A recent decision issued by the U.S. Tax Court in Graev v. Commissioner 1 could prove pivotal in cases where a practitioner has requested abatement of penalties for their client. While not yet applicable in every case for every penalty, the Court’s admonishment to the IRS that it must prove that it strictly adhered to statutory requirements for penalty assertion must be noted, and taken into consideration in all of your penalty challenges with the IRS.
Internal Revenue Code section 6751(b)(1)states: “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.” The exceptions to this provision only include penalties assessed under IRS sections 6651, 6654, or 6655, or automatically calculated through electronic means. 2 The exceptions relate primarily to late filing and late payment or federal tax deposit penalties, and estimated tax penalties, which are again, purely computational. A penalty is only considered to be “automatically calculated through electronic means” if no IRS human employee makes an independent judgment with respect to the applicability of the penalty. 3
In 1955, there were approximately 14 penalty provisions in the Internal Revenue Code. There are now more than ten times that number. 4 All options for penalty relief must be considered when requesting abatement for your client in any penalty situation.
In Graev, where the Court considered the appropriateness of accuracy related penalties under IRC §6662, it took a closer look at the requirements for imposition of the penalty, including written managerial approval, for the proposed assessment (in this deficiency case). The Court followed the Second Circuit in Chai v. Commissioner 5 which held that: “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…” and that “compliance with § 6751(b) is part of the Commissioner’s burden of production and proof in a deficiency case in which a penalty is asserted.”
Following Graev, the Tax Court in Ford v. Commissioner held: “We do not …sustain the section 6662(a) accuracy-related penalties relating to negligence for the years in issue. Respondent failed to present any evidence that the penalties were personally approved (in writing) by the immediate supervisor of the individual making such determination.” 6 The Court did not uphold the proposed accuracy related penalty against the taxpayer.
While Graev takes a winding path down the road of strict adherence to the letter of the law contained in section 6751, 7 it lays down an important framework in reviewing penalty assessments and requests for abatement. When making your request for abatement of a penalty other than a computational penalty, discussed above, a demand for the managerial approval letter should be requested in every case. The approval must be in writing.
In considering requests for penalty abatement, this requirement is similar to the first time abatement provision in Internal Revenue Manual (IRM) 220.127.116.11.3.2.1. Relief is automatic if certain requirements are met: your client has filed, or filed a valid extension for, all required returns currently due, and has paid, or arranged to pay, any tax currently due. Additionally, there is a three-year look-back period for any prior penalties. If prior penalties have been assessed within that three-year period, there is no relief under this IRM section.
This is different of course from the reasonable cause provisions in the section 20 of the IRM. Determinations in reasonable cause requests become much more discretionary, and recently have become increasingly difficult to obtain, even where circumstances closely fit the requirements. The manual provides relief in cases where “death, serious illness, or unavoidable absence” occurs involving the taxpayer or an immediate family member. 8 This would seem like a fairly straightforward analysis in most cases, but it is not since the IRM section goes on to leave much to the discretion of the reviewing IRS employee in terms of considering why the delay in filing or payment occurred, when it occurred, how the event prevented compliance, etc. All of these considerations may be viewed differently depending on the reviewing employee. If that employee recently experienced a personal loss similar to that of the requesting taxpayer, it is conceivable that employee would be more sympathetic to that taxpayer. Different considerations such as how the event impacted the taxpayer’s ability to conduct business, or earn income, also affect the outcome of penalty determinations. Again, reasonable cause analyses are not “automatic” and are reviewed differently than those relief provisions discussed above.
In any event, the discretionary aspect of “reasonable cause” makes it critical that, when you are preparing requests for penalty abatement for your client, you routinely take into consideration automatic abatement provisions. This includes first time abatement, and the recently emphasized written managerial approval requirement discussed in Graev, and followed in the Ford case.
1 149 T.C. No. 23 (Dec. 20, 2017)
2 IRC §6751(b)(2)
3 IRM 18.104.22.168.3(5)
4 IRM 22.214.171.124.1(1)
5 851 F.3d 190, 221 (2d Cir. 2017), aff'g in part, rev'g in part T.C. Memo. 2015-42.
6 Ford v. Commissioner, T.C. Memo. 2018-8, January 25, 2018
7 In Graev, the Court opines on whether a new penalty may be proposed within an already pending Tax Court deficiency case by IRS counsel, and whether the approval process in such a situation meets the requirements of section 6751. In that case, the Court determined the approval requirements were met.
8 IRM 126.96.36.199.2.2.1
Kathleen M. Lach is a Partner in the Tax and Litigation Departments of Arnstein & Lehr LLP. She represents clients before a variety of different tax authorities, including the Internal Revenue Service, the Illinois Department of Revenue, and the Illinois Department of Employment Security.