Sec. 6662(a) penalties require written supervisor approval

The Tax Court rules on when the burden of production regarding written supervisory approval moves to the taxpayer.
By Shannon Veyon Jemiolo, CPA, Ph.D.

The Tax Court held that the burden of production regarding compliance with procedural requirements related to a Sec. 6662(a) penalty initially falls to the IRS. The burden transfers to the taxpayer after the IRS provides evidence of written supervisory approval for the penalty.

Facts: Charles Frost was a self-employed insurance salesman and consultant. He deducted his expenses related to these endeavors. Frost also held a significant membership interest in Retirewell.org, an information and advertising limited liability company taxed as a partnership, for which he deducted his share of losses. Frost also had extensive previous experience as both an enrolled agent and a revenue agent with the IRS.

The IRS Office of Appeals issued notices of deficiency for Frost's 2010, 2011, and 2012 tax years, reducing his deductions and disallowing the loss. Accuracy-related penalties under Sec. 6662(a) of $3,883, $4,181, and $1,219 were levied for the respective tax years.

Issue: The burden of production related to evidence supporting the imposition of such penalties is initially on the IRS. The court considered when the burden of production on the issue moves to the taxpayer.

Holding: The Tax Court held that if a taxpayer challenges the IRS's penalty determinations, the IRS must come forward with sufficient evidence of the approval of each penalty imposed, as part of its initial burden of production under Sec. 7491(c). After the Service makes that showing, the burden shifts to the taxpayer, who must come forward with contrary evidence.

Under Sec. 6751(b)(1), accuracy-related penalties must be "personally approved (in writing) by the immediate supervisor of the individual making such determination" before the first formal communication of the penalties to the taxpayer (Graev, 149 T.C. 485 (2017)). The IRS failed to produce the required written supervisory approval forms for the Sec. 6662(a) penalties related to 2010 and 2011. Thus, for those years, the IRS had failed to meet its burden of production under Sec. 7491(c) to prove that it complied with Sec. 6751(b) and could not impose a Sec. 6662(a) penalty.

However, the IRS did produce a written supervisory approval form for the penalty for 2012, so the burden of production transferred to the taxpayer to show that this approval was untimely, i.e., the penalty was formally communicated before the written approval date. Frost neither claimed nor provided evidence that the communication came before the written supervisory approval. The court therefore upheld the Sec. 6662(a) penalty related to 2012.

  • Frost, 154 T.C. No. 2 (2020)

— By Shannon Veyon Jemiolo, CPA, Ph.D., assistant professor of accounting, Canisius College, Buffalo, N.Y.

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