Two recent Tax Court cases show us that while the §6751(b) supervisory approval requirement does apply to a tax penalty mechanically applied by a human employee it does not apply to the same penalty mechanically applied by a computer. As a result, two similarly situated taxpayers get treated differently. One gets penalized and the other does not. It is an understandable result, but not a sensible one. To me, it shows the incoherence of the statute.
In Andrew Mitchell Berry and Sara Berry v. Commissioner, T.C. Memo, 2021-42 (Apr. 7, 2021), Judge Marvell holds that a §6662(b)(2) understatement penalty is invalid without proper supervisory approval when proposed as a matter of routine in a 30-day letter issued by a Revenue Agent. In contrast, Anna Elise Walton v. Commissioner, T.C. Memo. 2021-40 (Mar. 30, 2021) (Judge Urda) explains why supervisory approval is not required for the very same penalty if it is first proposed in a computer-generated CP2000 notice, issued without any human involvement. Both the 30-day letter and the CP2000 notice serve the same function, to encourage the taxpayer to engage with the IRS to ensure the accuracy of their returns. Yet the penalty proposed in one requires 2 humans to approve and the penalty proposed in the other requires no human approval.
These cases are straightforward applications of the statute. They are unremarkable in their conclusions that human-proposed penalties need human review but computer-proposed penalties do not. That is what the statute indeed says. However, what makes them worth your time is that they demonstrate the strange interaction of penalty statutes and tax administration. Here we have two equally culpable (or innocent, take your pick!) taxpayers, but only one gets hit with the same mechanically-computed penalty and that solely because of the difference in how the penalties are first proposed. The difference is between what is routine and what is automatic. It’s a difference created by how the IRS operates, the language of the statute, and the Tax Court’s interpretation of that statute. And it’s a difference that makes little sense, at least to me. I think there is a better distinction to be made.
If you are already a tax penalty jock and know how incoherent the system is, you do not need this lesson. Otherwise, I invite you to dive into the details below the fold.
April 12, 2021 in Bryan Camp, New Cases, Scholarship, Tax, Tax Practice And Procedure, Tax Scholarship | Permalink
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