Proposed Rule2023-07232
Rules for Supervisory Approval of Penalties
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
April 11, 2023
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations regarding supervisory approval of certain penalties assessed by the IRS. The proposed regulations are necessary to address uncertainty regarding various aspects of supervisory approval of penalties that have arisen due to recent judicial decisions. The proposed regulations affect the IRS and persons assessed certain penalties by the IRS.
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<title>Federal Register, Volume 88 Issue 69 (Tuesday, April 11, 2023)</title>
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[Federal Register Volume 88, Number 69 (Tuesday, April 11, 2023)]
[Proposed Rules]
[Pages 21564-21572]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-07232]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[REG-121709-19]
RIN 1545-BP63
Rules for Supervisory Approval of Penalties
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations regarding
supervisory approval of certain penalties assessed by the IRS. The
proposed regulations are necessary to address uncertainty regarding
various aspects of supervisory approval of penalties that have arisen
due to recent judicial decisions. The proposed regulations affect the
IRS and persons assessed certain penalties by the IRS.
DATES: Electronic or written comments and requests for a public hearing
must be received by July 10, 2023. Requests for a public hearing must
be submitted as prescribed in the ``Comments and Requests for a Public
Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-121709-
19) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish any comments submitted electronically and comments
submitted on paper, to the public docket. Send paper submissions to:
CC:PA:LPD:PR (REG-121709-19), Room 5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
David Bergman, (202) 317-6845; concerning submissions of comments and
requests for a public hearing, Vivian Hayes (202) 317-5306 (not toll-
free numbers) or by email at <a href="/cdn-cgi/l/email-protection#304045525c595358555142595e5743705942431e575f46"><span class="__cf_email__" data-cfemail="82f2f7e0eeebe1eae7e3f0ebece5f1c2ebf0f1ace5edf4">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Regulations on
Procedure and Administration (26 CFR part 301) under section 6751(b) of
the Internal Revenue Code (Code). No regulations have previously been
issued under section 6751.
1. Legislative Overview
Section 6751 was added to the Code by section 3306 of the Internal
Revenue Service Restructuring and Reform Act of 1998 (1998 Act), Public
Law 105-206, 112 Stat. 685, 744 (1998). Section 6751(a) sets forth the
content of penalty notices. Section 6751(b) provides procedural
requirements for the Secretary of the Treasury or her delegate
(Secretary) to assess certain penalties, including additions to tax or
additional amounts under the Code. See section 6751(c).
Section 6751(b)(1), as added by the 1998 Act, provides that ``[n]o
penalty under this title shall be assessed unless the initial
determination of such
[[Page 21565]]
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.'' As an exception to
this rule, section 6751(b)(2), as added by the 1998 Act, provides that
section 6751(b)(1) ``shall not apply to--(A) any addition to tax under
section 6651, 6654, or 6655 [of the Code]; or (B) any other penalty
automatically calculated through electronic means.''
The report of the United States Senate Committee on Finance
regarding the 1998 Act (1998 Senate Finance Committee Report) provides
that Congress enacted section 6751(b)(1) because of its concern that,
``[i]n some cases, penalties may be imposed without supervisory
approval.'' S. Rep. No. 105-174, at 65 (1998), 1998-3 C.B. 537, 601.
The report further states that ``[t]he Committee believes that
penalties should only be imposed where appropriate and not as a
bargaining chip.'' Id. The report provides that, to achieve this goal,
section 6751(b)(1) ``requires the specific approval of IRS management
to assess all non-computer generated penalties unless excepted.''
Section 212 of the Taxpayer Certainty and Disaster Tax Relief Act
of 2020, which was enacted as Division EE of the Consolidated
Appropriations Act, 2021, Public Law 116-260, 134 Stat. 1182, 3067
(2020), expanded the list of penalties in section 6751(b)(2)(A)
excepted from the supervisory approval requirement of section
6751(b)(1) by revising the end of section 6751(b)(2)(A) to read ``6654,
6655, or 6662 (but only with respect to an addition to tax by reason of
subsection (b)(9) thereof);'' (relating to the addition to tax under
section 6662(b)(9) of the Code with regard to the special charitable
contribution deduction under section 170(p) of the Code for taxable
years of individuals beginning in 2021). Section 605 of Division T of
the Consolidated Appropriations Act, 2023, Public Law 117-328, 136
Stat. 4459, 5395 (2022), further amended section 6751(b)(2)(A) by
striking ``subsection (b)(9)'' and inserting ``paragraph (9) or (10) of
subsection (b).'' Section 6662(b)(10) imposes an accuracy-related
penalty on underpayments attributable to any disallowance of a
deduction by reason of section 170(h)(7).
2. Judicial Treatment
In 2016, a United States Tax Court (Tax Court) majority read
section 6751(b)(1)'s silence about when supervisory approval is
required to mean that no specific timing requirement exists and, thus,
the approval need only be obtained at some time, but no particular
time, prior to assessment. Graev v. Commissioner, 147 T.C. 460, 477-81
(2016), superseded by 149 T.C. 485 (2017).
The United States Court of Appeals for the Second Circuit (Second
Circuit) rejected the Graev court's interpretation of section
6751(b)(1), finding ambiguity in the statute's phrase ``initial
determination of such assessment.'' Chai v. Commissioner, 851 F.3d 190,
218-19 (2d Cir. 2017). The Second Circuit held that, with respect to
penalties subject to deficiency procedures, section 6751(b)(1) requires
written approval of the initial penalty determination no later than the
date the IRS issues the notice of deficiency (or files an answer or
amended answer asserting such penalty). Id. at 221. The Second Circuit
reasoned that for supervisory approval to be given force, it must be
obtained when the supervisor has the discretion to give or withhold it,
and, for penalties determined in a notice of deficiency, this
discretion no longer exists upon the issuance of the notice. Id. at
220. In Graev III, 149 T.C. 485 (2017), the Tax Court reversed its
earlier interpretation of section 6751(b) and followed Chai. Since
then, the Tax Court has imposed increasingly earlier deadlines by which
supervisory approval of the initial penalty determination must be
obtained to be considered timely under the statute, formulating tests
that are difficult for IRS employees to apply.
In Clay v. Commissioner, 152 T.C. 223, 249-50 (2019), the Tax Court
held that supervisory approval of penalties was too late where it was
obtained before the IRS issued a notice of deficiency but after the
revenue agent sent the petitioner a ``30-day letter'' proposing
penalties and giving the petitioner an opportunity to request an
administrative appeal. In Belair Woods, LLC v. Commissioner, 154 T.C.
1, 13 (2020), the Tax Court held that supervisory approval must be
obtained before the IRS sends a notice that ``formally communicates to
the taxpayer, the [IRS] Examination Division's unequivocal decision to
assert a penalty.'' In subsequent cases, the Tax Court has held that
supervisory approval must be obtained before the first communication to
the taxpayer that demonstrates that an initial determination has been
made. See, e.g., Beland v. Commissioner, 156 T.C. 80 (2021); Kroner v.
Commissioner, T.C. Memo. 2020-73, rev'd 48 F. 4th 1272 (11th Cir.
2022); Carter v. Commissioner, T.C. Memo. 2020-21, rev'd 2022 WL
4232170 (11th Cir. Sept. 14, 2022). The Tax Court has applied this
timing rule to penalties subject to pre-assessment review in the Tax
Court, as well as to assessable penalties.
Recently the United States Court of Appeals for the Ninth Circuit
(Ninth Circuit), the United States Court of Appeals for the Tenth
Circuit (Tenth Circuit), and the United States Court of Appeals for the
Eleventh Circuit (Eleventh Circuit) reversed the Tax Court's ``formal
communication'' timing rule, noting that it has no basis in the text of
the statute. Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 29
F.4th 1066 (9th Cir. 2022), reh'g en banc denied, No. 20-73420 (9th
Cir. July 14, 2022); Minemyer v. Commissioner, Nos. 21-9006 & 21-9007,
2023 WL 314832 (10th Cir. Jan. 19, 2023); Kroner v. Commissioner, 48 F.
4th 1272 (11th Cir. 2022). In Laidlaw's, the Ninth Circuit held that
the statute requires approval before the assessment of a penalty or, if
earlier, before the relevant supervisor loses discretion whether to
approve the penalty assessment, and noted that ``[t]he statute does not
make any reference to the communication of a proposed penalty to the
taxpayer, much less a `formal' communication.'' Laidlaw's, 29 F. 4th at
1072. In Minemyer, the Tenth Circuit, in an unpublished opinion, held
that the statute requires approval before the IRS issues a notice of
deficiency asserting a penalty. Minemyer, 2023 WL 314832 at *4-5. In
Kroner, the Eleventh Circuit held that the statute only requires
approval before assessment, finding that a deadline of assessment is
``consistent with the meaning of the phrase `initial determination of
such assessment,' . . . . reflects the absence of any express timing
requirement in the statute . . . [and] is a workable reading in light
of the statute's purpose.'' Kroner, 48 F.4th at 1276. The Tax Court has
continued to use its ``formal communication'' timing rule subsequent to
Laidlaw's and Kroner. See, e.g., Simpson v. Commissioner, T.C. Memo
2023-4; Castro v. Commissioner, T.C. Memo. 2022-120.
Recent cases have also addressed other issues under section
6751(b)(1), including (but not limited to) clarification as to who is
an immediate supervisor, see, e.g., Sand Investment Co. v.
Commissioner, 157 T.C. 136 (2021); what constitutes personal, written
approval, see, e.g., PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193
(5th Cir. 2018); whether particular Code sections impose a ``penalty''
subject to section 6751(b)(1), see, e.g., Grajales v. Commissioner, 156
T.C. 55 (2021), aff'd 2022 WL 3640274 (2d Cir. 2022); and what
constitutes a penalty ``automatically calculated through
[[Page 21566]]
electronic means.'' See, e.g., Walquist v. Commissioner, 152 T.C. 61
(2019).
Explanation of Provisions
The Treasury Department and the IRS have concluded that it is in
the interest of sound tax administration to have clear and uniform
regulatory standards regarding the penalty approval requirements under
section 6751(b). In the absence of such regulatory standards, caselaw
has developed rules for the application of section 6751(b). Such
judicial holdings are subject to unanticipated but frequent change,
making it difficult for IRS employees to apply them in a consistent
manner. The difficulty in applying or anticipating how courts will
construe these rules has resulted in otherwise appropriate penalties on
taxpayers not being sustained and has undermined the efficacy of these
penalties as a tool to enhance voluntary compliance by taxpayers. In
addition, the evolving standards regarding interpretations of section
6751(b) have served to increase litigation, which consumes significant
government resources. The recent Ninth Circuit and Eleventh Circuit
rulings also create a different test to satisfy the requirements of
section 6751(b) in cases appealable to those circuits as opposed to
other cases that come before the Tax Court. See Laidlaw's Harley
Davidson Sales, 29 F.4th at 1066; Kroner v. Commissioner, 48 F. 4th at
1276. The proposed regulations are intended to clarify the application
of section 6751(b) in a manner that is consistent with the statute and
its legislative history, has nationwide uniformity, is administrable
for the IRS, and is easily understood by taxpayers.
1. Timing Issues
The proposed regulations would adopt three rules regarding the
timing of supervisory approval of penalties under section 6751(b) that
are based on objective and clear standards. One rule addresses
penalties that are included in a pre-assessment notice that is subject
to the Tax Court's review, such as a statutory notice of deficiency.
One rule is for penalties that the IRS raises in an answer, amended
answer, or amendment to the answer to a Tax Court petition. And one
rule is for penalties assessed without prior opportunity for review by
the Tax Court.
A. Penalties Subject to Pre-Assessment Review in the Tax Court
Proposed Sec. 301.6751(b)-1(c) provides that, for penalties that
are included in a pre-assessment notice issued to a taxpayer that
provides the basis for jurisdiction in the Tax Court upon timely
petition, supervisory approval may be obtained at any time before the
notice is issued by the IRS. Section 6751(b) clearly provides that
there be supervisory approval before the assessment of a penalty and
contains no express requirement that the ``written approval be obtained
at any particular time prior to assessment.'' Chai, 851 F.3d at 218.
Courts have noted that there is ambiguity in the statutory phrase
``initial determination of such assessment [of the penalty]'' that a
supervisor must approve. See, e.g., Chai, 851 F.3d at 218-19 (noting
that since an ``assessment'' is the formal recording of a taxpayer's
tax liability, one can determine a deficiency and whether to make an
assessment, but one cannot ``determine'' an assessment); Roth v.
Commissioner, 922 F.3d 1126, 1132 (10th Cir. 2019) (``[W]e agree with
the Second Circuit that the plain language of Sec. 6751(b) is
ambiguous. . . .''). But courts have not agreed that an ambiguity about
what constitutes an initial determination provides an opportunity to
craft a deadline for approval of an initial determination from the
statute's legislative history. Compare Chai, 851 F.3d at 219 with
Laidlaw's Harley Davidson Sales, 29 F.4th at 1072. Instead, courts have
agreed that a supervisor can approve a penalty only at a time that the
supervisor has discretion to give or withhold approval. See, e.g.,
Chai, 851 F.3d at 220; Laidlaw's Harley Davidson Sales, 29 F.4th at
1074; Cf., Kroner, 48 F. 4th at 1276, n.1 (holding that approval is
required before assessment but declining to address whether the
supervisor must have discretion at the time of approval because it was
undisputed in that case that the supervisor did).
Prior to the Second Circuit's ruling in Chai, the Tax Court
interpreted section 6751(b) merely to require supervisory approval
prior to assessment, which is the only definitive deadline provided in
the statute and which, for penalties determined in a notice of
deficiency, occurs after the opportunity for Tax Court review of a
penalty. See Graev v. Commissioner, 147 T.C. 460 (2016), superseded by
149 T.C. 485 (2017). The Treasury Department and the IRS acknowledge
that approval of a penalty after the IRS issues a notice subject to Tax
Court review is counter to the statutory scheme for Tax Court review.
Once a taxpayer petitions to the Tax Court a notice that includes a
penalty, section 6215(a) of the Code directs that the Tax Court decides
whether the penalty will be assessed. In that case, a supervisor no
longer has discretion that will control. Further, as a practical
matter, the IRS has no general process for supervisory approval of a
penalty after issuing a pre-assessment notice to a taxpayer subject to
review by the Tax Court that includes the penalty, such as a notice of
deficiency. If a taxpayer does not timely petition the Tax Court, the
IRS will simply assess any penalty determined in the notice. Therefore,
the Treasury Department and the IRS conclude that a penalty appearing
in a pre-assessment notice issued to a taxpayer subject to Tax Court
review should be subject to supervisory approval before the notice is
issued. This interpretation is consistent with the Second Circuit's
holding in Chai and provides for penalty review while the IRS still has
discretion regarding penalties. See also Laidlaw's Harley Davidson
Sales, 29 F.4th at 1074 (``Accordingly, we hold that Sec. 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.'').
The proposed regulations do not require written approval of an
initial determination of a penalty that is subsequently included in a
pre-assessment notice subject to review by the Tax Court by any
deadline earlier than the issuance of the notice to the taxpayer. As
already mentioned, no language in the statute imposes any such earlier
deadline, and the statutory scheme for assessing such penalties does
not deprive a supervisor of discretion to approve an initial
determination before the issuance of a pre-assessment notice subject to
review by the Tax Court.
The Treasury Department and the IRS have concluded that an earlier
deadline for approval of an initial determination of a penalty would
not best serve the legislative purpose of section 6751(b). The lack of
any deadline in the statute other than the deadline that approval must
come before assessment indicates that Congress did not intend an
earlier deadline. No earlier deadline is mentioned in the legislative
history. To create earlier deadlines, the caselaw relies on a single
statement in the limited legislative history that ``[t]he Committee
believes that penalties should only be imposed where appropriate and
not as a bargaining chip.'' See Belair Woods, 154 T.C. at 7 (citing S.
Rep. No. 105-174, at 65 (1998)). But the earlier deadlines created by
the Tax Court do not ensure that penalties are only imposed where
appropriate.
First, the supervisory approval deadlines the Tax Court has created
are unclear in application. One formulation
[[Page 21567]]
sets the deadline for approval to occur before the IRS ``formally
communicates to the taxpayer, the Examination Division's unequivocal
decision to assert a penalty.'' Belair Woods, 154 T.C. at 13. Prior to
assessment, it is unclear what constitutes this unequivocal decision
other than a notice that gives the taxpayer the right to petition the
Tax Court. For any notice before the right to petition the Tax Court,
the taxpayer is free to present more evidence or arguments to the
Examination Division as to why a penalty should not apply, which could
lead the IRS supervisor charged with approving an initial determination
to conclude that a penalty should not be asserted.
Second, if the ``Examination Division's unequivocal decision to
assert a penalty,'' id., means that the Examination Division was
finished with its work and could or would not change its mind upon
receiving further information, there is no harm in delaying approval in
writing until sometime after that moment. There would be no possibility
of a change to the penalty during the period after the Examination
Division has completed its work. The Tax Court's imposition of an
approval deadline immediately after the Examination Division has
completed its work rather than sometime later would do nothing to
prevent an attempt to bargain because the Examination Division could
not consider a bargain if it has already completed its work
Third, none of the deadlines the Tax Court has imposed actually
ensure that penalties could never be used as a bargaining chip because
each formulation of what constitutes an ``initial determination'' has
been tied to a written communication. Although it would violate
longstanding IRS Policy Statements and would contradict the Internal
Revenue Manual's (IRM) instructions, in theory a penalty could be used
as a bargaining chip if conveyed orally, and the deadlines the Tax
Court has created do not come into play without written communication.
As a result, the Tax Court opinions imposing deadlines are not
effective to prevent bargaining.
Fourth, the courts' struggles to determine a consistent deadline
has undermined the legislative purpose that penalties be imposed
``where appropriate.'' S. Rep. No. 105-714 at 65. The Tax Court has
found no evidence that an IRS employee actually attempted to use a
penalty as a bargaining chip in any of the cases in which it
invalidated a penalty for section 6751(b) noncompliance. Instead, the
Tax Court has consistently removed penalties when IRS employees simply
obtained written supervisory approval after deadlines the Tax Court
created and applied retroactively without any indication that the
penalty was improper. See, e.g., Kroner, T.C. Memo. 2020-73, rev'd 48
F. 4th 1272 (11th Cir. 2022); Carter, T.C. Memo. 2020-21, rev'd 2022 WL
4232170 (11th Cir. Sept. 14, 2022). In one case, the Tax Court
explicitly noted that imposition of the penalty would be proper but for
the IRS's failure to obtain written supervisory approval by the
deadline created by the Tax Court. See Becker v. Commissioner, T.C.
Memo. 2018-69 (stating that ``Mr. Becker's fraud is evident'' and that,
but for section 6751(b) compliance, the court's analysis ``would
normally lead to a holding that sustains the Commissioner's civil fraud
penalty determinations . . .'').
In contrast, by allowing a supervisor to approve the initial
determination of a penalty up until the time the IRS issues a pre-
assessment notice subject to review by the Tax Court, the proposed rule
ensures that penalties are ``only [ ] imposed where appropriate.'' S.
Rep. No. 105-714 at 65. With this deadline, the supervisor has the
opportunity to consider a taxpayer's defense against a penalty, if
applicable, and decide whether to approve the penalty. If the facts of
the case suggest that a penalty should have been considered but none is
imposed, the supervisor's later review would allow the supervisor to
question why none was recommended. Furthermore, this bright-line rule
relieves supervisors from having to predict whether approval at a
certain point will be too early or too late, thereby risking that an
otherwise appropriate penalty may not be upheld by a court. Pre-
assessment notices that provide a basis for Tax Court jurisdiction are
well known to supervisors, and the proposed rule will be clear in
application to both IRS employees and taxpayers.
Finally, the rule in proposed Sec. 301.6751(b)-1(c) is consistent
with longstanding IRS Policy Statements. Penalty Policy Statement 20-1
has, since 2004, included the following direction to IRS employees:
``The [IRS] will demonstrate the fairness of the tax system to all
taxpayers by:
a. Providing every taxpayer against whom the [IRS] proposes to
assess penalties with a reasonable opportunity to provide evidence that
the penalty should not apply;
b. Giving full and fair consideration to evidence in favor of not
imposing the penalty, even after the [IRS]'s initial consideration
supports imposition of a penalty; and
c. Determining penalties when a full and fair consideration of the
facts and the law support doing so.
Note: This means that penalties are not a ``bargaining point''
in resolving the taxpayer's other tax adjustments. Rather, the
imposition of penalties in appropriate cases serves as an incentive
for taxpayers to avoid careless or overly aggressive tax reporting
positions.''
IRM 1.2.1.12.1 (9). As reflected in this Policy Statement and the
language of section 6751(b) itself, it may not be until the IRS has had
the opportunity to develop the facts in support of or against the
penalty that a supervisor is in the best position to approve an initial
determination to assert a penalty as appropriate. Therefore, the
Treasury Department and the IRS have concluded that the deadline for
providing approval for penalties appearing in a pre-assessment notice
that entitles a taxpayer to petition the Tax Court should be no earlier
than issuance of such notice.
B. Penalties Raised in the Tax Court After a Petition
Proposed Sec. 301.6751(b)-1(d) provides that, for penalties raised
in the Tax Court after a petition, supervisory approval may be obtained
at any time prior to the Commissioner requesting that the court
determine the penalty. The proposed rule gives full effect to the
language in both sections 6214 and 6751(b)(1) because once a penalty is
raised, the Tax Court decision will control whether it is assessed.
Section 6214(a) permits the Commissioner to raise penalties in an
answer or amended answer that were not included in a notice that
provides the basis for Tax Court jurisdiction upon timely petition. The
proposed rule allows the exercise of this statutory grant of
independent judgment by the IRS Office of Chief Counsel (Counsel)
attorney, while maintaining the intent of Congress that penalties be
imposed only where appropriate, and with meaningful supervisory review.
Any concern about a Counsel attorney using penalties raised in an
answer or amended answer as a bargaining chip is mitigated by the
requirement in proposed Sec. 301.6751(b)-1(d) for supervisory approval
within Counsel before the answer or amended answer is filed. Moreover,
by raising a penalty on answer, amended answer, or amendment to the
answer to, the Commissioner will likely bear the burden of proof at
trial regarding the application of the penalty, thus reducing further
the possibility that Counsel will attempt to use a penalty as
[[Page 21568]]
a bargaining chip in a docketed case. See Tax Court Rule 142.
Furthermore, Tax Court Rule 33(b) provides that signature of counsel on
a pleading constitutes a certificate by the signer that the pleading is
not interposed for any improper purpose, thus diminishing the potential
for abuse. No case has found that a penalty raised on answer, amended
answer, or amendment to the answer was untimely under section 6751(b).
C. Penalties Not Subject to Pre-Assessment Review in the Tax Court
Proposed Sec. 301.6751(b)-1(b) provides that supervisory approval
for penalties that are not subject to pre-assessment review in the Tax
Court may be obtained at any time prior to assessment. This includes
penalties that could have been included in a pre-assessment notice that
provides the basis for Tax Court jurisdiction upon timely petition, but
which were not included in such a notice because the taxpayer agreed to
their immediate assessment.
Unlike penalties subject to deficiency procedures before
assessment, there is no Tax Court or potential Tax Court decision that
would make approval of an immediately assessable penalty by an IRS
supervisor meaningless. Instead, consistent with the language of
section 6751(b), supervisory approval can be made at any time before
assessment without causing any tension in the statutory scheme for
assessing penalties.
The proposed rule is also consistent with congressional intent that
penalties not be used as a bargaining chip. Most penalties not subject
to pre-assessment review in the Tax Court cannot be used as a
bargaining chip because they are not in addition to a tax liability.
Rather, the penalty is the sole liability at issue.
2. Exceptions to the Rule Requiring Supervisory Approval of Penalties
Proposed Sec. 301.6751(b)-1(a)(2) provides a list of penalties
excepted from the requirements of section 6751(b). Proposed Sec.
301.6751(b)-1(a)(2) excepts those penalties listed in section
6751(b)(2)(A), along with penalties imposed under section 6673 of the
Code. Penalties under section 6673 are imposed at the discretion of the
court and are designed to deter bad behavior in litigation and conserve
judicial resources. Section 6673 penalties are not determined by the
Commissioner, and the applicable Federal court may impose them
regardless of whether the Commissioner moves for their imposition. The
proposed rule excepts penalties under section 6673 from the
requirements of section 6751(b)(1) because section 6751(b)(1) was not
intended as a mechanism to restrain Federal courts. This rule is
consistent with the Tax Court's holding in Williams v. Commissioner,
151 T.C. 1 (2018).
3. Definitions
A. Immediate Supervisor and Designated Higher Level Officials
Section 6751(b)(1) requires approval by ``the immediate
supervisor'' of the individual who makes the initial penalty
determination, or such higher level official as the Secretary may
designate. The statute does not define the term immediate supervisor.
The 1998 Senate Finance Committee Report only provides that section
6751(b) requires the approval of ``IRS management.'' In Sand
Investment, the Tax Court held that for purposes of section 6751(b) the
``immediate supervisor'' is the individual who directly supervises the
examining agent's work in an examination. In the Tax Court's view, the
legislative history of section 6751(b) supports the conclusion that the
person with the greatest familiarity with the facts and legal issues
presented by the case is the immediate supervisor. 157 T.C. at 142.
Proposed Sec. 301.6751(b)-1(a)(3)(iii) defines the term
``immediate supervisor'' as any individual with responsibility to
approve another individual's proposal of penalties without the proposal
being subject to an intermediary's approval. The proposed rule does not
limit the term immediate supervisor to a single individual. To limit
the term to a single individual within the IRS would restrict section
6751(b)(1) in a way that does not reflect how the IRS operates and
would invite unwarranted disputes about which specific individual was
most appropriate in situations where multiple individuals could fairly
be considered an ``immediate supervisor.'' Instead, the term is better
understood to refer to any person who, as part of their job, directly
approves a penalty proposed by another. This includes acting
supervisors operating under a proper delegation of authority. This
approach is consistent with the intent of Congress to prevent IRS
examining agents from operating alone. The proposed rule further
ensures that the person giving the approval has appropriate supervisory
responsibility with respect to the penalty.
Proposed Sec. 301.6751(b)-1(a)(4) designates as a higher level
official authorized to approve an initial penalty determination for
purposes of section 6751(b)(1) any person who has been directed via the
IRM or other assigned job duties to approve another individual's
proposal of penalties before they are included in a notice prerequisite
to Tax Court jurisdiction, an answer to a Tax Court petition, or are
assessed without need for such inclusion. Proposed Sec. 301.6751(b)-
1(a)(3)(iv) defines a higher level official as any person designated as
such under proposed Sec. 301.6751(b)-1(a)(4).
With respect to ``higher level officials'' who may provide penalty
approval in lieu of the immediate supervisor, the statute does not
specify whether the official needs to be at a ``higher level'' than the
individual making the initial penalty determination, or at a higher
level than that individual's supervisor. Read in light of the statute's
legislative purpose and the structure and operations of the IRS, it is
appropriate to understand that term as referring to an official at a
higher level than the individual making the initial penalty
determination. To do otherwise would be to exclude a large group of
individuals the IRS has assigned to review proposed penalties. This
approach is consistent with the legislative history and allows IRS
employees to operate within the scope of their assigned duties.
To be able to identify which supervisor should approve an initial
penalty determination, it must be clear which individual made the
``initial determination of [a penalty] assessment.'' Proposed Sec.
301.6751(b)-1(a)(3)(ii) provides that the individual who first proposes
a penalty is the individual who section 6751(b)(1) references as the
individual making the initial determination of a penalty assessment.
Proposed Sec. 301.6751(b)-1(a)(3)(ii) also provides that a proposal
includes those made either to a taxpayer or to the individual's
supervisor or a designated higher level official. This approach will
allow for easy identification of the appropriate supervisor or higher
level official. Proposed Sec. 301.6751(b)-1(a)(3)(ii) also makes clear
that the assessment of a penalty must be attributable to an
individual's proposal for that individual to be considered as the
individual who made the ``initial determination of such assessment.''
If a proposal of a penalty is not tied to an ultimate assessment, then
it should not be treated as the ``initial determination of such
assessment.'' This approach allows the IRS the flexibility to pursue
penalties when new information is received that alters earlier thinking
on whether a penalty is appropriate. It also allows for more than one
set of an individual employee and supervisor to exercise
[[Page 21569]]
independent judgment about whether a penalty should be assessed. This
situation is illustrated by an example in proposed Sec. 301.6751(b)-
1(e)(4).
B. Personally Approved (in Writing)
Section 6751(b)(1) requires that the immediate supervisor
``personally approve (in writing)'' the initial determination to assert
a penalty. Proposed Sec. 301.6751(b)-1(a)(3)(v) provides that
``personally approved (in writing)'' means any writing, including in
electronic form, that is made by the writer to signify the writer's
assent and that reflects that it was intended as approval. The proposed
rule reflects a straightforward, plain language interpretation of the
term, and is consistent with the legislative history's requirement that
``specific approval'' be given. The plain language of the statute
requires only personal approval in writing, not any particular form of
signature or even any signature at all. The plain language of the
statute also contains no requirement that the writing contain the
supervisor's substantive analysis, nor does the statute require the
supervisor to follow any specific procedure in determining whether to
approve the penalty. Thus, for example, a supervisor's signature on a
cover memorandum or a letter transmitting a report containing penalties
is sufficient approval of the penalties contained in the report. The
proposed rule is consistent with existing caselaw on this issue. See
PBBM-Rose Hill, 900 F.3d at 213; Deyo v. Commissioner, 296 Fed. Appx.
157 (2d Cir. 2008); Thompson v. Commissioner, T.C. Memo. 2022-80;
Raifman v. Commissioner, T.C. Memo. 2018-101.
C. Automatically Calculated Through Electronic Means
Section 6751(b)(2) exempts from the penalty approval requirements
penalties under sections 6651, 6654, 6655, 6662(b)(9), and 6662(b)(10)
and ``any other penalty automatically calculated through electronic
means.'' The term is not defined in the statute and the legislative
history only provides that approval is required of ``all non-computer
generated penalties.''
Proposed Sec. 301.6751(b)-1(a)(3)(vi) provides that a penalty is
``automatically calculated through electronic means'' if it is proposed
by an IRS computer program without human involvement. Proposed Sec.
301.6751(b)-1(a)(3)(vi) provides that a penalty is no longer considered
``automatically calculated through electronic means'' if a taxpayer
responds to a computer-generated notice proposing a penalty and
challenges the penalty or the amount of tax to which the penalty is
attributable, and an IRS employee works the case.
Current IRS computer software, including but not limited to the
Automated Correspondence Exam (ACE) program using Report Generation
Software (RGS) and the Automated Underreporter (AUR) program, is
capable of automatically proposing certain penalties to taxpayers
without the involvement of an IRS examiner. Penalties that can be
proposed in this way are then assessed without review by an IRS
examiner. Requiring supervisory approval for these penalties would
disrupt the automated process of determining a penalty and would not
square with the statutory text requiring approval by the immediate
supervisor of the ``individual'' making an initial penalty
determination.
When an IRS computer program sends a taxpayer a notice proposing a
penalty and the taxpayer responds to that notice, an IRS examiner often
considers the taxpayer's response. If the taxpayer's response questions
the validity of the penalty or the adjustments to which the penalty
relates, and an examiner considers the response, any subsequent
assessment of the penalty would not be based solely on the automatic
calculation of the penalty by the computer program. Instead, it would
be at least partially based on a choice made by an IRS employee as to
whether the penalty is appropriate. Therefore, the exception for
penalties automatically calculated through electronic means does not
apply, and supervisory approval is required in that situation. This
rule is consistent with the Tax Court's holding in Walquist, 152 T.C.
at 73.
Proposed Applicability Dates
The proposed rules are proposed to apply to penalties assessed on
or after the date of publication of the Treasury decision adopting the
proposed rules as final regulations in the Federal Register.
Special Analyses
I. Regulatory Planning and Review
It has been determined that this notice of proposed rulemaking is
not subject to review under section 6(b) of Executive Order 12866
pursuant to the Memorandum of Agreement (April 11, 2018) between the
Treasury Department and the Office of Management and Budget regarding
review of tax regulations.
II. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that this regulation will not have a significant
economic impact on a substantial number of small entities. This
certification is based on this regulation imposing no obligations on
small entities and the effectiveness of the regulation in having
supervisors ensure that penalties for violations of other provisions of
tax law are appropriate and not used as a bargaining chip. Because only
appropriate penalties will apply with the proper application of this
regulation, the proposed regulations do not impose a significant
economic impact on a substantial number of small entities.
Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking has been submitted to the Chief Counsel
for the Office of Advocacy of the Small Business Administration for
comment on its impact on small business.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. This rule does not include any Federal mandate that may
result in expenditures by State, local, or Tribal governments, or by
the private sector in excess of that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These proposed regulations do not
have federalism implications and do not impose substantial direct
compliance costs on state and local governments or preempt State law
within the meaning of the Executive order.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
The Treasury Department and the IRS
[[Page 21570]]
request comments on all aspects of the proposed rules. All comments
will be available at <a href="http://www.regulations.gov">www.regulations.gov</a> or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing also are encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement 2020-4,
2020-17 I.R.B 1, provides that, until further notice, public hearings
conducted by the IRS will be held telephonically. Any telephonic
hearing will be made accessible to people with disabilities.
Drafting Information
The principal author of these regulations is David Bergman of the
Office of the Associate Chief Counsel (Procedure and Administration).
However, other personnel from the Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendment to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 301 as follows:
PART 301--PROCEDURE AND ADMINISTRATION
0
Paragraph 1. The authority citation for part 301 continues to read in
part as follows:
Authority: 26 U.S.C. 7805.
0
Par. 2. Section 301.6751(b)-1 is added to read as follows:
Sec. 301.6751(b)-1 Supervisory and higher level official approval for
penalties.
(a) Approval requirement--(1) In general. Except as provided in
paragraph (a)(2) of this section, section 6751(b) of the Internal
Revenue Code (Code) generally bars the assessment of a penalty unless
the initial determination of the assessment of the penalty is
personally approved (in writing) by the immediate supervisor of the
individual making the initial determination or such higher level
official as the Secretary of the Treasury or her delegate (Secretary)
may designate. Paragraph (a)(2) of this section lists penalties not
subject to section 6751(b)(1) and this paragraph (a)(1). Paragraph
(a)(3) of this section provides definitions of terms used in section
6751(b) and this section. Paragraph (a)(4) of this section designates
the higher level officials described in this paragraph (a)(1).
Paragraphs (b), (c), and (d) of this section apply section 6751(b)(1)
and this paragraph (a)(1) to penalties not subject to pre-assessment
review in the Tax Court, penalties that are subject to pre-assessment
review in the Tax Court, and penalties raised in the Tax Court after a
petition, respectively. Paragraph (e) of this section provides examples
illustrating the application of section 6751(b) and this section.
Paragraph (f) of this section provides dates of applicability of this
section.
(2) Exceptions. Under section 6751(b)(2), section 6751(b)(1) and
this section do not apply to:
(i) Any penalty under section 6651, 6654, 6655, 6673, 6662(b)(9),
or 6662(b)(10) of the Code; or
(ii) Any other penalty automatically calculated through electronic
means.
(3) Definitions. For purposes of section 6751(b) and this section,
the following definitions apply--
(i) Penalty. The term penalty means any penalty, addition to tax,
or additional amount under the Code.
(ii) Individual who first proposed the penalty. Except as otherwise
provided in this paragraph (a)(3)(ii), the individual who first
proposed the penalty is the individual who section 6751(b)(1) and
paragraph (a)(1) of this section reference as the individual making the
initial determination of a penalty assessment. A proposal of a penalty
can be made to either a taxpayer (or the taxpayer's representative) or
to the individual's supervisor or designated higher level official. A
proposal of a penalty, as defined in paragraph (a)(3)(i) of this
section, to a taxpayer does not include mere requests for information
relating to a possible penalty or inquiries of whether a taxpayer wants
to participate in a general settlement initiative for which the
taxpayer may be eligible, but does include offering the taxpayer an
opportunity to agree to a particular penalty in a particular amount
other than a penalty under a settlement initiative offered to a class
of taxpayers. An individual who first proposed the penalty is not the
individual whom section 6751(b)(1) and paragraph (a)(1) of this section
reference as the individual making the initial determination of a
penalty assessment if the assessment of the penalty is attributable to
an independent proposal made by a different individual.
(iii) Immediate supervisor. The term immediate supervisor means any
individual with responsibility to approve another individual's proposal
of penalties, as defined in paragraph (a)(3)(i) of this section,
without the proposal being subject to an intermediary's approval.
(iv) Higher level official. The term higher level official means
any person designated under paragraph (a)(4) of this section as a
higher level official authorized to approve a penalty for purposes of
section 6751(b)(1).
(v) Personally approved (in writing). The term personally approved
(in writing) means any writing, including in electronic form, made by
the writer to signify the writer's assent. No signature or particular
words are required so long as the circumstances of the writing reflect
that it was intended as approval.
(vi) Automatically calculated through electronic means. A penalty,
as defined in paragraph (a)(3)(i) of this section, is automatically
calculated through electronic means if an IRS computer program
automatically generates a notice to the taxpayer that proposes the
penalty. If a taxpayer responds in writing or otherwise to the
automatically-generated notice and challenges the proposed penalty, or
the amount of tax to which the proposed penalty is attributable, and an
IRS employee considers the response prior to assessment (or the
issuance of a notice of deficiency that includes the penalty), then the
penalty is no longer considered ``automatically calculated through
electronic means.''
(4) Higher level official. Any person who has been directed by the
Internal Revenue Manual or other assigned job duties to approve another
individual's proposal of penalties before they are included in a pre-
assessment notice prerequisite to United States Tax Court (Tax Court)
jurisdiction, an answer, amended answer, or amendment to the answer to
a Tax Court petition, or are assessed without need for such inclusion,
is designated as a higher level official authorized to approve the
penalty for purposes of section 6751(b)(1).
(b) Penalties not subject to pre-assessment review in the Tax
Court. The requirements of section 6751(b)(1) and paragraph (a)(1) of
this section are satisfied for a penalty that is not subject to pre-
assessment review in the Tax Court if the immediate supervisor of the
individual who first proposed the penalty personally approves the
penalty in writing before the penalty is assessed. Alternatively, a
person designated as a higher level official as described in paragraph
(a)(4) of this section may
[[Page 21571]]
provide the approval otherwise required by the immediate supervisor.
(c) Penalties subject to pre-assessment review in the Tax Court.
The requirements of section 6751(b)(1) and paragraph (a)(1) of this
section are satisfied for a penalty that is included in a pre-
assessment notice that provides a basis for Tax Court jurisdiction upon
timely petition if the immediate supervisor of the individual who first
proposed the penalty personally approves the penalty in writing on or
before the date the notice is mailed. Alternatively, a person
designated as a higher level official as described in paragraph (a)(4)
of this section may provide the approval otherwise required by the
immediate supervisor. Examples of a pre-assessment notice described in
this paragraph (c) include a statutory notice of deficiency under
section 6212 of the Code, a notice of final partnership administrative
adjustment under former section 6223 of the Code, and a notice of final
partnership adjustment under section 6231 of the Code.
(d) Penalties raised in the Tax Court after a petition. The
requirements of section 6751(b)(1) and paragraph (a)(1) of this section
are satisfied for a penalty that the Commissioner raises in the Tax
Court after a petition (see section 6214(a) of the Code) if the
immediate supervisor of the individual who first proposed the penalty
personally approves the penalty in writing no later than the date on
which the Commissioner requests that the court determine the penalty.
Alternatively, a person designated as a higher level official as
described in paragraph (a)(4) of this section may provide the approval
otherwise required by the immediate supervisor.
(e) Examples. The following examples illustrate the rules of this
section.
(1) Example 1. In the course of an audit regarding a penalty not
subject to pre-assessment review in the Tax Court, Revenue Agent A
concludes that Taxpayer T should be subject to the penalty under
section 6707A of the Code for failure to disclose a reportable
transaction. A sends T a letter giving T the options to agree to the
penalty; submit additional information to A about why the penalty
should not apply; or request within 30 days that the matter be sent to
the Independent Office of Appeals (Appeals) for consideration. After T
requests that Appeals consider the case, A prepares the file for
transmission, and B (who is A's immediate supervisor, as defined in
paragraph (a)(3)(iii) of this section) signs a cover memorandum
informing Appeals of the Office of Examination's proposed penalty and
asking Appeals to consider it. The Appeals Officer upholds the penalty,
and it is assessed. The requirements of section 6751(b)(1) are
satisfied because B's signature on the cover memorandum is B's personal
written assent to the penalty proposed by A and was given before the
penalty was assessed.
(2) Example 2. In the course of an audit, Revenue Agent A concludes
that Taxpayer T should be subject to an accuracy-related penalty for
substantial understatement of income tax under section 6662(b)(2). A
sends T a Letter 915, Examination Report Transmittal, along with an
examination report that includes the penalty. The Letter 915 gives T
the options to agree to the examination report; provide additional
information to be considered; discuss the report with A or B (who is
A's immediate supervisor, as defined in paragraph (a)(3)(iii) of this
section); or request a conference with an Appeals Officer. T agrees to
assessment of the penalty and signs the examination report to consent
to the immediate assessment and collection of the amounts shown on the
report. B provides written supervisory approval of the penalty after T
signs the examination report, but before the penalty is assessed.
Paragraph (b) of this section applies because T's agreement to
assessment of the penalty excepts it from pre-assessment review in the
Tax Court. Because B provided written supervisory approval before
assessment of the penalty, the requirements of section 6751(b) are
satisfied.
(3) Example 3. In the course of an audit of Taxpayer T by a team of
revenue agents, Revenue Agent A concludes that T should be subject to
an accuracy-related penalty for negligence under sections 6662(b)(1)
and 6662(c). Supervisor B is the issue manager and is assigned the duty
to approve the Notice of Proposed Adjustment for any penalty A would
propose. A reports to B, but B is not responsible for the overall
management of the audit of T. C is the case manager of the team
auditing T and is responsible for the overall management of the audit
of T. C may assign tasks to A and other team members, and has
responsibility for approving any examination report presented to T.
(i) Only B approves the penalty in writing before the mailing to T
of a notice of deficiency that includes the penalty. Under paragraph
(a)(3)(iii) of this section, B qualifies as the immediate supervisor of
A with respect to A's penalty proposal, and the requirements of section
6751(b)(1) are met.
(ii) Only C approves the penalty in writing before the mailing to T
of a notice of deficiency that includes the penalty. Because C has
responsibility to approve A's proposal of the penalty as part of
approving the examination report, C qualifies as a higher level
official designated under paragraph (a)(4) of this section to approve
the penalty proposed by A, and the requirements of section 6751(b)(1)
are met.
(4) Example 4. In the course of an audit, Revenue Agent A concludes
that Taxpayer T should be subject to a penalty for negligence under
section 6662(c). A recommends the penalty to her immediate supervisor
B, who thinks more factual development is needed to support the penalty
but must close the audit immediately due to the limitations period on
assessment expiring soon. The IRS issues a statutory notice of
deficiency without the penalty and T petitions the Tax Court. In
reviewing the case file and conducting discovery, IRS Chief Counsel
Attorney C concludes that the facts support imposing a negligence
penalty under section 6662(c). Attorney C proposes to her immediate
supervisor, D, that the penalty should apply and should be raised in an
Answer pursuant to section 6214(a). D agrees and signs the Answer that
includes the penalty before it is filed. The section 6662(c) penalty at
issue is subject to pre-assessment review in the Tax Court and was
raised in the Tax Court after a petition under paragraph (d) of this
section. Therefore, written supervisory approval under paragraph (d) of
this section was required prior to filing the written pleading that
includes the penalty. Attorney C is the individual who first proposed
the penalty for purposes of section 6751(b)(1) and paragraphs (d) and
(a)(3)(ii) of this section, and she secured timely written supervisory
approval from D, the immediate supervisor, as defined in paragraph
(a)(3)(iii) of this section, so the requirements of section 6751(b)(1)
are met. Revenue Agent A did not make the initial determination of the
penalty assessment because any assessment would not be attributable to
A's proposal but would be based on the independent proposal of Attorney
C raised pursuant to section 6214(a).
(5) Example 5. The IRS's Automated Underreporter (AUR) computer
program detects a discrepancy between the information received from a
third party and the information contained on Taxpayer T's return. AUR
automatically generates a CP2000, Notice of Underreported Income, that
includes an adjustment based on the unreported
[[Page 21572]]
income and a proposed penalty under section 6662(d) that is mailed to
T. The CP2000 gives T 30 days to respond to contest the proposed
adjustments and the penalty. T submits a response to the CP2000, asking
only for more time to respond. More time is granted but no further
response is received from T, and a statutory notice of deficiency that
includes the adjustments and the penalty is automatically generated and
issued to T. The section 6662(d) penalty at issue is automatically
calculated through electronic means under paragraphs (a)(2)(ii) and
(a)(3)(vi) of this section. The penalty was proposed by the AUR
computer program, which generated a notice to T that proposed the
penalty. Although T submitted a response to the CP2000, the response
did not challenge the proposed penalty, or the amount of tax to which
the proposed penalty is attributable. Therefore, the penalty was
automatically calculated through electronic means and written
supervisory approval was not required.
(f) Applicability date. The rules of this section apply to
penalties assessed on or after [the date of publication of the Treasury
decision adopting these rules as final regulations in the Federal
Register].
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-07232 Filed 4-10-23; 8:45 am]
BILLING CODE 4830-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.