ABA Makes Supervisory Penalty Approval Recommendations

The American Bar Association offered the Internal Revenue Service a series of suggestions in response to a proposed regulation regarding supervisory approval of certain penalties.

In a July 7, 2023, letter to the agency, ABA noted that there has been “significant litigation regarding when the Service must obtain supervisoryapproval as well as who must approve the penalty and the form of that approval“ under Code Sec. 6751(b).

The organization stated that the proposed regulations, which were published April 11, 2023, in the Federal Register, “provide specific timing rules for supervisoryapproval of (1) penalties subject to pre-assessment review in the Tax Court, (2) penalties raised for the first time in the Tax Court after a petition is files, and (3) penalties not subject to pre-assessment review in the Tax court. The Proposed Regulations further define key terms, including ‘immediate supervisor’ and ‘higher-level official,’ and clarify the exemption to the approval requirement for penalties ‘automatically calculated through electronic means,” in addition to other provisions.

ABA offered the IRS nine recommendations related to the proposed regulations, including:

Penalty approval should be required before the Service issues its 30-day letter, or substantive equivalent, regardless of whether the penalty is subject to pre-assessment Tax Court review;
A revision to “immediate supervisor” to mean any individual who directly supervises the substantive work of the individual who first proposed the penalty;
A revision of “higher level official” to specify that the “assigned job duties” that include penalty approval must be in writing;
A revision of “personally approved (in writing)” to require the approve, if made electronically, by through a digital signature that includes a software-generated timestamp indicating precisely when and who signed the document; and
A penalty should not be treated as “automatically calculated through electronic means” if an applicable penalty statute includes a defense that must be determined on a case-by-case basis except where Code Sec. 6751(b) expressly provides otherwise.