Tax Notes logo
HOMETax Notes ResearchFederalOther Documentspublic comments on regulations

‘Immediate Supervisor’ Is Branded as Too Broad in Penalty Approval Regs

JUL. 3, 2023

‘Immediate Supervisor’ Is Branded as Too Broad in Penalty Approval Regs

DATED JUL. 3, 2023
DOCUMENT ATTRIBUTES
[Editor's Note:

View attachments in the PDF version of the document.

]

July 3, 2023

Internal Revenue Service
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Proposed Regulations under I.R.C. §6751
REG-121709-19

Dear Sir or Madam:

We appreciate the opportunity to comment on the proposed regulations under I.R.C. §6751. We have not been engaged by a client to make this submission. Rather, we make this submission out of concern for taxpayer rights. These comments focus on one aspect of the proposed regulations, the proposed definition of “immediate supervisor.”

In the “Explanation of Provisions” published with the proposed regulations, the government acknowledges that the 1998 Senate Finance Committee Report intended for “immediate supervisor” to mean “IRS management.” The proposed regulations define “immediate supervisor” in a manner inconsistent with Congressional intent and so broadly that nearly any IRS employee could be considered an immediate supervisor for penalty approval purposes.

We first address the proposed definition of “immediate supervisor.” Second, we address the unique circumstances of penalty approval in IRS submission processing centers or campuses. Third, we propose specific changes to the proposed regulations to adjust the proposed regulations to align with Congressional intent. Fourth, we provide an additional suggestion related to these topics.

Proposed Definition of “Immediate Supervisor”

The proposed regulations define “immediate supervisor” as follows:

The term immediate supervisor means any individual with responsibility to approve another individual's proposal of penalties, as defined in paragraph (a)(3)(i) of this section, without the proposal being subject to an intermediary's approval.

As drafted, the proposed regulations define “immediate supervisor” too broadly and would allow non-managerial, non-supervisory personnel to approve penalties. The proposed definition encompasses any IRS employee reviewing a penalty approval regardless of supervisory or managerial status. Arguably, the proposed definition deviates so substantially from the statute that if implemented in final regulations, the proposed definition will be subject to judicial challenge. The proposed definition converts the statutory requirement of “supervisory approval” to “any IRS worker approval.”

Penalties Assessed by Examination Personnel v. Campus Personnel

The proposed regulations appear to be drafted from the perspective of examinations and penalties arising from examinations. Exam personnel, typically revenue agents, generally determine penalties during the course of gathering facts from interaction with taxpayers or taxpayer representatives. The examination process generally culminates in a revenue agent proposing specific penalties, including alternative penalties, on a penalty approval lead sheet (Lead Sheet 300). Then, the revenue agent forwards the penalty approval lead sheet to his/her manager for approval. Both revenue agents and supervisory revenue agents are generally higher-graded government personnel on the GS scale. The proposed regulation's definition of “immediate supervisor” makes sense in the context of an examination by a revenue agent. But contrast penalties determined as a result of an examination with penalties assessed in a campus environment.

IRS submission processing centers, or campuses, are designed to handle huge volumes of paper submissions. Most campus workers are loyal and hard working federal employees, but most campus workers perform mechanical tasks quickly and repetitively. Campuses are designed for speed and volume. Many IRS workers at campuses hold positions on the GS scale much lower than revenue agents and are given task-specific training with little latitude in handling their assignments.

Yet, campus personnel are responsible for assessing various international information return penalties. IRS campus personnel routinely make systemic penalty assessments for perceived foot-faults and perceived tardiness involving Forms 3520 and 3520-A. Those campus personnel routinely make penalty determinations of millions of dollars for perceived late-filed or substantially incomplete Forms 3520 and 3520-A.

Especially in the context of penalty determinations that routinely involve significant sums, written supervisory approval of such penalties becomes crucial. An IRS manager or supervisor must approve in writing those penalty determinations. An approving manager or supervisor must be more than a fellow IRS worker approving the initial penalty determination by another IRS worker. As drafted, the proposed regulations would classify a bargaining unit1 reviewing worker as an “immediate supervisor.” That does not accord with Congressional intent and runs contrary to the text of §6751(b)(1) requiring written supervisory approval of penalties.

Specific Changes to the Proposed Definition of Immediate Supervisor

We recommend that the final regulations define “immediate supervisor” as follows:

The term immediate supervisor means the manager or supervisor (including an acting manager or supervisor with a valid written delegation of authority) who directly supervises the work of the individual who proposes penalties. In general, one who directly supervises work is responsible for preparing performance evaluations and addressing any personnel issues of a subordinate. For purposes of this section, an IRS manager or supervisor must hold a “non bargaining unit” position in the IRS or a have a valid written delegation of authority as an acting manager or supervisor.

We believe the suggested language in this letter better fits Congressional intent underlying §6571(b)(1).

Additional Suggestions

Beyond the suggested language for the definition of “immediate supervisor,” we also recommend additional procedural safeguards be implemented in either the final regulations or the IRM.

1. Based on our review of various cases involving systemic penalty assessments by IRS campus personnel, it does not appear that IRS campus personnel currently use an established IRS form or lead sheet to document supervisory approval of penalties. At least the IRS has never produced any in response to FOIA requests. We recommend that IRS campus operations adopt the use of IRS Lead Sheet 300 for documenting penalty assertion and supervisory approval. This will promote compliance with I.R.C. §6751(b)(1) and more uniformity across IRS operations.

2. Based on our review of various cases involving systemic penalty assessments by IRS campus personnel, it is practically impossible to identify by name IRS campus personnel involved in proposing and approving penalty assessments. The IRS uses, among other systems, the Correspondence Imaging System (CIS) to record key data points for campus penalty assessments and attempting to comply with I.R.C. §6751(b)(1). For example, CIS generally includes key dates relating to campus penalty assessments, extremely brief notes, and employee numbers. But the employee numbers in CIS are not the same as employee badge numbers or employee numbers in the IRS business directory known as the “Discovery Directory.” The employee numbers used in the CIS system make it impossible to link specific IRS workers with penalty proposals and written supervisory approval of penalties. We recommend that the IRS modify CIS to include the employee names for penalty proposals and supervisory approval of penalties. We have included a redacted sample of a CIS record for reference. This sample relates to a penalty imposed for the late filing of a Form 3520. Eventually, the penalty was fully conceded by the Independent Office of Appeals on the basis of reasonable cause.

3. For campus assessments of Form 3520 and Form 3520-A penalties exceeding $250,000, we recommend requiring approval by a supervisor or manager with a grade of IR-13/GS-13 or higher. Review of substantial proposed penalties relating to Forms 3520 and 3520-A by higher graded IRS employees might eliminate penalties imposed for timely filing where IRS workers misconstrue timeliness. Review by a higher graded IRS supervisor may also contribute to the IRS considering reasonable cause statements prior to assessment. See generally, Andrew Velarde, “Commentators Line Up to Critique Foreign Trust Penalty Operation,” TAX NOTES, March 6, 2023. We have included a copy of the article for your reference. We encourage you to read the various public comments the article references to understand the dysfunction of campus based systemic penalties and background for this proposal.

4. We recommend increasing transparency about how IRS campuses are (or are not) complying with the requirement under I.R.C. §6751(b)(1) to secure written supervisory approval of penalties before assessment.

We appreciate the hard work by personnel in Treasury, the Office of Chief Counsel, and the IRS.

Sincerely,

Daniel N. Price
Managing Member
Law Offices of Daniel N. Price, PLLC

Enclosures:

1. Redacted sample CIS record
2. Andrew Velarde, “Commentators Line Up to Critique Foreign Trust Penalty Operation,” TAX NOTES, March 6, 2023

CC:
David Bergman to david.j.bergman@irscounsel.treas.gov

FOOTNOTES

1In the unionized environment of the IRS, employees are designated as “bargaining unit” (“BU”) or “non-bargaining unit” (“NBU”). See generally 2019 National Agreement — Internal Revenue Service and National Treasury Employees Union, page 3. https://www.irs.gov/pub/irs-utl/2019_national_agreement_irs_nteu.pdf BU personnel are covered by the NTEU-IRS contract, whereas NBU personnel are not. One key distinction between BU and NBU is that managers, supervisors, executives and a few other positions are all classified as NBU.

END FOOTNOTES

DOCUMENT ATTRIBUTES
Copy RID