Walquist Harms The Poor: Revisiting Supervisory Approval For Accuracy Penalties

0 Flares Filament.io 0 Flares ×

Today’s post comes from University of Minnesota Law student, Patrick Riley Murray. Mr. Murray is not actually one of my students in my Federal Tax Procedure or the Federal Tax Clinic courses. However, Mr. Murray was referred to me by a student and previous Procedurally Taxing contributor Casey Epstein (see post here), as having written on a topic I may be interested in. Casey was correct: I have a deep and abiding interest in the Walquist case and will be making an additional post on it in the near future. This post was originally written for and posted on Minnesota Law Review’s De Novo Blog and edited by Minnesota Law Review’s Online Editors. -Caleb

The Internal Revenue Service (IRS) processes more than 250 million business and individual tax returns each year. The vast majority of these returns are correctly filed and end in either additional tax paid or a refund. When a taxpayer files a return with incorrect information, the IRS will typically assess a penalty. Naturally, the IRS must adhere to statutorily imposed procedural requirements when assessing these penalties.

For example, Code § 6751 requires supervisor approval before a penalty can be assessed against a taxpayer. But a significant exception to this rule exists: if a penalty is “automatically calculated through electronic means,” supervisory approval is not required. Given the modern processes of the IRS, many penalties—including those in audits concerning the Earned Income Tax Credit, a tax break for low- to middle-income taxpayers—are assessed via computer software. The IRS claims that these accuracy penalty assessments are automatic. Meanwhile, taxpayer litigants, who are often wealthy, have been able to escape accuracy penalties by arguing that the IRS did not follow § 6751’s procedural requirements.

In short, § 6751’s application has become convoluted. The result: poor taxpayers must pay penalties that rich taxpayers can avoid through litigation. This Post discusses recent case law on the issue of supervisory approval for § 6662 penalties and argues that § 6751 should be amended to require all penalties to have supervisory approval.

read more…


Congress added the procedural requirements—including the requirement for supervisory approval for certain penalty assessments—of § 6751 to the Code in 1998 because of concerns that the IRS was using penalties as a bargaining chip with taxpayers even when no basis for a penalty existed. § 6751 was not significantly litigated for nearly twenty years, until the Second Circuit decided Chai v. Commissioner in 2017.

In Chai, the taxpayer failed to pay self-employment tax related to $2 million in payments from a tax-shelter scheme, and the IRS assessed penalties. In Tax Court, the IRS failed to provide sufficient evidence that IRS agents obtained supervisory approval before assessing penalties. The Second Circuit held on appeal that supervisory approval must be obtained before the IRS issues a notice of deficiency. Since Chai, the Tax Court has applied an “ad hoc” treatment to § 6751 cases.

The Tax Court recently found against taxpayer litigants in Walquist v. Commissioner. At issue in Walquist was the IRS’s Automated Correspondence Exam (ACE) software. ACE automatically processes taxpayer returns. In many cases, ACE handles returns from receipt to closing with “minimal to no tax examiner involvement.” In Walquist, ACE processed the taxpayer’s 2014 tax return, assessed a § 6662 penalty, and issued the notice of deficiency automatically and without any human interaction. The Tax Court found that because the penalty was determined mathematically by a computer software program without the involvement of a human IRS examiner, the penalty was “automatically calculated through electronic means.”

Walquist has potential to harm many poor taxpayers. ACE software is designed to process taxpayer returns that claim the Earned Income Tax Credit (EITC)—a tax break for low- to middle-income taxpayers. In light of the Walquist decision, taxpayers who incorrectly claim the EITC, maliciously or not, can receive significant penalties on their tax returns without any human interaction, much less supervisory approval, from the IRS.

This seems ostensibly fair. If the IRS does not obtain approval, the taxpayer can simply challenge the penalty assessment. But this line of reasoning does not hold up when considering the resources available to tax litigants. Wealthy taxpayers often have the time and resources to challenge and litigate their penalties. For example, Graev v. Commissioner featured twelve years of litigation. And Chai v. Commissioner involved a taxpayer who made millions from their tax-shelter scheme. Poor taxpayers simply do not share that luxury. In practice, automatic penalty assessments against poor taxpayers are final, and these taxpayers have no avenue for challenging their penalties.


At least two solutions exist for this problem: (1) the Tax Court could overturn Walquist and (2) Congress could amend the tax code. Since the former suffers from a number of defects, this Post advocates for the latter solution.

The first solution, in which the Tax Court would overturn Walquist, is problematic. First, the Walquist court’s statutory interpretation of § 6751’s “automatically calculated through electronic means” exception leaves little room for argument; after all, the IRS’s ACE software automatically calculates accuracy penalties. Only a statutory interpreter willing to disregard the Code’s text completely in favor of normative concerns could advance a good faith argument to overturn the court’s statutory interpretation. It is unlikely that this strained argument would prevail at court and even more unlikely that it would survive appeal. Second, the Tax Court dismissed the taxpayer’s case in Walquist for refusing to comply with Tax Court rules. Since it is unlikely that Walquist’s litigants will see their case relitigated, this exact issue would have to come before the Tax Court again before the court could overturn its decision. This leaves poor taxpayers with no recourse for years potentially.

The second solution is far more helpful to lower-income taxpayers. This proposed solution is simple: Congress amends § 6751 to require supervisory approval for all accuracy penalties, and excuse taxpayers from their penalties if this requirement is not met. This could mechanically be accomplished by simply eliminating the exceptions in § 6751(b)(2) and by adding statutory language specifically listing out the consequences of IRS noncompliance. This solution is normatively preferable. While taxpayers should pay penalties for noncompliance with the tax code, the IRS should ensure that every step in its audit process is accurate. If noncompliance is met with severe penalties on the taxpayer’s side, noncompliance on the IRS’s side should also be met with severe penalties. And since President Joe Biden has indicated that tax reform is on his agenda, this solution could see timely implementation. Finally, this solution offers a bright-line rule for courts and the IRS to follow, leaving little room for significant litigation. Overall, this solution is vastly superior.


The recent boom of litigation surrounding § 6751’s procedural requirements has left the Tax Court searching for answers regarding supervisory approval of penalties. This has allowed wealthier taxpayers and bad actors to escape liability through litigation, leaving poor taxpayers—who often do not have the resources to litigate their penalties—at the mercy of the IRS’s whims. With tax reform on President Biden’s agenda, there is the possibility for relief. One normatively preferable solution consists of Congress amending the tax code to require supervisory approval for all accuracy penalties, excusing taxpayers from their penalties in the event of IRS noncompliance. While taxpayers should pay penalties for willful noncompliance, the Government must safeguard their rights.

Caleb Smith About Caleb Smith

Caleb Smith is Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today.


  1. I’ll be interested in seeing the thoughts of those who deal extensively with low income taxpayers as to whether the suggested amendment to 6751 would be a practical solution to what’s a real problem. But my reaction is that one or more alternatives could be implemented more quickly and more easily, and also would be less expensive and better directed at the underlying problem.

    In the first place, it seems to me that the Service could fairly easily change the processing system to insert supervisory approval without affecting the underlying problems that caused the noncompliance being penalized. Perhaps automatic application of “first time abate” penalty waiver relief – combined with instructions to the taxpayer as to how to avoid future mistakes – would be easier to implement and more effective in addressing the basic issues causing the erroneous reporting – at least for taxpayers who qualify for the relief. Beyond first time abate, a “reasonable cause” defense assertion could be made easier to assert if the initial penalty notices were accompanied by a form that would facilitate submission of information that might support “reasonable cause.”

    I’m sure that practitioners who do significant work in this area will have other and probably more effective ways of addressing the underlying issues here. But at least at this point, I’m skeptical that a 6751 amendment would result in much relief.

    Ron Wiener, Philadelphia

  2. Kenneth H. Ryesky says

    The second solution, requiring supervisory approval for ALL penalties, is the only one that can really work. Walquist is overturned, then the IRS is likely to follow Stanford Med’s example and start blaming the algorithm:


    The IRS will likely have instances of blaming the algorithm in any case, but is less likely to be held accountable under Alternative 1 than under Alternative 2.

  3. Steven M. Harris says

    The Tax Court litigation on Code Section 6751(b)(1) is already so far off the rails, it is hard to determine in which direction the supervisor’s approval train is heading. Time to simply repeal the provision and stop the Tax Court from wasting more time inventing interpretations. On the other hand, the exception in Code Section 6751(b)(2)(B) actually makes sense given the likely intent of the statute.

    As for the concern that “poor taxpayers must pay penalties that rich taxpayers can avoid through litigation.” Assuming the premise is correct and significant enough (I am a doubter) to merit any attention, why is that unusual in administrative law contests?

    • Anthony Marqusee says

      The EITC penalties can easily exceed $1,000, imposed on families whose total annual income is often less than $20k. About 25 million taxpayers claimed EITC last year, so for even a small percentage of them to face these penalties is absolutely significant. .

  4. Sandeep Singh says

    AUR audits, by their nature, disproportionally affect the poor. It is not just the penalties. Most poor taxpayers find it difficult or impractical to communicate with the IRS over relatively benign adjustments. Oftentimes, records and correspondence forwarded to the IRS in response to a proposed adjustment letter go into a void. Taxpayer is then surprised by a Notice of Deficiency in the mail. At that point, poor taxpayers are much more likely to default than file a timely tax court petition. The IRS ultimately prevails in collection the tax through wage garnishments/levies because the average poor taxpayer simply give up fighting.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind