A hearing is scheduled for September 11, 2023 for interested persons and organizations to provide testimony on proposed regulations on the timing and approval process for penalties. Section 6751(b) provides that:

No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate. 

The timing of when the approval is required by Section 6751(b) has been the subject of significant litigation. The Second Circuit in Chai v. Commissioner concluded that Congress enacted section 6751(b) to “prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.” This has caused a lot of litigation in both the Tax Court and U.S. District Courts such that there are currently two different standards on timing of when such supervisory approval is required. If supervisory approval is to meet the goal of not being used as an unfair “bargaining chip” it must be required before such unwanted behavior can occur. Many groups have submitted comments asking for supervisory approval to be done earlier in the examination process than the proposed regulations require and that approval be done by a direct supervisor and not just anyone with penalty approval rights within the IRS.Continue Reading IRS Sanctioned for Bad Faith on Supervisory Approval of Penalties While Proposed Regulations on the Same Issue are Pending

Deadlines are important, particularly in federal tax law.  Many taxpayers are aware, for example, of the significant penalties that the IRS may impose upon them for failure to timely file an income tax return or timely pay all taxes owed.  But fewer taxpayers have an understanding or appreciation for the deadline rules associated with filing a timely petition with the United States Tax Court. Continue Reading Federal Courts Mixed on Whether the 90-Day Tax Court Petition Deadline Under Section 6213 is Jurisdictional

Many people, myself included, can sometimes be accused of poor penmanship. As our paperwork becomes more and more electronic, we write less and less down with pen and paper. However, a recent decision from the tax court may be sending more supervisors at the IRS to penmanship classes.  The taxpayers, Gregory and Simone Colbert, were assessed income tax deficiencies and associated accuracy related penalties. The Colberts admitted the deficiencies but disputed the interest and penalties.
Continue Reading IRS Penalty Denied Because of Poor Penmanship

On June 21, 2022, the United States Supreme Court agreed to hear a dispute involving split decisions among the circuit courts on non-willful penalties. The Fifth Circuit parted ways with the taxpayer friendly decision of the Ninth Circuit that non-willful penalties are capped at $10,000 per FBAR filing instead of the $10,000 per unreported bank account argued by the government. District courts in New Jersey, Connecticut, California, and Texas had all ruled in the taxpayer’s favor that non-willful penalties were capped at $10,000 per form as well.  The case headed to the Supreme Court is United States v. Bittner, where a taxpayer friendly decision from the District Court reduced the $2.7 million penalty to $50,000 based on a $10,000 per form cap on non-willful FBAR penalties.  The Fifth Circuit reversed the favorable district court decision and held that the “$10,000 penalty cap therefore applies on a per-account, not a per-form basis.”
Continue Reading Supreme Court Will Hear Non-Willful FBAR Penalty Dispute

In some federal tax disputes, if at first you don’t succeed you may not get to try again. A recent Fifth Circuit decision confirms issue preclusion when the parties and the issue are truly the same. See ETC Sunoco Holdings, LLC v. United States, No. 21-10937 (5th Cir. June 8, 2022). Sunoco sought a refund in the Court of Federal Claims for tax years 2005 through 2008, arguing that they should be permitted a deduction of their costs of goods sold as an excise tax expense even though it did not technically reduce the company’s excise-tax liability. The Court of Federal Claims disagreed. See Sunoco, Inc. v. United States, 908 F.3d 710, 715 (Fed. Cir. 2018). Sunoco then sued again, five years later, for alleged overpayments from tax years 2010 and 2011 but filed suit in the Northern District of Texas instead. Jurisdiction in tax disputes can often be brought in the Federal District Court with local jurisdiction or the Court of Federal Claims that has national jurisdiction. Therefore, jurisdictionally, this was proper.  However, District Courts can choose not to hear the case if they conclude that the doctrine of issue preclusion applies.
Continue Reading Fifth Circuit Says No Do-Overs in Oil and Gas Tax Dispute

Properly navigating the IRS labyrinth of rules and regulations is difficult and sometimes taxpayers fail to dot every “i” and cross every “t”. The results can sometimes be devastating for both individuals and small businesses. Especially if the IRS chooses to assess penalties for the unknown failures and then pay those penalties from other funds the taxpayer submits through its offset power. The recent case of Special Touch Home Care Services v. United States, provides an example of how this can sometimes occur.
Continue Reading Taxpayer’s Informal Claim for Refund of Taxes Paid and Offset by the IRS Denied on a Technicality

Although the government bears the burden of production for penalties, this often involves nothing more than showing that the penalties were properly assessed. Penalty relief is usually only given when the taxpayer can marshal their best facts and make a persuasive argument for leniency. This is because the focus is usually on the actions of the taxpayer in properly reporting amounts on the tax return and not the procedures followed by the IRS. However, recent litigation surrounding Code Sec. 6751 has turned added focus onto the IRS procedures for assessing penalties. This focus has resulted in numerous taxpayers having the opportunity to challenge penalties on technical grounds without delving into the actions of the taxpayer’s tax reporting. In some cases, the IRS has even conceded penalties when faced with their own lack of evidence regarding the proper approval procedures.
Continue Reading IRS Fails to Follow its Own Procedures and IRS Counsel Claims Supervisory Approval Still Valid

Dealing with the IRS can be a dangerous labyrinth for the untrained taxpayer or their non-tax advisors. In a recent Federal court case, E. John Rewwer, et al. v. United States, the taxpayers filed the wrong form claiming a refund and both the IRS and the DOJ Tax Division cried foul and tried to dismiss their case.  Fortunately, the court found that the taxpayer’s filing met the “informal refund claim” requirements and denied the government’s motion.

The taxpayers received an unfavorable audit determination increasing their tax liabilities for 2007, 2008 and 2009.  All amounts were paid and the taxpayers then filed IRS Form 843 (Claim for Refund and Request for Abatement) for all three years. The taxpayer’s attorney, not the taxpayers, signed the requests for refund but didn’t include IRS Form 2848 (Power of Attorney). The IRS allowed the 2008 claim but then denied the 2007 and 2009 claims, so the taxpayers appealed within the IRS.  A taxpayer generally has two years from the date of the determination to file a refund suit in federal district court.  The taxpayers didn’t hear from IRS Appeals, and the two years was expiring, so they filed their refund suit.
Continue Reading Taxpayer Wins Tax Refund Despite IRS Claims That The Taxpayer Used The Wrong Form

Starting any business has risk, and most businesses take time to become profitable. Unfortunately, the IRS sees multiple years of losses from a business as a red-flag that usually results in further scrutiny. That scrutiny can result in disallowance of legitimate business losses and potential penalties for the underreporting. However, with the proper documentation and testimony, legitimate losses over multiple years can be taken and upheld. A recent Tax Court case on a miniature donkey businesses, Huff v. Comm’r, T.C. Memo 2021-140, outlines the factors needed to defend multiple years of losses in a business.
Continue Reading Taxpayer’s Testimony on Businesses Losses Defeats IRS Arguments and Penalties

Football penalty flagThe IRS is vigorously litigating cases involving conservation easements they believe are abusive.  One such case was Plateau Holdings, LLC v. Comm’r, T.C. Memo 2020-93 (Plateau I). In that case the Tax Court denied the entire deduction claimed based on a determination that the $25,449,000 value claimed was actually $2,691,200. A 40 percent penalty applied to the overvaluation amount (i.e. $22,757,800). In a subsequent action, Plateau Holdings, LLC v. Comm’r, T.C. Memo 2021-133 (Plateau II), the IRS also sought a 20 percent penalty for negligence on the lower valuation amount denied because the easement deed failed to protect the conservation purpose in perpetuity.  However, the taxpayer wasn’t required to pay the 20 percent penalty because the Tax Court concluded they were entitled to a defense against that penalty for acting with reasonable cause and in good faith.
Continue Reading Recent Tax Court Case Outlines Factors Taxpayers can use to Avoid Negligence Penalties