An Overview of IRS Penalty Relief Sec. 6751(b)(1)
As stated in IRS Restructuring and Reform Act of 1998, P.L. 105-206 Sec. 6751(b)(1), taxpayers can dissolve penalties by submitting an “initial determination” or a written supervisory assessment approval.
Such penalties include accuracy, negligence, and fraud. The relief can be applied to the following exams: field, correspondence, and CP-2000 notices.
A Brief History
Since 2017, there have been numerous cases where penalty relief and abatement requests were readily available for taxpayers.
The leading case was Chai v. Commissioner, 851 F.3d 190, when the Second Circuit reviewed the Tax Court’s decision to reject the reduction of an accuracy-related penalty.
In return, the taxpayer argued that the IRS did not declare a supervisor to approve the penalty per Sec. 6751(b)(1).
The Second Circuit applied Sec. 7491(c), another provision that states “”the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty.”
The argument made was that the documentation of supervisory approval fell on the IRS’s burden of proof for penalties and the timeframe to obtain approval should occur at the very least when IRS issues the notice of deficiency.
In Graev, 149 T.C. 485 (2017), the ruling was reversed. The IRS was required to provide proof of written supervisory approval of penalties before their initial determination of penalties.
Two years later, in Clay, 152 T.C. No. 13 (2019), the Tax Court ruled the initial determination of penalties occurred before the notice of deficiency was declared, and taxpayers were allowed to appeal the decision. When the IRS was unable to provide approval records, the penalties were removed.
Since the beginning of 2020, the Tax Court has ruled that when “initial determinations” are being made, verbal discussions are disallowed, and a written supervisory assessment approval is not required until “the first formal communication to the taxpayers that the commissioner has determined a penalty.”
Such historical cases and others have led to help update procedure changes in the Internal Revenue Manual Section 184.108.40.206.2. Now, supervisory approval is required when a notice of deficiency or Final Partnership Administrative Adjustment (FPAA) is sent out.
Taxpayers who wish to request abatement for cases in prior years may file a Freedom of Information Act. The IRS audit file should include the IRS’s supervisor’s written approval for the penalty for each client.
If it is not included, taxpayers should file Form 843, Claim for Refund and Request for Abatement within two years when the tax was paid or three years when the return was filed.