IRS Finalizes Regulations on Supervisory Approval of Penalties
- Posted by admin
- On January 10, 2025
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Key Highlights
The IRS has finalized regulations (TD 10017) under IRC Section 6751(b), clarifying the timing and authority required for supervisory approval of penalties. The final regulations, effective from December 23, 2024, largely adopt the proposed rules issued in April 2023 with minor clarifications.
Key takeaways include:
- The final regulations confirm the IRS’s authority to obtain supervisory approval of penalties at various stages before a penalty assessment is finalized.
- Definitions of key terms like “immediate supervisor,” “higher-level official,” and “personally approved (in writing)” have been refined to ensure clarity.
- The regulations uphold the “bright line rule” for timing, specifying that supervisory approval must be obtained before issuing a statutory notice of deficiency for pre-assessment penalties.
- Exceptions for penalties calculated through “electronic means” remain unchanged from the proposed rules.
Notable Provisions
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Timing Rules for Approval
- For penalties included in a statutory notice of deficiency, supervisory approval must be obtained before the notice is issued.
- For penalties raised in Tax Court proceedings, supervisory approval must be obtained before the IRS requests the court to determine the penalty.
- For penalties not subject to pre-assessment review by the Tax Court, approval must be obtained before the penalty is assessed.
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Definitions
- Individuals who first proposed the penalty: The regulations clarify that the proposal must be made to the taxpayer or a supervisor and not be a mere inquiry.
- Immediate supervisor: Defined as the person responsible for reviewing penalty proposals without intermediary approval.
- Higher-level official: Includes any authorized IRS employee who can approve penalties based on the Internal Revenue Manual or job duties.
- Personally approved (in writing): Defined broadly to include any form of written approval, including electronic formats.
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Exceptions
- The supervisory approval requirement does not apply to penalties under IRC Sections 6651, 6654, 6655, 6662(b)(9), 6662(b)(10), or 6673.
- Penalties calculated through “electronic means” by an IRS computer program without human involvement are also exempt unless a taxpayer challenges the penalty.
Why This Matters
The final regulations aim to promote consistency and ease of administration for the IRS while ensuring that penalties are imposed appropriately. However, the rules may continue to face challenges from taxpayers due to differing interpretations of the statutory language under IRC Section 6751(b)(1).
The IRS’s adoption of a timing “bright line rule” may invite ongoing legal challenges regarding the validity of penalty approvals. A notable example is the Eleventh Circuit’s decision in Kroner v. Commissioner, which ruled that supervisory approval must be obtained before a penalty is assessed, but not necessarily before it is communicated to the taxpayer. This decision highlights the ongoing judicial debate over the exact timing requirements under IRC Section 6751(b)(1), and it underscores the potential for further disputes over how penalties are approved and imposed by the IRS.
Practical Implications and Next Steps
The final regulations bring essential clarity to the supervisory approval process for penalties, yet the possibility of ongoing legal disputes remains. Taxpayers should prioritize compliance reviews and maintain comprehensive documentation to mitigate risks as the IRS seeks to standardize its penalty practices. Staying informed about evolving interpretations of IRC Section 6751(b)(1) and consulting with tax advisors can help taxpayers address potential challenges effectively.
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