The Tax Court has determined that written supervisory approval for the accuracy-related penalties at issue was timely. The tax compliance officer’s supervisor approved the penalties before the petitioner’s case was transferred to Appeals. (Kraske, (2023) 161 TC No. 7)
Written supervisory approval for penalties. Under the Code, the IRS can’t assess a penalty against a taxpayer unless the “initial determination” to impose the penalty is personally approved (in writing) by the immediate supervisor of the individual making the initial determination to assess the penalty. In addition, the IRS has the burden of showing that an individual taxpayer is liable for a penalty and, as part of that burden, the IRS must show compliance with the written penalty approval requirements in the Code.
Facts. The IRS audited two years of Mr. Kraske’s income tax returns. In June 2014, the IRS issued a 15-day letter to Kraske proposing deficiencies and penalties for both years.
The 15-day letter told Kraske that he could request a conference with the IRS Office of Appeals if he disagreed with any of the examiner’s adjustments. To request a conference Kraske had to supply the examiner with a list of disagreed adjustments within 15 days. Upon the examiner’s receipt of the disagreed items list, the 15-day letter continued, his case would be sent to Appeals.
About a month later, Kraske sent a letter to the examiner requesting Appeals consideration. Before the examiner received the letter, their immediate supervisor gave written approval for the assessment of penalties for both years under examination. After Kraske couldn’t reach an agreement with Appeals to settle his case, the IRS sent him a notice of deficiency determining his liability for taxes and penalties for both years.
Penalty approval was timely. The Tax Court held that the penalties assessed in the notice of deficiency were properly approved, in writing, by the examiner’s supervisor. The supervisor gave her approval before the examiner received the taxpayer’s letter asking for an Appeals conference while she still had the discretion to approve or reject those penalties.
The Tax Court relied on Laidlaw’s Harley Davidson Sales, Inc., (CA9 2022) 129 AFTR 2d ¶2022-517, which it said is “squarely on point” with this case’s facts.
In Laidlaw’s, the Ninth Circuit reversed a Tax Court’s decision that rejected the IRS’ assessment of a reportable transaction penalty because the supervisor’s approval came after the IRS formally communicated the proposed penalties to the taxpayer.
Note. The Tax Court has generally held that supervisory penalty approval must be obtained no later than (1) the date on which the IRS issues the deficiency notice, or (2) the date, if earlier, on which the IRS formally communicates to the taxpayer its decision to assert a penalty. In this case it adopts a fuzzier deadline that depends on when the supervisor loses their discretion to approve/disapprove penalties.
The Ninth Circuit noted that the Code doesn’t have an express requirement for written approval of penalties to be obtained at any specific time before assessment. And, while an earlier deadline for obtaining approval (i.e., before issuing a notice of deficiency) might apply to penalties subject to the deficiency procedures, the reportable transaction penalties were not subject to the deficiency procedures.
Note. The Ninth Circuit reasoned that, in the case of penalties subject to deficiency procedures, a deadline earlier than just before assessment might be required because a supervisor begins to lose discretion over penalty approval once a notice of deficiency is sent to the taxpayer.
For more information about the requirement to obtain supervisory approval to assess penalties, see Checkpoint’s Federal Tax Coordinator ¶ V-1601.1.
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