The IRS and Fraud Penalties: Recent Case Addresses the Approval Requirement
Minemyer v. Comm’r, T.C. Memo. 2020-99 | July 1, 2020 | Kerrigan, K. | Dkt. No. 22182-10
Short Summary: Petitioner contested the IRS’ imposition of the fraud penalty under IRC §6663(a) for his 2001 personal income taxes. The Tax Court held that the IRS had not met its burden of production for the determination of the IRC §6663(a) fraud penalty, and therefore the Petitioner was not liable for the fraud penalty for 2001.
Key Issue: Whether the IRS had met its burden of production for the determination of the IRC §663(a) fraud penalty.
- The initial determination of the IRC §663(a) fraud penalty must be approved in writing by the immediate supervisor of the individual making the determination before the penalty determination is communicated to the taxpayer.
Key Points of Law:
- IRC §6751(b)(1) states that “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 Tax Court has interpreted IRC §6751(b)(1) to require approval before the penalty determination is communicated to the taxpayer. See Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152 T.C. 75, 84, 89 (2019).
- The initial determination of the penalty occurs no later than when those proposed adjustments are communicated to the taxpayer formally as part of a communication that advises the taxpayer that penalties will be proposed and giving the taxpayer the right to appeal with Appeals. See Clay v. Commissioner, 152 T.C. 223, 249 (2019). The initial determination of the penalty assessment is embodied in the document by which the Examination Division formally notifies the taxpayer in writing, that it has completed its work and made an unequivocal decision to assert penalties. See Belair Woods, LLC Commissioner, 154 T.C. 333, 333 (slip op. at 24-25)(Jan. 6, 2020).
- The IRS has the burden of production under IRC §7491(c) with respect to IRC §6663 fraud penalty includes introducing sufficient evidence to establish compliance with the supervisory approval requirement of IRC §6751(b)(1).
- The Tax Court has held that the IRS’ introduction of evidence of written approval of a penalty before a formal communication of the penalty to the taxpayer is sufficient to carry its initial burden of production under IRC §7491(c) to show that it complied with the procedural requirement of IRC §6751(b)(1). See Frost v. Commissioner, 154 T.C. 333, 333 (slip op. at 21-22)(Jan. 7, 2020).
Insight: The Hewitt case illustrates the need of a taxpayer or his or her representative to investigate and determine if the IRS has followed its procedural requirements under IRC §6751(b)(1) when it imposes the fraud penalty. There is the possibility that the IRS has not, and the penalty can be removed.
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