In an egregious example of last-minute rulemaking, the IRS quietly released its final supervisory signature rule just before Christmas in the last weeks of President Joe Biden’s term. The final rule violates the “no signature, no penalty” intent of current law and rejects all of the taxpayer protections against excessive or arbitrary penalties suggested by NTUF and others in public comments.
The supervisory signature rule is an important taxpayer protection. Included in the 1998 IRS Restructuring and Reform Act (RRA), 26 U.S.C. § 6751(b)(1) requires that an IRS agent’s “immediate supervisor” provide a signature of approval at the initial determination of a penalty. This ensures that a penalty is appropriate for the situation and helps prevent the threat of a penalty from being used as a bargaining chip to force taxpayers into a settlement to which they otherwise would not agree.
Unfortunately for the IRS, the Tax Court frequently disallows penalties that have been assessed on taxpayers, ruling that the IRS failed to comply with the procedural requirements of Section 6751. However, instead of reforming its internal processes to meet these statutory standards, the IRS has opted to implement a rule that sidesteps these safeguards. The IRS also acknowledges recent court cases with conflicting interpretations of the timing of penalties, but again opts for an anti-taxpayer implementation rather than advocate for congressional clarification.
Common sense and the legislative history of the RRA would both dictate that the “initial determination” of a penalty is when the IRS agent determines that a penalty is appropriate, prior to communicating the penalty with the taxpayer. However, the final rule would allow IRS agents to get their supervisor’s approval at any stage of the penalty process—even up until the Tax Court enters a final judgement on the matter.
The definition of an “immediate supervisor” can be easily interpreted as the person to whom the IRS agent directly reports. Yet, the IRS convolutes this by determining that a supervisor is “any individual with responsibility to review another individual’s proposal of penalties.” This is even broader than the definition proposed in an earlier version of the rule that would have required the supervisor to be someone with responsibility to approve another’s proposal of penalties.
The IRS proposed the rule on April 11, 2023, and held a public hearing on September 11, 2023. In early 2024, the regulatory page for the proposed rule indicated an unspecified date in June 2024 for final action. In August, an official from the IRS Office of Chief Counsel replied to an inquiry from NTUF regarding the rule’s status, stating, “We continue to work towards finalizing these regulations.” Shortly afterward, the date of final action was updated to July 2024. The IRS did not reply to any subsequent inquiries regarding the status.
NTU provided public comment for the proposed rule to address several taxpayer rights violations before it was finalized, yet every suggestion was rejected:
Failure to require a supervisor’s signature early in the process, prior to communicating the intended penalty to the taxpayer, would allow the penalty to be used as a bargaining chip. The National Taxpayer Advocate shares our concern, noting that the rule would allow the signature to be an “after-the-fact-rubber-stamp.” The IRS denies that its agents would use penalties as bargaining chips, despite its abysmal record upholding taxpayer rights. The IRS also attempts to justify interpreting “initial determination” as the time of penalty assessment rather than when the penalty is communicated to taxpayers on the grounds of vagueness: “the lack of any deadline in the statute other than assessment indicates that the provision did not intend an earlier deadline.”
The complex definition of “immediate supervisor,” which differs from that adopted by other federal agencies, would erode the intention of the statute and complicate the supervisory approval process. The IRS broadened its definition of supervisor further from its proposed regulation, and claims that its definition is justified because some IRS agents have many different supervisors. The IRS fails to recognize the common sense definition of an immediate supervisor as someone with direct authority over an individual’s role, simply stating that “responsibility to review another’s work is the hallmark of being a supervisor.”
Agents should complete a statement of signing similar to a taxpayers’ attestation on a 1040 form to uphold the intent of statutory language to “personally approve (in writing)” all proposed penalties. The IRS relies on prior court decisions to reject this protection that it deems a formality.
The rule would significantly reduce the amount of penalties subject to the supervisory signature rule, in contrast to the law’s intent to cover nearly all penalties. By introducing new categories of exceptions from the rule and expanding the exception “automatically calculated through electronic penalties,” the rule’s protections are being narrowed significantly, reducing the number of penalties subject to the supervisory signature process from nearly all penalties to less than 15 percent of the total.
At the IRS hearing on penalty approval regulations, other organizations and individuals provided testimony alongside NTU. Nina Olson of the Center for Taxpayer Rights (and former National Taxpayer Advocate) advocated for reforms like better training, specific documentation requirements, and meaningful supervisory review before penalties are communicated to taxpayers. Joshua Smeltzer of the Tax Section of the State Bar of Texas recommended defining an immediate supervisor as the person directly overseeing the work of the individual who proposed the penalty, aligning with congressional intent and providing a clear, objective standard for taxpayers and the IRS.
As an insult to injury, the IRS deemed many of the taxpayer protections proposed in public comment as “laborious formalities,” that it claims would be unnecessary, extra-statutorial, and frustrating on the agency as it administers and enforces tax laws. Taxpayers should remember that characterization when it’s time to jump through hoops to file taxes and comply with the Service’s complex and bureaucratic processes.
The final supervisory signature rule issued at the eleventh hour is a serious setback for taxpayer rights, enabling potential abuses of power and unjust penalties. Yet, it shouldn’t come as a surprise. In fact, the IRS proposed this regulation at least in part to retroactively validate its past abuses of the supervisory signature rule.
There is a better path forward. Taxpayer Advocate Erin Collins recommends that Congress clarifies that supervisory approval is required before a proposed penalty is communicated in written form to a taxpayer. In the previous Congress, Senator Tim Scott (R-SC) and nine other sponsors introduced the IRS Accountability and Taxpayer Protection Act (S. 1249), to amend section 6751. The bill would add a clarifying sentence that approval “shall be given at a time in the pre-assessment process.” This remedy would ensure that penalties are applied fairly, restore trust in the IRS’s penalty process, and protect taxpayers from unwarranted assessments stemming from procedural loopholes. Congress should clarify the statute and safeguard taxpayer rights.