Rules for Supervisory Approval of Penalties

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 301</CFR> <DEPDOC>[TD 10017]</DEPDOC> <RIN>RIN 1545-BP63</RIN> <SUBJECT>Rules for Supervisory Approval of Penalties</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final regulation. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations regarding supervisory approval of certain penalties assessed by the IRS. The final regulations are necessary to address uncertainty regarding various aspects of supervisory approval of penalties that have arisen due to recent judicial decisions. The final regulations affect the IRS and persons assessed certain penalties by the IRS. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective Date:</E> These regulations are effective December 23, 2024. <E T="03">Applicability Date:</E> For date of applicability, <E T="03">see</E> § 301.6751(b)-1(f). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> William Prater, (202) 317-6845 (not a toll-free number). </FURINF> <SUPLINF> <REGTEXT> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document amends the Regulations on Procedure and Administration (26 CFR part 301) by adding final regulations under section 6751(b) of the Internal Revenue Code (Code) relating to supervisory approval of certain penalties assessed by the IRS. Section 6751(b)(1) expressly delegates to the Secretary of the Treasury or her delegate the authority to designate, for purposes of approving the initial determination of a penalty assessment under the Code, a higher level official other than the immediate supervisor of the individual making that initial determination. In addition, section 7805(a) of the Code authorizes the Secretary to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” <HD SOURCE="HD1">Background</HD> On April 11, 2023, a notice of proposed rulemaking (REG-121709-19) relating to supervisory approval of certain penalties under section 6751(b) was published in the <E T="04">Federal Register</E> (88 FR 21564). <E T="03">See</E> the Background and the Explanation of Provisions sections of the preamble to REG-121709-19 for a discussion of the proposed regulations, which are incorporated in this document to the extent not inconsistent with the Summary of Comments and Explanation of Revisions section of this preamble. Eight comments responding to the notice of proposed rulemaking were received and are available at <E T="03">https://www.regulations.gov</E> or upon request. A public hearing was held on September 11, 2023, and four speakers provided testimony. After careful consideration of all of the written comments and testimony, the proposed regulations are adopted by this Treasury decision with minor modification. The public comments are summarized and discussed in the Summary of Comments and Explanation of Revisions. <HD SOURCE="HD1">Summary of Comments and Explanation of Revisions</HD> Many of the comments addressed similar issues and expressed similar points of view. The comments largely opposed the proposed timing rules and many of the proposed definitions. Comments expressed concern that the proposed regulations would not implement what the comments viewed as the purpose of section 6751(b). The Treasury Department and the IRS disagree with these comments' characterization of the text and effect of the proposed regulations, as well as their characterization of the statute's text and scope, its legislative history, and the caselaw interpreting it. As explained in the preamble to the proposed regulations, the purpose of these rules is to clarify application of section 6751(b) in a manner that is consistent with the statutory text and that promotes nationwide uniformity, administrability for the IRS, and ease of understanding by taxpayers. Several comments suggested alternative rules that would impose extra-statutory formalities on IRS employees that would increase the probability of appropriate penalties being avoided if IRS employees do not satisfy those formalities. By contrast, the adopted rules faithfully interpret the statutory text, ensure penalties are imposed where appropriate, and guard against inappropriate use of penalties. <HD SOURCE="HD2">1. Comments on Proposed Timing Rules</HD> The proposed regulations included three rules regarding the timing of supervisory approval of penalties under section 6751(b). Proposed § 301.6751(b)-1(c) provided that, for penalties that are included in a pre-assessment notice issued to a taxpayer that provides the basis for jurisdiction in the United States Tax Court (Tax Court) upon timely petition, supervisory approval must be obtained at any time before the notice is mailed by the IRS. Proposed § 301.6751(b)-1(d) provided that, for penalties raised in the Tax Court after a petition, supervisory approval may be obtained at any time prior to the Commissioner requesting that the court determine the penalty. Finally, proposed § 301.6751(b)-1(b) provided that supervisory approval for penalties that are not subject to pre-assessment review in the Tax Court may be obtained at any time prior to assessment. Comments argued that the proposed timing rules should be rejected in favor of earlier deadlines for supervisory approval of penalties, which the comments asserted would more effectively prevent bargaining by the IRS. The comments' suggested deadlines, however, lack any basis in the statutory text, and are supported by reasoning that has been rejected by three United States Circuit Courts of Appeals (circuit courts). Moreover, the suggested earlier deadlines would not do anything to prevent bargaining, as the preamble to the proposed regulations explained. Despite the comments' stated concerns about the existence of bargaining, no comment identified a specific example of bargaining, and no court has ever found that an IRS employee attempted to use a penalty as a bargaining chip. Some comments suggested that the timing rule should require supervisory approval before issuance of a 30-day letter  <SU>1</SU> <FTREF/> (or substantive equivalent). As support for this suggestion, one comment stated that caselaw supported the assertion that the statute is ambiguous regarding when approval must occur. This comment misinterprets the existing caselaw, which has focused on an ambiguity as to what the “initial determination” is that must be approved, not on when the approval must occur. On the question of when approval must occur, the circuit courts that have considered the issue have uniformly held that a supervisor can approve a penalty at any point before losing discretion over whether to approve imposition of the penalty. The comments advocating for requiring approval before issuance of a 30-day letter (or substantive equivalent) rest heavily on a misunderstanding of a supervisor's authority and on policy reasons that are not in fact served by the suggested deadline. The comments also fail to address the circuit courts' opinions that are contrary to their recommendations on this issue. <FTNT> <SU>1</SU>  Typically a 30-day letter proposes penalties and gives the taxpayer an opportunity to request an administrative appeal. </FTNT> As multiple circuit courts have explained, the statute lacks an “express timing requirement,” and the Tax Court's “formal communication” rule has no basis in the text of the statute. <E T="03">Kroner</E> v. <E T="03">Commissioner,</E> 48 F.4th 1272, 1276 (11th Cir. 2022); <E T="03">Laidlaw's Harley Davidson Sales, Inc.</E> v. <E T="03">Commissioner,</E> 29 F.4th 1066, 1072 (9th Cir. 2022), <E T="03">reh'g en banc denied,</E> No. 20-73420 (9th Cir. July 14, 2022); <E T="03">Minemyer</E> v. <E T="03">Commissioner,</E> Nos. 21-9006 & 21-9007, 2023 WL 314832 (10th Cir. January 19, 2023). As explained in the preamble to the proposed regulations, the lack of any deadline in the statute other than assessment indicates that the provision did not intend an earlier deadline. Despite this, the Tax Court has continued to apply its own precedent in cases appealable to circuits other than the Ninth, Tenth, and Eleventh. <E T="03">See Aldridge</E> v. <E T="03">Commissioner,</E> T.C. Memo. 2024-24 (appealable to the Eighth Circuit); <E T="03">Swift</E> v. <E T="03">Commissioner,</E> T.C. Memo. 2024-13 (appealable to the Fifth Circuit); <E T="03">Bachner</E> v. <E T="03">Commissioner,</E> T.C. Memo. 2023-148; <E T="03">Robinson</E> v. <E T="03">Commissioner,</E> T.C. Memo. 2023-147 (appealable to the Fourth Circuit); <E T="03">Jadhav</E> v. <E T="03">Commissioner,</E> T.C. Memo. 2023-140; <E T="03">Conrad</E> v. <E T="03">Commissioner,</E> T.C. Memo. 2023-100; <E T="03">Braen</E> v. <E T="03">Commissioner,</E> T.C. Memo 2023-85 (appealable to the Third Circuit). For cases appealable to the Ninth Circuit, the Tax Court has held that it will follow the timing rule of <E T="03">Laidlaw's,</E> which the Tax Court interpreted to require a case-by-case analysis of whether a particular supervisor retained the discretion to approve penalties when they did so. <E T="03">See Kraske</E> v. <E T="03">Commissioner,</E> 161 T.C. 104 (2023). In <E T="03">Kraske</E> and <E T="03">Pangelina</E> v. <E T="03">Commissioner,</E> T.C. Memo. 2024-5, the Tax Court suggested that an IRS Examination Division (Exam) supervisor's discretion may be lost when a case is transferred to the Independent Office of Appeals (Appeals), but this is factually incorrect. As the Ninth Circuit recognized in <E T="03">Laidlaw's,</E> it is only “once the notic ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 47k characters. 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