Section 6700 Penalties – Issues and Unique Procedural Hurdles

Under Section 6700 of the Internal Revenue Code, the IRS can assess penalties for promoting an “abusive tax shelter.”  The general application of the penalty (as well as discussion of a relevant Chief Counsel Advice memorandum) was discussed in a previous Freeman Law blog: https://freemanlaw.com/section-6700-penalties-false-or-fraudulent-statements/.

However, aside from the substantive question of whether a section 6700 penalty is appropriate, there are a number of procedural hurdles and traps for the unwary in the assessment (and challenge) of section 6700 penalties.

Administrative Process

Once the IRS commences its administrative process to assess section 6700 penalties, it will generally offer the taxpayer an opportunity to rebut the evidence in the government’s possession.  This can be an excellent opportunity to see what evidence the government is relying on.  Of note, the government has the burden of proof for penalties under section 6700, 6701, and 6702.  IRC § 6703(a).

Assessment

At the conclusion of the administrative process, the IRS may make an assessment of the section 6700 penalties.  Because traditional “deficiency procedures” (i.e., a statutory notice of deficiency and a right to petition the Tax Court) do not apply (see IRC § 6703(b)), the IRS can directly assess the penalty at the conclusion of its administrative review.

However, do not try to “wait out” the time to make the assessment.  The government contends that, because these penalties are meant to combat fraud, there is no statute of limitations (in the Internal Revenue Code, or otherwise) on its ability to make section 6700 penalty assessments.  See e.g., Sage v. United States, 908 F.2d 18 (5^th Cir. 1990) (court finds no statute of limitations on section 6700 penalties); Mullikin v. United States, 952 F.2d 920 (6^th Cir. 1991) (court finding no statute of limitations on section 6701 penalties).

Special Procedural Challenge After Assessment

IRC § 6703(c) provides a special procedure to challenge a section 6700 assessment.  Notably, the statute provides that the taxpayer can halt levy or proceedings in court for the collection of the penalty if the taxpayer (1) pays 15% of the amount of the penalty, and (2) files a claim for refund with the IRS.  IRC § 6703(c)(1).  Both of these actions must occur within 30 days of the IRS issuing a notice and demand letter.  Id.

However, if the IRS denies the refund claim (either by explicitly denying the claim through a letter, or if six months expire without IRS action), the taxpayer has thirty (30) days to bring a suit in federal district court to determine the liability of the penalty.  IRC § 6703(c)(2).

Failure to bring suit within this thirty-day period (after denial of the claim) has been found to deprive the federal district court of jurisdiction to hear the suit.  Dalton v. United States, 800 F.2d 1316 (4^th Cir. 1986); Humphrey v. United States, 854 F. Supp.2d 1301 (2011).  However, these cases (finding a lack of jurisdiction) should likely be revisited in light of cases like Boechler, P.C. v. Comm’r, 596 U.S. 199, 203-04 (2022) and Hoogerheide v. I.R.S., 637 F.3d 634 (6^th Cir. 2011), which caution courts not to read a requirement or procedural step as “jurisdictional” unless required to do so.