Lawmakers Ask Werfel to Explain Backdated Penalty Documents

February 27, 2024

The Honorable Daniel Werfel
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224

Dear Commissioner Werfel:

Several cases in which Internal Revenue Service (“IRS”) employees misled taxpayers and the U.S. Tax Court regarding the backdating of penalty documents have recently come to light.¹ Additionally, there are concerns about how the IRS responded in another case of backdating in which the U.S. Tax Court opined that IRS Counsel acted in “bad faith” and failed to correct their previous “misrepresentations of fact” in the case.²

In May 2016, the IRS was in communication with a taxpayer about reaching a resolution in an audit of a conservation easement matter.³ A settlement between the two parties was never reached and on July 15, 2016, an IRS Revenue Agent (“RA”) prepared a penalty consideration lead sheet against the taxpayer.⁴ This is a form in which an examiner must document the assertion or nonassertion of penalties against a taxpayer whenever an audit results in a deficiency. In February 2017, the RA amended the July 2016 lead sheet to include additional penalties recommended by IRS Counsel. Internal Revenue Code (“IRC”) §6751(b)(1) requires that an IRS RA obtain their supervisor's approval in writing of an initial determination of penalties before such penalties are assessed to a taxpayer.⁵ Although the RA's manager signed the July 2016 lead sheet on February 10, 2017, she improperly backdated her signature by writing in a date of July 16, 2016.⁶

When this matter, Lakepoint Land II, LLC v. Commissioner, was brought before the U.S. Tax Court, the IRS misled the court for five months regarding when the IRS RA backdated the lead sheet.⁷ The IRS also failed to advise the court about the error in a timely manner.⁸ The agency later admitted that the RA backdated her signature on the lead sheet and that its previous statements to the court “admittedly fall short of the level of excellence and professionalism that the Court has a right to expect and that the Commissioner and Chief Counsel require from IRS personnel and Chief Counsel attorneys.”⁹ The U.S. Tax Court ultimately sided with the taxpayer and granted, in part, the taxpayer's motion to impose sanctions on the IRS for misconduct.¹⁰ Additionally, the judge admonished the IRS's counsel for acting in “bad faith” and having “multiplied the proceedings in this case unreasonably and vexatiously.”¹¹

In a separate case, an IRS RA emailed his manager in July 2021 about three partnerships he was examining to inform the manager that it was likely that penalties would be asserted against each partnership, though he did not specify which penalties or the basis for the penalties.¹² Two days later, the manager responded to the agent saying that he approved the penalties, though he did not specify which penalties he was approving or the basis for the approvals.¹³ In March 2022, the RA asked his manager to sign a penalty approval lead sheet for all three partnerships and told his manager that it would be ideal for him to sign using the date that he approved the penalties “or a little thereafter.”¹⁴ In the same email, the RA provided “backup” examples related to a different taxpayer.¹⁵ The manager replied three days later telling the RA that all three lead sheets are signed with the July 2021 date and thanked the RA for providing the “backup” examples.¹⁶

Both cases indicate a willingness of IRS employees to improperly approve official tax forms. On October 24, 2023, you testified before the House Committee on Oversight and Accountability's Subcommittee on Government Operations and the Federal Workforce at a hearing entitled “Oversight of the Internal Revenue Service.”¹⁷ During the hearing you were asked to provide comment on Lakepoint Land II, LLC v. Commissioner — the case involving backdating — and you responded that such situations are “extremely limited.”¹⁸ Following the hearing, you also stated that:

Good risk management says let's evaluate what happened. What was the root cause and whether it's happened elsewhere. The most important thing is to acknowledge it, and we did, and to make sure that for that particular part of the case that we withdrew our claim, because we want our paperwork to be fully valid and reliable.¹⁹

We agree that it is important for the agency to acknowledge its actions, including the fact that it misled the U.S. Tax Court for months. The agency's response, however, should not end there.

The National Taxpayer's Advocate (“NTA”) 2023 Purple Book proposed a legislative recommendation to clarify that supervisory approval is required under IRC §6751(b) before proposing penalties.²⁰ According to the NTA, the current language in the IRC is unclear with respect to the phrase “initial determination of [an] assessment.”²¹ As a result of the ambiguity in the statute, courts have come to different conclusions about when supervisory approval must occur.²²

Our country's voluntary tax system is only successful if taxpayers trust the IRS to be honest and follow the law. These instances of IRS employees backdating official tax documents lead to great concern about the judgement exercised by agency employees. Such actions are especially concerning for employees who are in management positions and whose actions should be an example for employees who report to them. As such, we request that you provide responses to the following questions as soon as possible, but no later than 5 p.m. on March 12, 2024:

Sincerely,

Jason Smith
Chairman
Committee on Ways and Means

David Schweikert
Chairman
Subcommittee on Oversight