[Federal Register Volume 89, Number 246 (Monday, December 23, 2024)]
[Rules and Regulations]
[Pages 104419-104425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-29074]
[[Page 104419]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 10017]
RIN 1545-BP63
Rules for Supervisory Approval of Penalties
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
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SUMMARY: This document contains final regulations regarding supervisory
approval of certain penalties assessed by the IRS. The final
regulations are necessary to address uncertainty regarding various
aspects of supervisory approval of penalties that have arisen due to
recent judicial decisions. The final regulations affect the IRS and
persons assessed certain penalties by the IRS.
DATES:
Effective Date: These regulations are effective December 23, 2024.
Applicability Date: For date of applicability, see Sec.
301.6751(b)-1(f).
FOR FURTHER INFORMATION CONTACT: William Prater, (202) 317-6845 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document amends the Regulations on Procedure and
Administration (26 CFR part 301) by adding final regulations under
section 6751(b) of the Internal Revenue Code (Code) relating to
supervisory approval of certain penalties assessed by the IRS. Section
6751(b)(1) expressly delegates to the Secretary of the Treasury or her
delegate the authority to designate, for purposes of approving the
initial determination of a penalty assessment under the Code, a higher
level official other than the immediate supervisor of the individual
making that initial determination. In addition, section 7805(a) of the
Code authorizes the Secretary to ``prescribe all needful rules and
regulations for the enforcement of [the Code], including all rules and
regulations as may be necessary by reason of any alteration of law in
relation to internal revenue.''
Background
On April 11, 2023, a notice of proposed rulemaking (REG-121709-19)
relating to supervisory approval of certain penalties under section
6751(b) was published in the Federal Register (88 FR 21564). See the
Background and the Explanation of Provisions sections of the preamble
to REG-121709-19 for a discussion of the proposed regulations, which
are incorporated in this document to the extent not inconsistent with
the Summary of Comments and Explanation of Revisions section of this
preamble.
Eight comments responding to the notice of proposed rulemaking were
received and are available at https://www.regulations.gov or upon
request. A public hearing was held on September 11, 2023, and four
speakers provided testimony. After careful consideration of all of the
written comments and testimony, the proposed regulations are adopted by
this Treasury decision with minor modification. The public comments are
summarized and discussed in the Summary of Comments and Explanation of
Revisions.
Summary of Comments and Explanation of Revisions
Many of the comments addressed similar issues and expressed similar
points of view. The comments largely opposed the proposed timing rules
and many of the proposed definitions. Comments expressed concern that
the proposed regulations would not implement what the comments viewed
as the purpose of section 6751(b). The Treasury Department and the IRS
disagree with these comments' characterization of the text and effect
of the proposed regulations, as well as their characterization of the
statute's text and scope, its legislative history, and the caselaw
interpreting it.
As explained in the preamble to the proposed regulations, the
purpose of these rules is to clarify application of section 6751(b) in
a manner that is consistent with the statutory text and that promotes
nationwide uniformity, administrability for the IRS, and ease of
understanding by taxpayers. Several comments suggested alternative
rules that would impose extra-statutory formalities on IRS employees
that would increase the probability of appropriate penalties being
avoided if IRS employees do not satisfy those formalities. By contrast,
the adopted rules faithfully interpret the statutory text, ensure
penalties are imposed where appropriate, and guard against
inappropriate use of penalties.
1. Comments on Proposed Timing Rules
The proposed regulations included three rules regarding the timing
of supervisory approval of penalties under section 6751(b). Proposed
Sec. 301.6751(b)-1(c) provided that, for penalties that are included
in a pre-assessment notice issued to a taxpayer that provides the basis
for jurisdiction in the United States Tax Court (Tax Court) upon timely
petition, supervisory approval must be obtained at any time before the
notice is mailed by the IRS. Proposed Sec. 301.6751(b)-1(d) provided
that, for penalties raised in the Tax Court after a petition,
supervisory approval may be obtained at any time prior to the
Commissioner requesting that the court determine the penalty. Finally,
proposed Sec. 301.6751(b)-1(b) provided that supervisory approval for
penalties that are not subject to pre-assessment review in the Tax
Court may be obtained at any time prior to assessment.
Comments argued that the proposed timing rules should be rejected
in favor of earlier deadlines for supervisory approval of penalties,
which the comments asserted would more effectively prevent bargaining
by the IRS. The comments' suggested deadlines, however, lack any basis
in the statutory text, and are supported by reasoning that has been
rejected by three United States Circuit Courts of Appeals (circuit
courts). Moreover, the suggested earlier deadlines would not do
anything to prevent bargaining, as the preamble to the proposed
regulations explained. Despite the comments' stated concerns about the
existence of bargaining, no comment identified a specific example of
bargaining, and no court has ever found that an IRS employee attempted
to use a penalty as a bargaining chip.
Some comments suggested that the timing rule should require
supervisory approval before issuance of a 30-day letter \1\ (or
substantive equivalent). As support for this suggestion, one comment
stated that caselaw supported the assertion that the statute is
ambiguous regarding when approval must occur. This comment
misinterprets the existing caselaw, which has focused on an ambiguity
as to what the ``initial determination'' is that must be approved, not
on when the approval must occur. On the question of when approval must
occur, the circuit courts that have considered the issue have uniformly
held that a supervisor can approve a penalty at any point before losing
discretion over whether to approve imposition of the penalty. The
comments advocating for requiring approval before issuance of a 30-day
letter (or substantive equivalent) rest heavily on a misunderstanding
of a supervisor's authority and on policy reasons that are not in fact
served by the
[[Page 104420]]
suggested deadline. The comments also fail to address the circuit
courts' opinions that are contrary to their recommendations on this
issue.
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\1\ Typically a 30-day letter proposes penalties and gives the
taxpayer an opportunity to request an administrative appeal.
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As multiple circuit courts have explained, the statute lacks an
``express timing requirement,'' and the Tax Court's ``formal
communication'' rule has no basis in the text of the statute. Kroner v.
Commissioner, 48 F.4th 1272, 1276 (11th Cir. 2022); Laidlaw's Harley
Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1072 (9th Cir.
2022), reh'g en banc denied, No. 20-73420 (9th Cir. July 14, 2022);
Minemyer v. Commissioner, Nos. 21-9006 & 21-9007, 2023 WL 314832 (10th
Cir. January 19, 2023). As explained in the preamble to the proposed
regulations, the lack of any deadline in the statute other than
assessment indicates that the provision did not intend an earlier
deadline.
Despite this, the Tax Court has continued to apply its own
precedent in cases appealable to circuits other than the Ninth, Tenth,
and Eleventh. See Aldridge v. Commissioner, T.C. Memo. 2024-24
(appealable to the Eighth Circuit); Swift v. Commissioner, T.C. Memo.
2024-13 (appealable to the Fifth Circuit); Bachner v. Commissioner,
T.C. Memo. 2023-148; Robinson v. Commissioner, T.C. Memo. 2023-147
(appealable to the Fourth Circuit); Jadhav v. Commissioner, T.C. Memo.
2023-140; Conrad v. Commissioner, T.C. Memo. 2023-100; Braen v.
Commissioner, T.C. Memo 2023-85 (appealable to the Third Circuit). For
cases appealable to the Ninth Circuit, the Tax Court has held that it
will follow the timing rule of Laidlaw's, which the Tax Court
interpreted to require a case-by-case analysis of whether a particular
supervisor retained the discretion to approve penalties when they did
so. See Kraske v. Commissioner, 161 T.C. 104 (2023). In Kraske and
Pangelina v. Commissioner, T.C. Memo. 2024-5, the Tax Court suggested
that an IRS Examination Division (Exam) supervisor's discretion may be
lost when a case is transferred to the Independent Office of Appeals
(Appeals), but this is factually incorrect. As the Ninth Circuit
recognized in Laidlaw's, it is only ``once the notice is sent'' that
``the Commissioner begins to lose discretion over whether the penalty
is assessed.'' Laidlaw's, 29 F.4th at 1071 n.4. Even when a case is
transferred from Exam to Appeals, the Exam supervisor still has
discretion to provide the required approval because the penalty is
still before the IRS as a whole. As the preamble to the proposed
regulations noted, a supervisor's discretion is lost only after the IRS
issues a pre-assessment notice subject to Tax Court review to a
taxpayer. Because a supervisor retains discretion to approve a penalty
until that point, issuance of the pre-assessment notice subject to Tax
Court review remains the appropriate deadline for obtaining supervisory
approval of penalties included in such a notice.
The earlier deadlines that comments recommended and that the Tax
Court continues to impose do not serve the legislative purpose that
penalties be imposed where appropriate. By contrast, the proposed
timing rules serve the legislative purpose of imposing penalties where
appropriate while ensuring the requirement for supervisory approval can
prevent bargaining. The proposed timing rules are consistent with all
of the circuit-level authority interpreting the statute and provide a
bright-line rule that is administrable for the IRS and fair to
taxpayers. Accordingly, this Treasury decision adopts the proposed
timing rules without modification.
2. Comments on Proposed Definitions
A. Individual Who First Proposed the Penalty
The proposed regulations provided that the individual who first
proposes a penalty is the individual who section 6751(b)(1) references
as the individual making the initial determination of a penalty
assessment. A proposal can be made either to a taxpayer (or the
taxpayer's representative) or to the individual's supervisor or a
designated higher level official. One comment agreed with the proposed
definition of ``individual who first proposed the penalty,'' while two
others disagreed.
The proposed regulations illustrated the effect of this definition
in an example in which a Revenue Agent proposes a penalty to her
immediate supervisor, but the supervisor does not approve the penalty
and it does not appear in the statutory notice of deficiency; the
penalty is then raised by an IRS Office of Chief Counsel (Counsel)
Attorney in a Tax Court Answer and that attorney is considered the
``individual who first proposed the penalty.'' Those disagreeing with
the proposed definition argued that, in that example, it was the
Revenue Agent and not the Counsel attorney that made the initial
determination of the penalty. Such a view is at odds with the statutory
text, which references (with respect to the penalty) the ``initial
determination of . . . assessment'', and caselaw. See North Donald LA
Property, LLC v. Commissioner, T.C. Memo. 2023-50 (citing multiple
cases before concluding that ``[w]e have never held that the exam
team's decision not to assert a penalty has any bearing on Chief
Counsel's ability to assert that penalty later''). As the preamble to
the proposed regulations explained, an initial determination that does
not ultimately result in an assessment of a penalty is not an ``initial
determination of . . . assessment.'' In addition, adopting the
comments' suggested interpretation would render section 6214, which
allows Counsel to raise a penalty in an answer, amended answer, or
other pleading, meaningless because it would remove Counsel's ability
to make an independent evaluation of whether a penalty is appropriate.
By contrast, the proposed definition harmonizes the statutory
scheme and allows the IRS the flexibility to pursue penalties when
appropriate. The IRS should not be prevented from asserting a penalty
solely because an individual IRS employee involved earlier in the
process did not determine that the penalty was appropriate at the time
such employee considered it, a result that would follow from adopting
the comments' suggestions. Instead, the IRS should be permitted to
assert penalties that both a Counsel attorney and the attorney's
supervisor believe are warranted.
Comments' concerns about the proposed definition of ``individual
who first proposed the penalty'' have led the Treasury Department and
the IRS to conclude that language is needed to clarify that, for
purposes of determining which individual first proposed a penalty, the
individual must have proposed the penalty either to a taxpayer (or the
taxpayer's representative) or to the individual's supervisor or
designated higher level official. This requirement is to preclude
informal suggestions of coworkers or supervisors as being treated as
the initial determination of a penalty assessment when those
individuals had no official responsibility with respect to a penalty
determination or the responsibility was a supervisory one. This
interpretation also allows supervisors to do their job of reviewing and
directing a subordinate's work, which may include suggesting that their
subordinates propose a penalty. It also eliminates those who are not
assigned responsibility for making an initial penalty determination
from being treated as having done so by virtue of having made an
informal comment about a penalty to a coworker. An example is added to
these final regulations to illustrate the effect of the definition.
Specifically, the new example highlights that an individual
[[Page 104421]]
who did not make a proposal to a taxpayer, supervisor, or designated
higher level official is not the individual who made the initial
determination of a penalty assessment.
B. Immediate Supervisor and Designated Higher Level Officials
The proposed regulations defined the term ``immediate supervisor''
as any individual with responsibility to review another individual's
proposal of penalties without the proposal being subject to an
intermediary's approval.
Some comments argued that the proposed definition of ``immediate
supervisor'' was too vague, and that it could allow non-managerial,
non-supervisory personnel to approve penalties. Some argued that the
definition should be revised to mean any individual who ``directly
supervises the substantive work'' of an individual, while others
recommended that it be limited to a single individual that meets the
definition of a ``supervisor'' or ``manager'' under other provisions of
Federal law related to labor and employment matters.
These alternative suggestions focus on substantive work generally,
rather than penalty review specifically. Because supervisory approval
in this context relates only to penalties, this broader focus is not
appropriate. By looking to an individual's assigned job duties rather
than their title, the proposed definition takes a functional approach
that is consistent with the statutory purpose of ensuring that a person
that is familiar with the penalty aspects of a case be the one to give
approval to assert penalties. See Sand Inv. Co. v. Commissioner, 157
T.C. 136, 142 (2021) (holding that the legislative history supports the
conclusion that the person with the greatest familiarity with the facts
and legal issues presented by the case is the ``immediate supervisor''
for purposes of section 6751(b)). Moreover, unlike some of the
suggested alternatives, the proposed definition recognizes that IRS
employees often have multiple supervisors with different roles for
different parts of an examination.
After consideration of the comments, the final regulations adopt
the proposed definition with one modification. Rather than defining
``immediate supervisor'' as ``any individual with responsibility to
approve another individual's proposal of penalties,'' the adopted
definition defines it as ``any individual with responsibility to review
another individual's proposal of penalties.'' This definition
recognizes that a person assigned to review a penalty proposal has the
responsibility to make a judgment call about the appropriateness of the
penalty. Responsibility to review another's work is the hallmark of
being a supervisor. The definition adopted in the final regulations
takes a practical approach that is consistent with the statute's focus
on supervision of the penalty proposal.
Pursuant to the grant of authority in section 6751(b)(1) to
designate which higher level officials may approve the initial
determination, in addition to the general grant of authority in section
7805(a), the proposed regulations defined a ``higher level official''
as any person who has been directed via the Internal Revenue Manual or
other assigned job duties to approve another individual's proposal of
penalties before they are included in a notice that is a prerequisite
to Tax Court jurisdiction, an answer to a Tax Court petition, or are
assessed without the need for such inclusion.
Some comments disagreed with this definition, arguing that it is
too vague and should be narrowed to only a small group of upper-level
management. But these comments' suggested alternatives reject a
functional approach in favor of unnecessary formalities that could
result in appropriate penalties being eliminated. They are also
inconsistent with section 6751(b)'s provision of discretion to
designate which higher level officials may designate a penalty.
Accordingly, the final regulations adopt the proposed definition
without change.
C. Personally Approved (in Writing)
The proposed regulations define ``personally approved (in
writing)'' to mean any writing, including in electronic form, that is
made by the writer to signify the writer's assent and that reflects
that it was intended as approval.
Comments argued that the definition of ``personally approved (in
writing)'' should be revised to require that the approval, if made
electronically, be made through a digital signature that includes a
software-generated timestamp indicating when the document was signed
and who signed it. One comment also argued that, alternatively, the IRS
should require that a statement of signing accompany the request for a
supervisor's approval of a penalty.
After consideration of the comments, the proposed definition is
adopted without change. Adopting the comments' suggestions would impose
formalities that frustrate imposition of appropriate penalties. The
statute does not mandate the use of a particular type of signature,
only that the approval be in writing. While it may be a best practice
to use digital signatures with software-generated timestamps, mandating
their use would go beyond the scope of the statute and these
regulations. Nor does the statute require the immediate supervisor to
use any particular format when approving the penalty, such as with a
statement of signing. The functional approach adopted in these final
regulations ensures that written approval, which is all the statute
requires, is obtained. See PBBM-Rose Hill, Ltd. v. Commissioner, 900
F.3d 193, 213 (5th Cir. 2018) (rejecting an argument that section
6751(b)(1) was not satisfied because the penalty was not on the same
page as the signature); Deyo v. Commissioner, 296 F. App'x 157 (2d Cir.
2008) (rejecting an argument that section 6751(b)(1) was not satisfied
because the approval was provided by a stamp rather than a manual
signature); Thompson v. Commissioner, T.C. Memo. 2022-80 (rejecting the
argument that cross-examination of a revenue agent and his supervisor
was needed because it ``would be immaterial and wholly irrelevant''
where there was written approval in the record); Raifman v.
Commissioner, T.C. Memo. 2018-101 (same).
D. Automatically Calculated Through Electronic Means
The proposed regulations provide that a penalty is ``automatically
calculated through electronic means'' if it is proposed by an IRS
computer program without human involvement. A penalty is no longer
considered ``automatically calculated through electronic means'' if a
taxpayer responds to a computer-generated notice proposing a penalty
and challenges the penalty or the amount of tax to which the penalty is
attributable, and an IRS employee works the case.
Some comments argued that the proposed definition of
``automatically calculated through electronic means'' is too broad and
encompasses penalties that, in the comments' view, should never be
exempt from supervisory approval for various reasons. As explained in
the preamble to the proposed regulations, the scope of this definition
is limited to identifying when a penalty should be considered exempt
from the supervisory approval requirements of section 6751(b)(1) by
operation of section 6751(b)(2)(B). Comments sought to narrow the
proposed definition and impose additional requirements on the IRS that
are divorced from the statutory requirements. The comments were
directed to whether proposal and assessment of certain penalties should
[[Page 104422]]
ever be automated, as opposed to whether a specific penalty was in fact
``automatically calculated through electronic means'' within the
meaning of section 6751(b)(2)(B). As such, the comments go beyond the
scope of the regulations.
One comment recommended that the proposed definition be revised to
eliminate the requirement that an IRS employee consider a taxpayer's
response to an automatically-generated notice in order to remove the
penalty from the automatically-calculated exception. In this comment's
view, this requirement could lead to situations where the IRS ignores
correspondence and asserts penalties without proper consideration of
the taxpayer's response to an automatically-generated penalty notice.
The Treasury Department and the IRS are sensitive to the comment's
concerns but consider this a matter outside of the scope of these
regulations. The stated concerns are policy considerations about how
the IRS should handle correspondence. They are not within the scope of
these regulations, which seek only to interpret and define the
statutory text of section 6751(b). As stated in the preamble to the
proposed regulations, it is the policy of the IRS to give ``full and
fair consideration to evidence in favor of not imposing [a] penalty,
even after the [IRS']s initial consideration supports imposition of a
penalty . . . .'' This policy should prohibit the type of conduct with
which the comment is concerned. Finally, even if the IRS did fail to
consider a taxpayer's response to an automatically-generated penalty
notice, there would be no bargaining nor would there be an individual
who made an initial determination with respect to the penalty at issue.
Accordingly, it would be impossible for the IRS to obtain supervisory
approval from the (non-existent) individual's supervisor. As the
preamble to the proposed regulations explains, requiring supervisory
approval in that situation would disrupt the automated process and
would not square with the statutory text. For these reasons, the
proposed definition is adopted without modification.
3. Other Comments
Comments made a number of other recommendations that went beyond
the scope of the proposed regulations. These recommendations related to
the types of forms the IRS should use in documenting supervisory
approval and how those forms should be provided to taxpayers, the
internal practices the IRS should follow to ensure compliance with
section 6751(b) among its employees, and the types of employees that
should be permitted to approve certain penalties over a certain dollar
threshold. Other comments also criticized the existing penalty approval
process as ineffective and stated that pending legislation would soon
obviate the need for these regulations. Finally, one comment was
submitted that did not relate to section 6751(b).
Aside from being outside of the scope of these regulations,
adopting these recommendations would impose laborious formalities that
are not required by section 6751(b) and that would give taxpayers and
their representatives more opportunities to avoid the penalties that
Congress intended be asserted against them. The final regulations
therefore do not adopt these recommendations.
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6(b) of Executive Order 12866, as amended. Therefore, a
regulatory impact assessment is not required.
II. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these regulations will not have a significant
economic impact on a substantial number of small entities. This
certification is based on these regulations imposing no obligations on
small entities and therefore no economic impact on those entities.
Because these regulations ensure that only appropriate penalties will
apply by imposing requirements on the IRS and do not otherwise bear on
the applicability of any penalty, the final regulations do not impose a
significant economic impact on a substantial number of small entities.
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for the Office of Advocacy of the Small Business Administration
for comment on its impact on small businesses, and no comments were
received.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. This rule does not include any Federal mandate that may
result in expenditures by State, local, or Tribal governments, or by
the private sector in excess of that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These final regulations do not have
federalism implications and do not impose substantial direct compliance
costs on state and local governments or preempt State law within the
meaning of the Executive order.
V. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs has designated this
rule as not a ``major rule,'' as defined by 5 U.S.C. 804(2).
Drafting Information
The principal author of these regulations is William Prater of the
Office of the Associate Chief Counsel (Procedure and Administration).
However, other personnel from the Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
0
Paragraph 1. The authority citation for part 301 is amended by adding
an entry for Sec. 301.6751(b)-1(a)(4) in numerical order to read in
part as follows:
Authority: 26 U.S.C. 7805.
* * * * *
Section 301.6751(b)-1(a)(4) also issued under 26 U.S.C.
6751(b)(1).
* * * * *
[[Page 104423]]
0
Par. 2. Section 301.6751(b)-1 is added to read as follows:
Sec. 301.6751(b)-1 Supervisory and higher level official approval
for penalties.
(a) Approval requirement--(1) In general. Except as provided in
paragraph (a)(2) of this section, section 6751(b) of the Internal
Revenue Code (Code) generally bars the assessment of a penalty unless
the initial determination of the assessment of the penalty is
personally approved (in writing) by the immediate supervisor of the
individual making the initial determination or such higher level
official as the Secretary of the Treasury or her delegate may
designate. Paragraph (a)(2) of this section lists penalties not subject
to section 6751(b)(1) and this paragraph (a)(1). Paragraph (a)(3) of
this section provides definitions of terms used in section 6751(b) and
this section. Paragraph (a)(4) of this section designates the higher
level officials described in this paragraph (a)(1). Paragraphs (b)
through (d) of this section apply section 6751(b)(1) and this paragraph
(a)(1) to penalties not subject to pre-assessment review in the United
States Tax Court (Tax Court), penalties that are subject to pre-
assessment review in the Tax Court, and penalties raised in the Tax
Court after a petition is filed, respectively. Paragraph (e) of this
section provides examples illustrating the application of section
6751(b) and this section. Paragraph (f) of this section provides dates
of applicability of this section.
(2) Exceptions. Under section 6751(b)(2), section 6751(b)(1) and
this section do not apply to:
(i) Any penalty under section 6651, 6654, 6655, 6673, 6662(b)(9),
or 6662(b)(10) of the Code; or
(ii) Any other penalty automatically calculated through electronic
means.
(3) Definitions. For purposes of section 6751(b) and this section,
the following definitions apply--
(i) Penalty. The term penalty means any penalty, addition to tax,
or additional amount under the Code.
(ii) Individual who first proposed the penalty. Except as otherwise
provided in this paragraph (a)(3)(ii), the individual who first
proposed the penalty is the individual who section 6751(b)(1) and
paragraph (a)(1) of this section reference as the individual making the
initial determination of a penalty assessment. For purposes of this
section, a proposal of a penalty can be made only to either a taxpayer
(or the taxpayer's representative) or to the individual's supervisor or
designated higher level official. A proposal of a penalty, as defined
in paragraph (a)(3)(i) of this section, to a taxpayer does not include
mere requests for information relating to a possible penalty or
inquiries of whether a taxpayer wants to participate in a general
settlement initiative for which the taxpayer may be eligible, but does
include offering the taxpayer an opportunity to agree to a particular
penalty in a particular amount other than a penalty under a settlement
initiative offered to a class of taxpayers. An individual who first
proposed the penalty is not the individual whom section 6751(b)(1) and
paragraph (a)(1) of this section reference as the individual making the
initial determination of a penalty assessment if the assessment of the
penalty is attributable to an independent proposal made by a different
individual.
(iii) Immediate supervisor. The term immediate supervisor means any
individual with responsibility to review another individual's proposal
of penalties, as defined in paragraph (a)(3)(i) of this section,
without the proposal being subject to an intermediary's approval.
(iv) Higher level official. The term higher level official means
any person designated under paragraph (a)(4) of this section as a
higher level official authorized to approve a penalty for purposes of
section 6751(b)(1).
(v) Personally approved (in writing). The term personally approved
(in writing) means any writing, including in electronic form, made by
the writer to signify the writer's assent. No signature or particular
words are required so long as the circumstances of the writing reflect
that it was intended as approval.
(vi) Automatically calculated through electronic means. A penalty,
as defined in paragraph (a)(3)(i) of this section, is automatically
calculated through electronic means if an IRS computer program
automatically generates a notice to the taxpayer that proposes the
penalty. If a taxpayer responds in writing or otherwise to the
automatically-generated notice and challenges the proposed penalty, or
the amount of tax to which the proposed penalty is attributable, and an
IRS employee considers the response prior to assessment (or the
issuance of a notice of deficiency that includes the penalty), then the
penalty is no longer considered ``automatically calculated through
electronic means.''
(4) Higher level official. Any person who has been directed by the
Internal Revenue Manual or other assigned job duties to approve another
individual's proposal of penalties before they are included in a pre-
assessment notice prerequisite to Tax Court jurisdiction, an answer,
amended answer, or amendment to the answer to a Tax Court petition, or
are assessed without need for such inclusion, is designated as a higher
level official authorized to approve the penalty for purposes of
section 6751(b)(1).
(b) Penalties not subject to pre-assessment review in the Tax
Court. The requirements of section 6751(b)(1) and paragraph (a)(1) of
this section are satisfied for a penalty that is not subject to pre-
assessment review in the Tax Court if the immediate supervisor of the
individual who first proposed the penalty personally approves the
penalty in writing before the penalty is assessed. Alternatively, a
person designated as a higher level official as described in paragraph
(a)(4) of this section may provide the approval otherwise required by
the immediate supervisor.
(c) Penalties subject to pre-assessment review in the Tax Court.
The requirements of section 6751(b)(1) and paragraph (a)(1) of this
section are satisfied for a penalty that is included in a pre-
assessment notice that provides a basis for Tax Court jurisdiction upon
timely petition if the immediate supervisor of the individual who first
proposed the penalty personally approves the penalty in writing on or
before the date the notice is mailed. Alternatively, a person
designated as a higher level official as described in paragraph (a)(4)
of this section may provide the approval otherwise required by the
immediate supervisor. Examples of a pre-assessment notice described in
this paragraph (c) include a statutory notice of deficiency under
section 6212 of the Code, a notice of final partnership administrative
adjustment under former section 6223 of the Code, and a notice of final
partnership adjustment under section 6231 of the Code.
(d) Penalties raised in the Tax Court after a petition. The
requirements of section 6751(b)(1) and paragraph (a)(1) of this section
are satisfied for a penalty that the Commissioner raises in the Tax
Court after a petition (see section 6214(a) of the Code) if the
immediate supervisor of the individual who first proposed the penalty
personally approves the penalty in writing no later than the date on
which the Commissioner requests that the court determine the penalty.
Alternatively, a person designated as a higher level official as
described in paragraph (a)(4) of this section may provide the approval
otherwise required by the immediate supervisor.
(e) Examples. The following examples illustrate the rules of this
section.
(1) Example 1. In the course of an audit regarding a penalty not
subject to pre-assessment review in the Tax Court,
[[Page 104424]]
Revenue Agent A concludes that Taxpayer T should be subject to the
penalty under section 6707A of the Code for failure to disclose a
reportable transaction. Revenue Agent A sends T a letter giving T the
option to agree to the penalty; submit additional information to A
about why the penalty should not apply; or request within 30 days that
the matter be sent to the Independent Office of Appeals (Appeals) for
consideration. After T requests that Appeals consider the case, A
prepares the file for transmission, and B (who is A's immediate
supervisor, as defined in paragraph (a)(3)(iii) of this section) signs
a cover memorandum informing Appeals of the proposed penalty and asks
Appeals to consider it. The Appeals Officer upholds the penalty, and it
is assessed. The requirements of section 6751(b)(1) are satisfied
because B's signature on the cover memorandum is B's personal written
assent to the penalty proposed by A and was given before the penalty
was assessed.
(2) Example 2. In the course of an audit, Revenue Agent A concludes
that Taxpayer T should be subject to an accuracy-related penalty for
substantial understatement of income tax under section 6662(b)(2).
Revenue Agent A sends T a Letter 915, Examination Report Transmittal,
along with an examination report that includes the penalty. The Letter
915 gives T the option to agree to the examination report; provide
additional information to be considered; discuss the report with A or B
(who is A's immediate supervisor, as defined in paragraph (a)(3)(iii)
of this section); or request a conference with an Appeals Officer. T
agrees to assessment of the penalty and signs the examination report to
consent to the immediate assessment and collection of the amounts shown
on the report. B provides written supervisory approval of the penalty
after T signs the examination report, but before the penalty is
assessed. Paragraph (b) of this section applies because T's agreement
to assessment of the penalty excepts it from pre-assessment review in
the Tax Court. Because B provided written supervisory approval before
assessment of the penalty, the requirements of section 6751(b)(1) are
satisfied.
(3) Example 3. In the course of an audit of Taxpayer T by a team of
revenue agents, Revenue Agent A concludes that T should be subject to
an accuracy-related penalty for negligence under section 6662(b)(1) and
(c). Supervisor B is the issue manager and is assigned the duty to
review the Notice of Proposed Adjustment for any penalty A would
propose. Revenue Agent A reports to B, but B is not responsible for the
overall management of the audit of T. C is the case manager of the team
auditing T and is responsible for the overall management of the audit
of T. C may assign tasks to A and other team members, and has
responsibility for approving any examination report presented to T.
(i) Alternative Outcome 1: Only B approves the penalty in writing
before the mailing to T of a notice of deficiency that includes the
penalty. Under paragraph (a)(3)(iii) of this section, B qualifies as
the immediate supervisor of A with respect to A's penalty proposal, and
the requirements of section 6751(b)(1) are met.
(ii) Alternative Outcome 2: Only C approves the penalty in writing
before the mailing to T of a notice of deficiency that includes the
penalty. Because C has responsibility to approve A's proposal of the
penalty as part of approving the examination report, C qualifies as a
higher level official designated under paragraph (a)(4) of this section
to approve the penalty proposed by A, and the requirements of section
6751(b)(1) are met.
(4) Example 4. In the course of an audit, Revenue Agent A concludes
that Taxpayer T should be subject to a penalty for negligence under
section 6662(c). Revenue Agent A recommends the penalty to her
immediate supervisor B, who thinks more factual development is needed
to support the penalty but must close the audit immediately due to the
limitations period on assessment expiring soon. The IRS issues a
statutory notice of deficiency without the penalty and T files a
petition in the Tax Court. In reviewing the case file and conducting
discovery, IRS Chief Counsel Attorney C concludes that the facts
support imposing a negligence penalty under section 6662(c). Attorney C
proposes to her immediate supervisor, D, that the penalty should apply
and should be raised in an Answer pursuant to section 6214(a). D agrees
and signs the Answer that includes the penalty before it is filed. The
section 6662(c) penalty at issue is subject to pre-assessment review in
the Tax Court and was raised in the Tax Court after a petition was
filed under paragraph (d) of this section. Therefore, written
supervisory approval under paragraph (d) of this section was required
prior to filing the written pleading that includes the penalty.
Attorney C is the individual who first proposed the penalty for
purposes of section 6751(b)(1) and paragraphs (d) and (a)(3)(ii) of
this section, and she secured timely written supervisory approval from
D, the immediate supervisor, as defined in paragraph (a)(3)(iii) of
this section. As a result, the requirements of section 6751(b)(1) are
met. Revenue Agent A did not make the initial determination of the
penalty assessment because any assessment would not be attributable to
A's proposal but would be based on the independent proposal of Attorney
C raised pursuant to section 6214(a).
(5) Example 5. In the course of an audit, Revenue Agent A concludes
that Taxpayer T should be subject to a penalty for negligence under
section 6662(c). Revenue Agent A includes the penalty in a draft report
that she sends for review to her immediate supervisor B. B reviews A's
recommendation and notices that A did not consider whether a penalty
for a substantial understatement of income tax under section 6662(d)
should apply in the alternative. B sends an email to A telling her to
``add a section 6662(d) penalty if the math checks out.'' Revenue Agent
A reviews the facts, determines that the imposition of the section
6662(d) penalty is warranted, and adds the penalty to a report she
issues to the taxpayer. Revenue Agent A is the individual who first
proposed both of the penalties for purposes of section 6751(b)(1) and
paragraphs (d) and (a)(3)(ii) of this section because she is the
individual who first proposed the penalty to the taxpayer. Supervisor B
did not make the initial determination of the section 6662(d) penalty
because, even though she first thought of and suggested it, she did not
propose it to the taxpayer or her supervisor (or designated higher
level official).
(6) Example 6. The IRS's Automated Underreporter (AUR) computer
program detects a discrepancy between the information received from a
third party and the information contained on Taxpayer T's return. AUR
automatically generates a CP2000, Notice of Underreported Income, that
includes an adjustment based on the unreported income and a proposed
penalty under section 6662(d) that is mailed to T. The CP2000 gives T
30 days to respond to contest the proposed adjustments and the penalty.
T submits a response to the CP2000, asking only for more time to
respond. More time is granted but no further response is received from
T, and a statutory notice of deficiency that includes the adjustments
and the penalty is automatically generated and issued to T. The section
6662(d) penalty at issue is automatically calculated through electronic
means under paragraphs (a)(2)(ii) and (a)(3)(vi) of this section. The
penalty was proposed by the AUR computer program, which generated a
notice to T that proposed the penalty. Although T submitted a response
to the CP2000, the response
[[Page 104425]]
did not challenge the proposed penalty, or the amount of tax to which
the proposed penalty is attributable. Therefore, the penalty was
automatically calculated through electronic means and written
supervisory approval was not required.
(f) Applicability date. The rules of this section apply to
penalties assessed on or after December 23, 2024.
Douglas W. O'Donnell,
Deputy Commissioner.
Approved: December 2, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-29074 Filed 12-20-24; 4:15 pm]
BILLING CODE 4830-01-P