As tax attorneys in Columbus, Ohio, we assist many individuals and businesses with U.S. tax reporting requirements, tax examinations, tax audits, appeals, and litigation relating to civil tax matters at the federal, state, and local levels. Further, the tax attorneys at Nardone Limited routinely advise taxpayers about penalty assessments and penalty abatements as part of our tax controversy work. As an example, we assist taxpayers with filing penalty abatement requests at the administrative level with the appropriate taxing authority, including the IRS and then any necessary appeals. Below is a discussion on the supervisor approval requirement when the IRS assesses penalties. Taxpayers may be able to request an abatement of certain penalties if the IRS has not followed the proper procedures, including obtaining written supervisor approval.
Written Approval Required
Generally, the IRS may not assess a penalty against a taxpayer unless the penalty has been approved in writing by the immediate supervisor of the individual making the initial assessment. See Internal Revenue Code (“IRC”) § 6751(b)(1). In fact, written supervisor approval must be completed before the IRS issues a Notice of Deficiency. If the taxpayer, in good faith, has an argument that the IRS did not follow the proper procedure when assessing penalties, then the taxpayer may be able to request an abatement of those penalties. When taxpayers are requesting an abatement of penalties requiring supervisor approval, the burden is on the IRS to prove that the IRS followed the proper procedure and received written approval by a supervisor before assessing the penalty against a taxpayer, provided there is not an exception to the requirement for written supervisor approval. See IRC § 7491.
Exceptions to Written Approval Requirement
There are two exceptions to the written supervisor approval requirement. See IRC § 6751(b)(2). The first exception to the written supervisor approval requirement is penalties assessed: (i) for failure to file or failure to pay under IRC § 6651; (ii) for failure by an individual to pay estimated income tax under IRC § 6654; and (iii) for failure by a corporation to pay estimated income tax under IRC § 6655. That is, these penalties do not require written approval by a supervisor.
The second exception is for penalties that are calculated electronically, as long as the penalty is free from any independent determination by an IRS employee. Some penalties are assessed using an automated system, called the Automated Underreporter Program. The Automated Underreporter Program compares a taxpayer’s return with third-party returns and sends the taxpayer a letter if there is a proposed deficiency. The taxpayer then has the opportunity to respond. If the taxpayer responds to the IRS’ letter, written approval by an IRS supervisor is necessary before a penalty can be assessed. If the taxpayer does not respond, the penalty is considered automatically calculated and may be assessed without written supervisor approval. See IRM 18.104.22.168.3.2. Accuracy-related penalties for negligent and substantial understatement under IRC § 6662 are assessed under this program, and therefore only require supervisor approval if the taxpayer responds to the pre-notification letter. See IRM 22.214.171.124.3.2. But, as technology advances, the IRS will likely calculate more penalties automatically through electronic means, widening the electronically calculated exception to the written supervisor approval rule. As an example, penalties for frivolous filings are now calculated through an automated electronic system and therefore do not need written supervisor approval unless the taxpayer responds to the IRS letter. See Deyo v. U.S, 296 F. App’x. 157, 2008 WL 4601890.
Obtaining Information from IRS
If the IRS assesses a penalty that requires supervisor approval, the document that contains the supervisor’s written approval is kept with the taxpayer’s file. The IRS is not required to provide a copy of the written approval to the taxpayer, though it may do so as a courtesy if requested by the taxpayer. See IRC § 6751. Documentation of the supervisor’s written approval may be obtained by the taxpayer through a Freedom of Information Act request (FOIA). See IRM 126.96.36.199.3. These records are important for the taxpayer for purposes of a penalty abatement request. Without obtaining a record of the written approval, the IRS could potentially make an argument that the taxpayer’s abatement request is frivolous. Again, keeping accurate and adequate records is essential to successfully defend against an IRS examination, appeal, or ultimately, litigation. The Tax Court has not generally been treating the taxpayer’s argument that the IRS failed to obtain written supervisor approval as frivolous. But, the Tax Court does consider the argument that the IRS failed to follow proper procedure to be frivolous if the taxpayer does not have evidence that the IRS did not obtain written supervisor approval.
Ultimately, if the IRS has assessed a penalty against you or your business, the attorneys at Nardone Limited can work with you to determine whether or not you have a good faith argument for a penalty abatement request due to the IRS’ failure to follow proper procedure and obtain written supervisor approval.
Contact Nardone Limited
Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including penalty abatement requests. If you or your business have been contacted by the IRS, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine what options and alternatives are available to you.