The tax community is currently embroiled in a heated debate over proposed IRS guidelines concerning timing provisions, the broad scope of individuals eligible to approve penalties and exemptions related to automated penalty calculations.

At the heart of the controversy lies Section 6751(b), which mandates that the immediate supervisor of a revenue agent must personally provide written approval for the initial determination of a penalty. This statute has gained significant prominence in the realm of tax practice and procedure due to differing interpretations within the court system.

The proposed IRS regulations also introduce three key rules regarding the timing of supervisory approval for penalties, sparking a wave of objections from stakeholders. These rules aim to provide clarity on when supervisory approval is required for various penalty situations.

TaxNotes covered the topic in an article on September 1, 2023 where Gray Reed Partner Joshua Smeltzer was one of the experts interviewed.  Board Certified in Tax Law by the Texas Board of Legal Specialization, Joshua uses his experience as a former litigator for the U.S. Department of Justice to defend clients in tax audits, tax appeals, and litigation in Federal District Court, U.S. Tax Court, the U.S. Court of Federal Claims, and tax issues in U.S. Bankruptcy Court.

The TaxNotes Excerpt:

Joshua Smeltzer, who represented the Tax Section of the State Bar of Texas, suggested that the IRS reconsider the supervisory approval for both deficiency procedures and that the assessable penalties should be made before issuance of the 30-day letter or its equivalent.

“The taxpayer deserves to know that at that point in the process, the penalties have not only been considered by the revenue agent but also by a supervisor above him so that he can have faith that it’s been given its due course of vetting and consideration,” Smeltzer said.

Under the proposed rules, an immediate supervisor is defined as “any individual with responsibility to approve another individual’s proposal of penalties without the proposal being subject to an intermediary’s approval.” The regs also state that a higher-level official is authorized to approve penalty determinations if they have been directed by the Internal Revenue Manual or other assigned job duties to approve another individual’s proposal of penalties.

Several attendees expressed dissatisfaction with the definitions, finding them vague and arguing that the definition doesn’t prevent non-managerial, non-supervisory personnel from being included as capable of providing approval.

The proposed rule “could allow the IRS to centralize the approval process into a few individuals who would not have the necessary knowledge of the specific facts and circumstances of each case, which would require the fairness that is required,” Smeltzer warned.

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