ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE IRS CANNOT LEGALLY ASSESS A PENALTY WITHOUT PROPER APPROVAL BY A SUPERVISOR
By Robert S. Schriebman
Proper and timely supervisory approval is necessary before an IRS agent can legally assess an audit-related penalty. If the approval form is not 100% correct, or the IRS drags its feet on approving the penalty, the taxpayer is entitled to have that penalty totally removed. Over the past year, there have been several US Tax Court decisions where penalties have been thrown out due to clerical errors. Some might call this nitpicking or taking advantage of a legal loophole. But the rules are the rules, and the law is the law. When the IRS does not internally comply with the law, a sharp lawyer or taxpayer can save his/her client big bucks by knowing these rules and how to apply them. The recent US Tax Court Colbert decision is one more example of not taking a penalty lying down.
Gregory Bernard Colbert, II and Simone P. Colbert v. Commissioner,(US Tax Court, TC Memo, 2022-74, July 13, 2022)
The Colberts were audited by the IRS for the years 2013 and 2014. They were assessed deficiencies for both years as well as a 20% accuracy-related penalty for each year. They challenged these assessments by filing a petition in the US Tax Court. As part of the case file, the IRS had to produce proof that the 20% penalty was properly assessed and that the rules and procedures for approval by the agent’s supervisor were properly followed.
The Rules and Procedures for Issuing Penalties
The IRS must show compliance with the procedural requirements for issuing penalties set forth in IRC § 6751(b)(1). This section provides that no penalty shall be assessed unless “the initial determination” of the assessment was “personally approved in writing by the immediate supervisor of the IRS agent.” Written supervisory approval of the initial penalty determination must be obtained no later than the date the Commissioner issues the Notice of Deficiency. The Commissioner must secure supervisory approval of the penalty before issuing that Notice to the taxpayer.
The supervisor must sign and date a document entitled “Civil Penalty Approval Form.” In the Colbert case, the approval form was illegible because the date on the form was obliterated, and the Tax Court judge could not read it. Because of this flaw, the approval form was not valid. This meant that the 20% accuracy-related penalty had to be removed from the assessment. The Colberts saved a penalty of $2,656 for 2013 and $2,016 in 2014.
The Colbert case is the latest of several cases issued over the past year where penalties were thrown out either because supervisory approval was not obtained, obtained too late, or the Form was not legible. In most audit assessments no one bothers to request the Civil Penalty Approval Form. They assume that the assessment and related penalties were properly issued. Now, with the series of cases, tax professionals and the public have a new awareness. Do your homework and ask for copies of this Form. If the IRS does not dot its I’s or cross its T’s, you may be able to save big bucks.
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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