Jump in ‘Graev’ References Pressures IRS on Penalty Assessments

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By Carolina Vargas and Courtney Rozen

The U.S. Tax Court has a message for the IRS: prove that penalties against a taxpayer were authorized by a manager before being assessed, or risk having the penalties dismissed.

The court cited its 2016 decision in Graev v. Commissioner—which determined that the agency bears the burden of providing evidence of written supervisory approval of an initial penalty determination—in more than half of the memorandum and division opinions issued during the second quarter of 2018, according to a Bloomberg Tax analysis.

Graev addresses tax code Section 6751(b), which requires that no penalty be assessed “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.”

The decision has prompted some tax practitioners to take another look at whether penalties against their clients were assessed properly, and to argue that the penalties should be dismissed if the Internal Revenue Service didn’t follow Section 6751(b). This approach is reflected in the large number of cases that referenced Graev in the second quarter of 2018.

“The courts are starting to hold their feet to the fire,” J. Walker Johnson, a partner at Steptoe and Johnson LLP in Washington, told Bloomberg Tax.

IRS Penalty Assessments Scrutinized

The Tax Court cited Graev in 28 decisions during the second quarter, up from 10 in the first quarter.

Tax Court Judge Mark V. Holmes often referenced the case in his decisions. Holmes cited Graev in a May 7 division opinion in Dynamo Holdings LP v. Commissioner and in a May 21 memorandum opinion in Becker v. Commissioner, which both dealt with the IRS’s burden of establishing that it properly imposed penalties through evidence of written supervisory approval.

“It’s a case that’s on everyone’s radar,” said Adriana Lofaro Wirtz, a partner at Cooley LLP in New York.

When the IRS raises the penalty in its answers, Wirtz said the agency is including the Section 6751 language. It also is “asserting that the requirement for obtaining managerial approval is satisfied by having a supervisor of the trial attorney sign the pleading,” she said.

Previously, the IRS “had the attitude” that it didn’t need to comply with requirements of the Administrative Procedure Act, which governs how federal agencies propose and establish regulations, said Johnson, who represents corporations in federal tax controversies.

An IRS chief counsel notice (CC-2018-006) issued June 6 suggested that the agency will try to work around Graev or minimize Section 6751(b).

“Determining the contours of Graev, and section 6751 generally, will be an ongoing issue for taxpayers and the government,” said Paul DiSangro, a partner at Mayer Brown LLP in Palo Alto, Calif., whose practice focuses on resolving tax disputes with the IRS.

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