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There is an old saying: “Those who can, do, and those who can’t, teach.” Of course, there are also people who can’t “do” or “teach,” and what happens to all those folks? It is obvious that some of them have chosen to go into political commentary, whether on their own podcast or National media. Others, it seems, have found a very pleasant home in the Office of the Treasury Inspector General Tax Administration, aka “TIGTA.” What prompts my comments are several assertions in the May 31, 2019 Report entitled “Few Accuracy-Related Penalties Are Proposed in Large Business Examinations, and They Are Generally Not Sustained on Appeal.”
TIGTA has a number of functions, including investigating allegations of wrongdoing by current and prior Internal Revenue Service employees, as well as “auditing” various operations of the Internal Revenue Service. Carrying out their roles, particularly the latter, gives rise to situations where it’s fair to say TIGTA doesn’t really know what it’s talking about, and this Report suffers from that.
While asserting that it understands that the purpose of penalties is not to raise revenue for the United States, the earliest part of the Report (p. 4) suggests that during the period covered by its review, the penalties which are not asserted by examination are equivalent to money left sitting on the table, which a more compliant IRS Appeals Office should be sustaining, without regard for the opportunity of taxpayers to challenge them. This sets a tone for the entire Report which demonstrates that TIGTA does not really understand the business of examination and has an even poorer understanding of the operation of the Appeals Office.
My first complaint is that the initial part of the Report is focused upon the failure of accuracy-related penalties to be proposed by the LB&I Division, which later shifts to say that proposed civil penalties may be eliminated by the Office of Appeals. TIGTA ignores the fact that the whole purpose of Appeals is to resolve tax disputes on a fair basis without the necessity of litigation. The Report implies that the concession by Appeals is exclusively the result of “hazards of litigation” which the Examination Function cannot consider. This is balderdash.
Although hazards are considered in many cases, even the best and brightest Internal Revenue Service Examiners will sometimes misunderstand the law, fail to understand or gather all of the facts, or misapply the law to the facts, all are which valid grounds for Appeals to refuse to sustain an adjustment in the first place, without regard to hazards of litigation. When an adjustment disappears, this gives rise to a concession of a penalty that was based upon that adjustment.
Next, as to the penalty aspect standing alone, the same applies: Did the Examiner properly understand and apply reasonable cause? The Report fails to even reference I.R.C. § 6664 which defines the concept. Did the Examiner properly consider the authority upon which the taxpayer relies and whether it qualifies as “substantial authority”? The Report fails to dig into anything beyond surface statistics to critique the underlying examination results and ascertain whether or not those factors are present. With fortunately few exceptions, the personnel of IRS Appeals do not believe it is their job to sustain the Examination Function regardless of the facts of the law, in either the income tax adjustments or the penalties themselves.
The Report also purports to focus on the involvement of Managers and complains that there are situations where a Manager does not participate in the process or sign off on the Agent’s Determination. In this regard, there is a reference to I.R.C. § 6751(b), which provides as follows:
Approval Of Assessment. --
I.R.C. § 6751(b)(1)
In General. -- — 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.
Exceptions. --— Paragraph (1) shall not apply to--
— any addition to tax under section 6651, 6654, or 6655; or
— any other penalty automatically calculated through electronic means.
(c) Penalties. For purposes of this section, the term “penalty” includes any addition to tax or any additional amount.
This provision was part of a 1998 IRS Restructuring and Reform Act, which contained many helpful provisions, but is probably the most poorly written one insofar as it never identifies when the “Initial Determination” takes place. Prior to the Opinion of the Second Circuit of Appeals in Chai v. Commissioner 851 F.3d 190 (2nd Cir. 2017), very few practitioners attempted to raise this provision to challenge a penalty, and the Courts uniformly said it was not a bar to sustaining the penalty. Following Chai, there have been a series of Opinions that hold that certain penalties, particularly the accuracy-related penalty of I.R.C. § 6662, cannot be sustained unless the Supervisor signed off on an approval prior to the issuance of the “Initial Determination,” which in most cases will be the Revenue Agent’s Report that is sent to the taxpayer. See Clay v. Commissioner, 152 T.C. No. 13 (2019), which was not cited in the Report, although it was issued prior to May 31, 2019. In my almost 15-year career as an IRS lawyer and my over 30-year career representing private taxpayers, I have never seen a situation prior to Chai when an Appeals Officer or an IRS lawyer in a docketed Tax Court case would concede a penalty solely because the Supervisor had not properly and timely signed the approval form.
There are a number of other points which undermine the findings of the Report. For instance, on page 6, a chart is included which attempts to compare the amount of proposed penalties with the final assessed penalty amount, but ignores the huge number of cases that were “open” in Appeals at the time of the Report, the ultimate resolution of which could have drastic effects on this Report. TIGTA assumes that all of those proposed penalties should have been sustained. Similarly , on page 10, the Report suggests that penalties are not proposed because Appeals sometimes does not uphold the proposed penalties, as if LB&I Examiners may be discouraged by that reality from asserting them. I can state with honesty that I have never seen an Examiner fail to assert the penalty because of the fear that it would be conceded or modified by Appeals. Such problems cause me to wonder whether it’s time for Congress to create an entity that periodically “audits” TIGTA, to see if it’s really capable of doing the job.
At this point, it would be refreshing for TIGTA to step back and, instead of cheap shotting the operations of the Internal Revenue Service, send a clear message to Congress about what is necessary to enable the Internal Revenue Service to do the job which both TIGTA and Congress seem to think it should. Whether the subject is funding, equipment such as the ancient IRS computer system, or personnel – hiring, training, retention, and proper management – these are all areas whether TIGTA’s investigations could provide the background needed to “tell it like it is” to a Congress that seems more intent on beating up the IRS than causing it to function properly.
George Connelly is recognized as one of the leading federal tax litigators in the United States. His practice focuses on IRS audit, collection and criminal matters including civil and criminal tax litigation matters, for clients ...