ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – IRS PENALTIES NEED SUPERVISORY APPROVAL – OR – FORGET ABOUT IT!
By Robert S. Schriebman
Internal Revenue Code § 6751 (IRC) discusses internal IRS procedures that are necessary before a penalty assessment is valid. If these procedures are not followed, any assessed penalty is invalid! If the penalty is invalid, it does not have to be paid. § 6751 states in substance that no penalty shall be assessed unless the initial determination is personally approved, in writing, by the immediate supervisor of the individual making such determination. They are a few exceptions that are not relevant here. This law was observed and upheld in the recent US Tax Court case of Battat v. Commissioner (Dec. 61,867(M), T.C. Memo 2021-057 May 11, 2021).
This article will discuss the Battat case and show how the IRS lost a penalty assessment of over $345,000 because of a procedural error.
The Battat Case
Stanley and Zmira Battat were audited by the IRS for the year 2008. They received an assessment which included a whopping penalty of over $345,000. This was an accuracy-related penalty assessed pursuant to IRC § 6662. At the end of the audit the agent presented them with a Revenue Agent Report (RAR) and related documents requiring their signature if they agreed with the audit results. This would allow the IRS to immediately assess the tax, penalties, and interest. All of this occurred in November 2011. The Battats discovered that the agent’s immediate supervisor did not sign or otherwise approve in writing the RAR or the penalty liability stated on the RAR. Finally, in December 2011, the auditor received supervisory approval for the penalty. The failure of the supervisor to approve in writing the RAR penalty assessment was required at the time the RAR was initially sent in November.
The agent’s failure to obtain written approval violated the provisions of IRC § 6751(b)(1). This section requires approval for the “initial determination” of a penalty assessment. A signed completed RAR includes an initial determination for purposes of the code section. (Beland v. Commissioner 156 TC March 9, 2021. Oropeza v. Commisioner 155 TC October 13, 2020)
A Consequential Moment
Most actions have consequences. IRS audits and resulting proposed assessments are no exception. The preparation of an RAR, as a result of an audit, denotes a communication to a taxpayer requiring a high degree of concreteness and formality. According the Tax Court, issuing an RAR to a taxpayer denotes a “consequential moment” of IRS action. A signed, completed RAR provides the requisite formality to constitute an “initial determination” for purposes of § 6751(b)(1). All required procedures under the law must be observed in this process. If a supervisor fails to sign-off on the penalty assessment or the auditor fails to request supervisory approval, this failure constitutes a “consequential moment” in the audit process. If the procedures are not properly observed the penalty assessment is invalid.
The Tax Court ruled that because a “consequential moment” occurred when the RAR was issued without supervisory approval the Battats did not have to pay the penalty.
In my lectures to professionals as well as conducting my classes at USC, I have always stressed the importance of knowing tax procedure. Most tax practitioners are well versed in the substantive provisions of the tax code. They can prepare returns and speak at length about the latest tax act. They can discuss code provisions relating to income exclusions and deductions. But they know almost nothing about procedural matters. Many tax cases are won or lost on procedural issues. The Battat case is just the latest example.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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