Page 2 - Written Supervisory Approval of IRS Penalties: When Must It Be Given, and Who May Give It?

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whether the supervisor timely approved not an assessment. In considering what is filed in Tax Court and that in this
the penalty in writing. According to the the statute intended, the Second Circuit case the suggestion that a 20% penalty
minority, the approval must be given examined the legislative history of IRC be added in the alternative was such an
when the supervisor has the ability to section 6751 and concluded that the “initial determination.”
approve or disapprove the penalty, so statute was meant to deter agents from
that it must be given before the Tax asserting unjustified penalties in order Ramifications
Court petition is filed. to obtain a settlement. This perceived The decisions in Chai and Graev II
abuse would not be prevented by allow- clear up some of the uncertainty with
Chai v. Comm’r ing the written approval to wait until respect to the written supervisory
The Tax Court decided Chai v. the moment before the assessment of approval rule in IRC section 6751(b).
Comm’r (TC Memo 2015-42) before the penalty, as the Tax Court held in The penalty must be approved by a
Graev II, and the taxpayer in Chai Graev II; therefore, penalty approval supervisor, in writing, before a notice
did not raise whether the question of must be obtained while the supervisor of deficiency is issued, or, if the penal-
whether IRC section 6751(b)(1) had still has discretion to give approval or ty is asserted for the first time in Tax
been satisfied until after the Tax to withhold it. According to the Second Court, before the answer or amended
Court trial. The Tax Court found that Circuit, written approval of the initial answer asserting the penalty is filed.
the taxpayer had raised the question penalty determination must be received In addition, the IRS must establish the
too late, and therefore it did not con- no later than the date the IRS issues the written supervisory approval as an ele-
sider it, because the delay was prej- notice of deficiency (or files an answer ment of its case in Tax Court. Many
udicial to the IRS. The taxpayer or amended answer in Tax Court) questions remain, however; despite the
appealed to the Second Circuit Court asserting such penalty. Tax Court’s decision in Graev III, it
of Appeals. is not clear that IRS Office of Chief
Between the Tax Court’s decision and Graev III Counsel has the authority to make an
briefing of the appeal, the Tax Court Once the Second Circuit decided “initial determination,” and have that
announced its decision in Graev II. As Chai, the Tax Court vacated its earlier determination approved, before a Tax
a result, the IRS argued that, instead of decision on section 6751(b) and Court proceeding is begun. Also, if a
the question being raised too late, decid- allowed the parties to brief and argue taxpayer receives a 30-day letter and
ing whether the IRS complied with sec- whether written supervisory approval protests the adjustments, must any
tion 6751(b)(1) was premature, as it had been timely received. In Graev v. penalty included in the adjustments be
could not be decided until the Tax Court Comm’r [149 T.C. No. 23 (December approved before the Office of Appeals
decision became final. The Second 20, 2017), Graev III], the Court decided considers the case, or may an appeals
Circuit thus had to decide when the IRS that the “initial determination” of the officer, and her manager, remedy the
was required to comply with the written 20% accuracy-related penalty had been lack of written approval? If the Office
supervisory approval requirement of IRC approved, in writing, when the super- of Appeals can remedy the absence of
section 6751(b). If written approval of vising attorney approved the IRS Office written supervisory approval, will
the penalty is required before a notice of of Chief Counsel attorney’s recommen- more taxpayers bypass the appeals
deficiency is sent to the taxpayer, Chai dation that the notice of deficiency be process and file in Tax Court?
could not be assessed the penalty, revised to include the 20% penalty. The Taxpayers, and taxpayers’ represen-
because the IRS had not established writ- taxpayer argued that the IRS Office of tatives, should be alert for situations
ten supervisory approval as part of bear- Chief Counsel attorney did not have in which a penalty has been added to
ing the burden of production on the authority to make an “initial determi- determine whether the penalty has
penalty in Tax Court. nation” of a penalty, because his role been approved in writing by the
In Chai v. Comm’r [851 F.3d 190 prior to a petition being filed in Tax agent’s supervisor, when the approval
(2nd Cir. March 20, 2017)], the Second Court is advisory only, and that his rec- was given, and who gave the approval.
Circuit Court of Appeals sided with the ommendation did not amount to an ini- It may be the quickest way to remove
taxpayer. Following the minority in tial determination. The Tax Court, over the penalty. q
Graev II, the court found that the mean- a dissent joined by six judges, decided
ing of “initial determination of [an] that IRS Office of Chief Counsel has Henry Stow Lovejoy, JD, is of coun-
assessment” was ambiguous, because the authority to make the initial deter- sel to Kostelanetz and Fink LLP, New
the IRS determines a deficiency, but mination of a penalty before a petition York, N.Y.

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