Carl Smith brought to my attention that one of the provisions in the tax bill currently working its way through Congress proposes to repeal IRC 6751(b) and he provided me with the title to this post. I joked with others on the email thread that such a repeal could spell the end of our blog. We have written so many posts on this poorly drafted law that having it repealed could significantly reduce the topics upon which we would write.
The other thought that went through my head was that the IRS had regained its voice in influencing tax legislation. In the 1960s, 1970s, and into the 1980s perhaps up to the first Taxpayer Bill of Rights legislation, the IRS had less to fear from adverse judicial precedent because it could generally fix bad precedent by going to Congress to reverse the problem caused by adverse precedent. This influence seemed particularly present when Wilbur Mills chaired the Ways and Means Committee. I have wondered about the impact of his dip in the Tidal Basin with Fanne Foxe on tax legislation and its trajectory. For the past couple decades, or more, the IRS seemed to have lost that ability, although there are some notable exceptions. Maybe it is returning. Congressman Neal, be careful where and with whom you go swimming.
read more...Congress passed 6751(b) as a part of the Restructuring and Reform Act of 1998 (RRA 98) in an effort to curb perceived abuse of penalty provisions to pressure taxpayers into conceding tax liabilities. No doubt some IRS agents used penalties or the prospect of penalties to cajole taxpayers into settlements. I never perceived this as a common practice, but I may not have been in the best position to observe behaviors regarding this issue. Whether real or mostly imagined, the statute drafted to fix the alleged problem was drafted by someone with little or no knowledge of tax procedure. It caused the Tax Court to twist itself into knots in order to interpret it and led Judge Holmes in dissenting from the interpretation in the Graev case to predict that the decision would led to many unpredicted and poor outcomes that he labeled Chai ghouls after the Second Circuit decision on this issue. He was right, but that’s not to say the majority of the court got the Graev case wrong. The statute is so poorly worded that no judge could draw the precise meaning.
One thing that saved the tax procedure world from 6751(b) for most of its life was that everyone ignored it. Neither the IRS nor the bar seemed to pay attention to its requirements, whatever they were or are, for over 15 years. Thanks to Nina Olson and the annual report to Congress and to Frank Agostino, litigation finally began to seek to provide meaning to the statute. The cases have led to results that don’t necessarily follow the goal of the statute and that let many taxpayers off the hook for penalties, not because the IRS used them inappropriately as bargaining tools but because it failed to secure the appropriate approvals. In some instances, the IRS would have had difficulty knowing what approvals would have been appropriate at the time of the imposition of the penalty since the court interpretation of the statute came several years thereafter. Of course, the IRS could have headed this off with timely regulations that sought to interpret the provision and set up clear rules to follow but it did not create such regulations and suffered in several cases for its inaction.
Maybe this obit for 6751(b) comes too early. Proposed legislation does not change the law. Here is the language of the proposed repeal which contains its own surprise:
SEC. 138404. MODIFICATION OF PROCEDURAL REQUIREMENTS RELATING TO ASSESSMENT OF PENALTIES.
(a) REPEAL OF APPROVAL REQUIREMENT.—Section 6751, as amended by the preceding provision of this Act, is amended by striking subsection (b).
(b) QUARTERLY CERTIFICATIONS OF COMPLIANCE WITH PROCEDURAL REQUIREMENTS.—Section 6751, as amended by subsection (a) of this section, is amended by inserting after subsection (a) the following new subsection:
‘‘(b) QUARTERLY CERTIFICATIONS OF COMPLIANCE.—Each appropriate supervisor of employees of the Internal Revenue Service shall certify quarterly by letter to the Commissioner of Internal Revenue whether or not the requirements of subsection (a) have been met with respect to notices of penalty issued by such employees.’’.
(c) EFFECTIVE DATES.—
(1) REPEAL OF APPROVAL REQUIREMENT.—
The amendment made by subsection (a) shall take effect as if included in section 3306 of the Internal Revenue Service Restructuring and Reform Act of 1998.
(2) QUARTERLY CERTIFICATIONS OF COMPLI ANCE WITH PROCEDURAL REQUIREMENTS.—
The amendment made by subsection (b) shall apply to notices of penalty issued after the date of the enactment of this Act.
Notice in subsection (c)(1) of the proposed legislation that it repeals 6751(b) back to 1998. Wow! While wiping this statute off the books makes Congress look better and gets rid of a provision that makes it look incompetent, few examples exist of such a period of retroactivity. Might the repeal itself, assuming it occurs, create yet more blog post opportunities for Procedurally Taxing? Maybe the repeal is a good thing for the blog since the number of different permutations of 6751(b) may be dwindling, reducing the number of future posts if the current law continues unchanged. A repeal such as this could be just the ticket for an additional round of posts as taxpayers whose cases are currently pending at some point on the continuum of audit or litigation will want to fight for the right to have their penalty removed.
Note also that section 6751(a), which provides that “The Secretary shall include with each notice of penalty under this title information with respect to the name of the penalty, the section of this title under which the penalty is imposed, and a computation of the penalty,” would not be repealed by the proposed legislation. The legislation would merely replace subsection (b) with a certification requirement within the IRS by managers on a quarterly basis as to their employees’ general compliance with subsection (a) – something likely of no use to taxpayers.
What about the sentiment that caused the essentially unanimous passage of RRA 98 regarding using penalties as an inappropriate bargaining chip? Has the IRS cleaned up its act in this regard over the past quarter century?
We almost never write about pending legislation but with the opportunity to use the title to today’s post coupled with the possible loss of one of the most productive post producers, it seemed appropriate in this instance. Now that you know about the proposal, you can start your lobbying efforts on behalf of the legislation or against it. No matter which way this plays out, 6751(b) has to remain among the top few provisions as the worst ever drafted in the tax procedure realm.
26 U.S. Code § 139F – Certain amounts received by wrongfully incarcerated individuals is one example of a retroactive provision adopted fairly recently.
7508A(d) is another one of the “worst ever” provisions. It might be fun to write a post on “the top 10 worst written tax statutes” or something like that? What others might there be?
A repeal back to 1998 is almost sure to strike the Supreme Court as unlawful if it has an effect of depriving taxpayers of a defense that they have already identified and asserted in situations that have not been closed out, even more so if the IRS takes the repeal as a warrant to reopen any cases where the statute of limitations is still open but the IRS has conceded that they failed to comply.
I do not have any information that would go to the question of whether the approval requirement is of any value or just means that two officials rather than one decided that rattling the taxpayer was a good strategy. I would prefer a provision that provided that a taxpayer who has been threatened with penalties that clearly cannot apply (because the IRS knew or should have known that by their terms they do not apply or that the underlying tax is clearly not due) can recover damages from the IRS equal to 3x the asserted penalty. The issue is really whether the threat of “ruin if you lose” is being used inappropriately to extract concessions or settlements from taxpayers.
The IRS 2021-2022 Priority Guidance Plan, https://www.irs.gov/pub/irs-utl/2021-2022-pgp-initial.pdf, issued 9/9/21, has the following:
13. Regulations regarding supervisory approval of proposed penalties under §6751(b).
Maybe the statutory language is so messed up that regulations under the ample authority of Chevron and Brand X just could not fix it, but it seems to me that the IRS could have gotten on top of this problem long ago.
As to retroactivity, I don’t see any real problem. Section 6751(b) does not impose a new liability but rather gives a taxpayer gratis relief and in many cases wholly undeserved relief from a penalty liability.
On a more basic level of internal control, requiring an original signature by the supervisor prevents the following:
1. It prevents the supervisor from signing a blank piece of paper, having multiple copies of that signature printed, and then having the decision printed on a copy with the supervisor’s signature.
2. It prevents photoshopping the signature which is altering an image digitally using Photoshop image-editing software.
Currently, when the supervisor is separated from the agent, emails are used to establish the authenticity of the signature.
Absolutely yes. I will bring my shovel.