TAS RECOMMENDATION MLI #3-1: Issue regulatory guidance to clarify that the supervisory approval under IRC § 6751(b) must occur prior to the first time the IRS sends a written communication to the taxpayer proposing the penalty as an adjustment.
TAS RECOMMENDATION MLI #3-2: Update its IRM to clarify that where the IRS uses a computer program to determine the accuracy-related penalty based on negligence, an IRS employee must first contact the taxpayer and review the facts and circumstances prior to determining the applicability of the negligence penalty and the IRS must obtain supervisory approval to ensure the penalty is appropriate prior to assertion of the penalty, consistent with the Memorandum from Director, Examination Field and Campus Policy, to Area Directors, Field Examination, SBSE-04-0920-0054 (Sept. 24, 2020).
IRS RESPONSE TO RECOMMENDATION MLI #3-1 and 3-2:
Over the last few years, the IRS has focused on ensuring our processes and procedures accurately reflect when supervisory approval is necessary for all examination programs. We appreciate that the National Taxpayer Advocate (NTA) recognized our efforts, noting in her report the significant decrease from last year in court opinions where taxpayers prevailed due to an IRS failure to comply with supervisory approval requirements.
Regarding the recommendation that the IRS issue regulatory guidance to clarify that the supervisory approval under section 6751(b) must occur prior to the first time the IRS sends a written communication to the taxpayer proposing the penalty as an adjustment, the IRS agrees to implement the recommendation in part. The Department of the Treasury 2020-2021 Priority Guidance Plan issued November 17, 2020, lists proposed regulations regarding supervisory approval of proposed penalties as among the guidance projects that will be the focus of efforts of the Department of the Treasury, the IRS, and the IRS Office of Chief Counsel during the 12-month period from July 1, 2020, through June 30, 2021. The ultimate rules imposed by final regulations are not 39 predetermined. The views of many stakeholders will be considered, including public comments received on any proposed regulations.
However, the IRS disagrees with TAS’s recommendation to require, where the IRS uses a computer program to determine the accuracy-related penalty based on negligence, that employees contact the taxpayer and review the facts and circumstances prior to determining the applicability of the negligence penalty and obtain supervisory approval prior to asserting it. The IRS’s procedures for penalties assessed using a computer program are in accordance with current law and regulations and with sound tax administration. Internal Revenue Code (IRC) section 6751(b)(2) provides that managers need not approve any penalties automatically calculated (assessed without an employee independently determining the appropriateness of the penalty) through electronic means. The NTA’s report also acknowledges the 2020 decision in which the Tax Court found the IRS did not have to obtain supervisory approval because the penalty was automatically calculated through electronic means.
The IRS uses a computer program to determine the accuracy-related penalty based on negligence for the Automated Underreporter (AUR) program. AUR matches taxpayer income and deductions submitted by third parties such as banks, brokerage firms and other payers on information returns (e.g. Form 1099, Form W-2) against amounts reported on individual income tax returns. The IRS Office of Chief Counsel has advised, citing Treas. Reg. 1.6662-3(b)(1)(i), that negligence is strongly indicated where a taxpayer fails to include on an income tax return an amount of income shown on an information return. Based on this opinion, we believe the AUR program would not need to discuss any additional facts and circumstances with the taxpayer prior to determining the applicability of the negligence penalty.
Nonetheless, Internal Revenue Manual (IRM) 184.108.40.206.3, Supervisory Approval of Penalties – IRC 6751 Procedural Requirements, provides that if a taxpayer submits a response, written or otherwise, that challenges the penalty or the amount of tax to which the penalty is attributable, written supervisory approval is required before the issuance of any Statutory Notice of Deficiency that includes the penalty. This IRM section further provides: “[t]he exception for penalties automatically calculated through electronic means no longer applies once a Service employee makes an independent determination to pursue a penalty or to pursue adjustments to tax for which a penalty is attributable.”