The IRS Director of Examination Field and Campus Policy recently issued a memorandum detailing specific guidance to implement the interim guidance issued on May 20, 2020, pertaining to supervisory approval of penalties in accordance with section 6751(b)(1).
Section 6751(b)(1) provides that 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. This section applies to all civil penalties in the Internal Revenue Code, except for penalties under section 6651, failure to file tax return or to pay tax section 6654, failure by individual to pay estimated income tax section 6655, failure by corporation to pay estimated income tax and penalties that are automatically calculated through electronic means.
The U.S. Tax Court provided judicial definition to aspects of section 6751(b)(1) in a series of cases issued over the last year. In Clay v. Commissioner, 152 T.C. 223 (2019), the Court said that the initial determination means the first formal communication to the taxpayer of the IRS determination to assert penalties. In Belair Woods, LLC v. Commissioner, 154 T.C. No. 1 (2020), the Court outlined characteristics that demonstrate a ‘determination’ such as: a definite decision to assert penalties, a formal written document, unequivocal language and offering appeal rights, but stopped short of declaring any particular document as the initial determination in all cases. For a more detailed discussion of these cases and others, please see our Jan. 10, 2020 and Jan. 30, 2020 alerts.
In an effort to provide a bright-line rule to IRS employees by means of policy, the IRS issued interim guidance effective May 20, 2020 that for all penalties subject to section 6751(b)(1), written supervisory approval required under section 6751(b)(1) must be obtained prior to issuing any written communication of penalties to a taxpayer that offers the taxpayer an opportunity to sign an agreement or consent to assessment or proposal of the penalty.
The specific guidance makes clear that it is a change in policy not law. Therefore, it will only enforce this requirement for cases effective May 20, 2020, or later. For such cases, the IRS will abate any penalties that were not approved in writing by a supervisor before the proposing agent issues a written communication to taxpayer that provides opportunity to sign an agreement or consent to assessment or proposal of the penalty. In cases that do not meet this criteria such as sections 6721 or 6722, the approval must occur before the case leaves the group. The guidance also provides instructions on how an acting supervisor may sign the penalty approval. The guidance encourages communication with the taxpayer and clarifies what documents and communications would be considered part of the negotiation stage prior to the written approval requirement. Specifically, the examiners are encouraged to consider reasonable cause and abatement of penalties.
This new guidance implementing the May 20, 2020 policy announcement should provide further clarity to both the taxpayer and the examiner with regard to when supervisor approval is required.