Some penalties require supervisory approval before they can be assessed by the IRS. The applicable statute, however, is vague regarding the point at which this approval must occur. This statutory ambiguity has generated conflicting decisions among the courts, which leaves taxpayers unsure about how they should be treated by the IRS and leads to unnecessary litigation that is bad for everyone. In hopes of bringing additional certainty to this area, the IRS has proposed regulations, for which public comments were open until July 10, 2023. The next step in this regulatory process will be a public hearing to be held on September 11, 2023.

TAS has encouraged the IRS and Congress to draw a clear line in the sand to clarify the issue, but our recommendation of where to draw the line is different than the IRS’s approach. The proposed regulations succeed in providing clarity, but it would be nice if they did so in a way that helps taxpayers rather than harming them.

Timing of Supervisory Approval
IRC § 6751(b)(1) generally requires that no penalty be assessed unless the initial penalty determination has been approved in writing by an applicable supervisor. Courts, however, have been all over the map when it comes to interpreting this requirement. For example, the U.S. Tax Court, in Clay v. Commissioner, held that supervisory approval for penalties subject to deficiency procedures was required prior to sending the taxpayer a formal communication that included the right to go to the IRS Independent Office of Appeals. On the other hand, the U.S. Court of Appeals for the Second Circuit held in Chai v. Commissioner that approval for these penalties could occur anytime up until issuance of the statutory notice of deficiency.

Under the proposed regulations, for pre-assessment penalties subject to Tax Court review, supervisory approval can be obtained anytime before issuance of the statutory notice of deficiency. Penalties not subject to pre-assessment Tax Court review can be approved up until the time of the assessment itself. Thus, the proposed regulations establish the broadest possible window and allow the requisite supervisory approval to occur at the latest possible moment. On the other hand, TAS has long urged the IRS to require supervisory approval before a proposed penalty is communicated in writing to a taxpayer.
Read More