Frivolous Penalties Require Management Approval

[LPC]

Notwithstanding several court opinions to the contrary, the Office of Chief Counsel has decided that the penalties for frivolous returns and frivolous submissions do require the written approval of the assessing officer's supervisor.

Chief Counsel Notice CC-2011-004 (11/1/2010)

Department of the Treasury
Internal Revenue Service
Office of Chief Counsel

Notice CC-2011-004

November 1, 2010

Subject:

Written Management Approval Required to Assess the Section 6702 Penalty for Frivolous Tax Submissions

Cancel Date :

Upon incorporation into the CCDM

Purpose

This Notice alerts Chief Counsel attorneys that the section 6702 penalty for frivolous tax submissions is subject to the preassessment written management approval provision of section 6751(b)(1).

Background

Section 6702(a) imposes a $5,000 penalty against any person who “files what purports to be a return” but which “does not contain information on which the substantial correctness of the selfassessment may be judged” or “contains information that on its face indicates that the selfassessment is substantially incorrect” based on a frivolous position or a desire to delay or impede the administration of federal tax laws. Section 6702(b) imposes a $5,000 penalty against any person who submits a “specified frivolous submission” as defined in section 6702(b)(2).

Section 6751(b)(1) provides that no penalty “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.” As an exception to this general rule, section 6751(b)(2) provides that managers need not approve any addition to tax under sections 6651, 6654, or 6655, or any other penalty automatically calculated through electronic means.

Section 6702 penalties cannot be automatically calculated through electronic means. A Service employee must make an independent determination that the taxpayer took a frivolous position or desired to delay tax administration on a document that purported to be a return before the Service may assess the section 6702(a) penalty. See IRM 4.10.12.1.3; IRM 20.1.10.10.2.2. Similarly, a Service employee must make an independent determination that the taxpayer submitted a specified frivolous submission before the Service may assess the section 6702(b) penalty. See IRM 5.1.9.3.16; IRM 5.20.10; IRM 8.22.2.2.10.3. In this respect, section 6702 penalties are unlike penalties under sections 6651, 6654, and 6655, which are assessed automatically in the course of processing returns at Service campuses according to objective data, such as the date a return is received, the amounts reported on the return, and the tax paid.

Several courts have held that the section 6702 penalty does not require supervisory approval because the penalty satisfies the exception in section 6751(b)(2)(B) for penalties “automatically calculated through electronic means.” See Lindberg v. Commissioner , T.C. Memo. 2010-67; Deyo v. United States , No. 3-04-cv-2043, 2006 WL 2699024, at * 3 (D. Conn. Sept. 18, 2006), aff'd on other grounds , 296 Fed. Appx. 157, 158-60 (2d Cir. 2008); Brousseau v. United States , No. 3:04-1025, 2005 WL 2177009, at * 3 (M.D. Tenn. Sept. 8, 2005); Borchardt v. Commissioner , 338 F. Supp.2d 1040, 1044 (D. Minn. 2004); Cole v. United States , No. 1:02-CV-137, 2002 WL 31495841, at * 6 (W.D. Mich. Oct. 21, 2002).

These cases provide minimal analysis and conclude that no managerial approval is required because the section 6702 penalty is “an automatic penalty for a fixed amount.” See , e.g. , Borchardt , 338 F.Supp.2d at 1044. The standard established for the section 6751(b)(2)(B) exception, however, is not that the penalty is “an automatic penalty for a fixed amount,” but that it is “automatically calculated through electronic means.” The section 6702 penalty is for a fixed amount, but it is not automatically calculated through electronic means and, therefore, does not come within the exception. It may only be assessed after written management approval.

Instructions

Chief Counsel attorneys should not argue that section 6702 penalties for frivolous tax returns or specified frivolous submissions satisfy the exception to preassessment written management approval under section 6751(b)(2)(B).

Any questions regarding the preassessment procedures applicable to, or the assessment of, the section 6702 penalty should be directed to Procedure and Administration, Branch 1 at (202) 622-4910 or Branch 2 at (202) 622-4940.

/s/
Deborah A. Butler
Associate Chief Counsel
(Procedure & Administration)

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Filename: CC-2011-004 File copy in: CC:FM:PF

[Gregg]

By the end of the day the crackheads will twist this into some major victory. Is it typically given now without management approval?

[Imalawman]

By the end of the day the crackheads will twist this into some major victory. Is it typically given now without management approval?

Yes, they are (from my observations). I agree with the GCM.

Also, reasonable minds would read this and say, "Oh, I guess the IRS isn't as unreasonable as I thought". TPs will likely say, "See, I told you the IRS was corrupt - see we're winning, slowly but surely!!!".

[Judge Roy Bean]

I believe there have been discussions around here about the efficacy of applying penalties to persons who simply have no means or even potential means of paying them.

Rather than driving them into the underground economy with onerous, unpayable amounts, dodging the first bullet might put them back on track and improve the chances of collecting the owed taxes.

[ArthurWankspittle]

To me, this looks like someone in the IRS is thinking ahead, that's all. (Ok you might say unusual.) In order to avoid anyone claiming that their penalty was not automatically generated and for $5000 and therefore invalid. They have now changed the rules to allow the penalty to be manual and varied, subject to a supervisory checking.

[Quixote]

I believe there have been discussions around here about the efficacy of applying penalties to persons who simply have no means or even potential means of paying them.

Rather than driving them into the underground economy with onerous, unpayable amounts, dodging the first bullet might put them back on track and improve the chances of collecting the owed taxes.

The IRS always fires a warning shot before imposing the penalty. All the taxpayer has to do to avoid the penalty is to replace the frivolous submission with a non-frivolous one. A surprising number choose not to dodge that bullet.

[LPC]

They have now changed the rules to allow the penalty to be manual and varied, subject to a supervisory checking.

No, the penalty is still a fixed amount, $5,000.

The only difference is that now two people have to review the submission before the penalty can be imposed, the employee who first reviews the return and recommends imposing the penalty and the employee's supervisor.

The advantage of this procedure is that it should reduce the chances of a mistaken or arbitrary penalty. The disadvantage is that it will give tax deniers another argument to make during their collection due process hearings.

[Quixote]

By the end of the day the crackheads will twist this into some major victory. Is it typically given now without management approval?

Yes and no.

Every penalty assessment is signed off on by the supervisor of the employee who is nominally asserting the penalty. However, that employee is probably not the one who determined that the submission was frivolous. I wasted quite a bit of effort trying to convince someone in the frivolous return unit that an old lady's economic stimulus return was weird, but not frivolous, before I learned that no one in that unit makes that type of determination. By the time the case reaches them the submission has already been determined to be frivolous. All the unit does is send out the IRC 6702(b) letters giving the TP a chance to withdraw or amend his frivolous submission, and assess the penalty on those who do not.

[Quixote]

The only difference is that now two people have to review the submission before the penalty can be imposed, the employee who first reviews the return and recommends imposing the penalty and the employee's supervisor.

As noted in the notice, that has always been the required procedure.

[Red Cedar PM]

The penalty is pretty steep and so I am glad there is some internal oversight before it is assessed. This seems like a prudent mechanism to have in place, no?

[Joey Smith]

Ah-ha! Show me that the IRS Manager FIRST took an Oath and that his or her signature is an original signature written in green ink with the words "Deny on Demand -- U.C.C. 1".