Do IRS Penalties Assessed by Computers Need Manager Approval?

Published Categorized as IRS Penalties, Tax Procedure
Do Irs Penalties Assessed By Computers Need Manager Approval?, Houston Tax Attorney

The courts have been abating penalties if the IRS fails to obtain manager approval for the penalties. But what about penalties assessed by the IRS computer? Do they need to be approved by a manager? The court addresses this in Grace Foundation v. Commissioner, T.C. Memo. 2014-229.

Facts & Procedural History

R.S. Ohendalski created and was the trustee of the Grace Foundation as a Section 4947(a)(1) nonexempt charitable trust treated as a private foundation.

The Foundation is required to annually file a Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation (Form 990-PF). The Foundation’s Form 990-PF for the 2003 tax year was filed late on February 16, 2011.

The IRS assessed a Section 6652(c) delinquency penalty of $10,000 for the late filing of the tax return. The IRS sent the Foundation a combined notice of intent to levy and a notice and demand for payment (Form CP504B) of the delinquency penalty.

The Foundation timely filed a Form 12153, Request for a Collection Due Process or Equivalent Hearing, requesting a collection due process (CDP) hearing for the notice of intent to levy to “to verify that proper assessment procedures were followed.”

IRS Penalty Assessment

The Foundation argued that the Section 6652 penalty was not properly assessed as the IRS did not comply with the Section 6751(b) provisions requiring that the approval of an immediate supervisor before assessment. The IRS’s records did not indicate that this approval was obtained.

The IRS noted that Section 6751(b) generally requires the approval of a supervisor before assessment of a penalty, but Section 6751(b)(2) provides an exception for penalties automatically calculated by electronic means. The IRS reviewed the account transcript for the Foundation’s 2003 tax liability and determined that the assessment of the delinquency penalty was a transaction code 238, which according to the IRS’ automated data processing book is a computer-generated assessment based on the Foundation’s failure to timely file the required return. After further verification, the IRS concluded that assessment of the Section 6652 delinquency penalty did not require management approval pursuant to Section 6751(b)(2)(B). Accordingly, the IRS determined that the proposed levy against the Foundation for 2003 should be sustained. The court agreed with the IRS.

Automatically Assessed Penalties

While not addressed in this case, it should be noted that the IRS has the ability to automatically assess most penalties. For example, the IRS started to auto assess penalties for late filed international tax returns. This includes the Section 6038 penalty for late filed Forms 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations.

It is also not addressed in the case, but it should be noted that manager approval is also not needed for tax penalties assessed under Section 6651 for failure to file or pay tax, Section 6654 for failure to pay estimated taxes by individuals, and Section 6655 failure to pay estimated taxes by corporations. These penalties are more common.

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