With 6751(b) Supervisory Penalty Approval, Timing is Everything

With 6751(b) Supervisory Penalty Approval, Timing is Everything

With 6751(b) Supervisory Penalty Approval

When it comes to issuing IRS penalties, Internal Revenue Code section 6751(b) has become a heavily litigated area of tax law. Specifically, the issue becomes the timing of the supervisor’s approval of the penalty. In general, the United States Tax Court has been more lenient towards taxpayers and has rejected penalties in several situations – basically stating that the penalty must be confirmed by the supervisor earlier in the process of communicating with the taxpayer. Conversely, multiple appellate courts have ruled in favor of the Internal Revenue Service and have provided that as long as the penalty is approved before it is assessed, then the IRS can still issue the penalties. There is a recent case in the eleventh circuit, Kroner, which provides good insight as to how the courts evaluate the statute and why they ruled in favor of the Internal Revenue Service. Let’s take a look:

26 U.S.C. 6751(b)

      • (b) Approval of assessment

        • 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.

      • 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.

Evaluating the Statutory Language

Looking at the code section at issue, the language presumes that the IRS will not issue a penalty unless the initial determination of such assessment is personally approved by the immediate supervisor of the individual making such a determination. The issue becomes how to define the phrase initial determination of such assessment is personally approved.

Tax Court Rules in Favor of Petitioner (Kroner)

As provided in the Appellate Court’s ruling:

      • “The court held that the IRS failed to show that it had obtained timely supervisory approval of the penalties under Section 6751(b).

      • Relying on its prior decisions interpreting the supervisory approval requirement to impose a compliance deadline at the time of the “initial determination” of a penalty assessment, the Tax Court explained that this determination occurs “no later than when the Commissioner issues a revenue agent’s report (RAR) to a taxpayer that proposes adjustments including penalties and gives the taxpayer the right to protest those proposed adjustments . . . with the Appeals Office.”

      • Applying this interpretation, the Tax Court held that the IRS’s August 6 letter and examination report was the “initial determination” of Kroner’s penalty assessment. Because Acosta did not sign a penalty approval form until October 31, the Tax Court determined that the IRS had violated Section 6751(b) by failing to obtain supervisory approval in time.

      • Thus, the court held that Kroner’s penalties were procedurally disallowed, a ruling that means that they can never be assessed.

What does this Mean?

It means that at the tax court level, the court found that the determination must be no later than when the commissioner issues the RAR report to a taxpayer proposing adjustments, including penalties (Form 4549) — and the taxpayer with the right to protest those proposed adjustments.

Court of Appeals Reverses the Tax Court

The Eleventh Circuit Court of Appeals reversed the Tax Court on the issue of when is the final time that the supervisor has to approve the penalty.

As provided by the Court of Appeals:

      • “We disagree with Kroner and the Tax Court.

      • We conclude that the IRS satisfies Section 6751(b) so long as a supervisor approves an initial determination of a penalty assessment before it assesses those penalties. See Laidlaw’s Harley Davidson Sales, Inc. v. Comm’r, 29 F.4th 1066, 1071 (9th Cir. 2022).

      • Here, a supervisor approved Kroner’s penalties, and they have not yet been assessed.

      • Accordingly, the IRS has not violated Section 6751(b).

      • We believe this is the best reading of the statute for three reasons. First, we think it is more consistent with the meaning of the phrase “initial determination of such assessment,” which is what must be approved. Second, we think it reflects the absence of any express timing requirement in the statute. And third, we think it is a workable reading in the light of the statute’s purpose. We address each reason in turn.

What does this Mean?

Here, the court takes a different position than the tax court and provides that the IRS supervisor actually has more time to approve an initial determination of a penalty assessment. The Court holds that the IRS has until the moment before it assesses those penalties. Therefore, as long as the supervisory approval of the initial determination of a penalty assessment comes before it actually assesses the penalty, then the IRS has not violated the statute.

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