supervisory approval before the assessment of the penalty or, if earlier, before the relevant supervisor loses discretion whether to approve the penalty assessment.

      • Since, here, Supervisor Korzec gave written approval of the initial penalty determination before the penalty was assessed and while she had discretion to withhold approval, the IRS satisfied § 6751(b)(1). 

What Does This Ruling Mean for Taxpayers?

This is an important decision because it clarifies that at least in the Ninth Circuit when the Taxpayer receives an initial notice (pre-formal assessment) the IRS is not required to have obtained the approval of the supervisor. In other words, as long as other timing requirements are met, the supervisor can approve the penalty after the notice has been sent to the Taxpayer, as long as it is approved before the assessment and the Supervisor still has discretion.

Current Year vs Prior Year Non-Compliance

Once a taxpayer misses the reporting requirements for prior years, they will want to be careful before submitting their current year’s international reporting forms. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass file previous forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign IRS tax forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

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