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Tax Court Case May Bolster Penalties as IRS Bargaining Chip

Law360 Tax Authority

A recent U.S. Tax Court decision finding that a preliminary IRS letter explaining a partnership's potential tax penalties did not require managerial approval by law may fortify the agency's ability to use penalties as bargaining chips to encourage settlements.


One reason the majority may have taken the approach of choosing the 30-day letter or 60-day letter as the point when an initial determination occurs is to create a bright-line test that is easily administrable, said Jed M. Silversmith, who is of counsel and practices white-collar defense and investigations at Blank Rome LLP.

While the dissent's viewpoint has a lot of merit, the majority decision creates a bright-line rule by stating approval is required only when a penalty has been finalized and someone is told of the right to appeal, he said. This rule is easier to administer because one can examine whether a letter simply explained finalized penalties, informed a taxpayer of a right to appeal and received managerial approval, rather than having to sort through earlier sets of correspondence that have varying levels of finality, Silversmith said.

What's more, the Tax Court's majority decision seems to be consistent with a 2019 case, Clay v. Commissioner (152 T.C. No. 13), in which the court dismissed penalties against the Miccosukee Tribe of Indians in Florida because the IRS did not obtain written supervisory approval before communicating its initial determination, which in that case was a report made by the revenue agent that was attached to a 30-day letter sent to the taxpayer, he said.

“My reaction is that it seemed consistent with Clay, which is the case that said the 30-day was the point that triggered the requirement to have supervisory approval,” Silversmith said. “I sort of initially thought that the 60-day letter [for a partnership] seemed to be consistent with the position in Clay because the 60-day letter is a lot like the 30-day letter for individuals.”

For now the Tax Court's decision is binding on other Tax Court cases. However, Belair Woods can appeal the decision, and the appeals court is not bound by the Tax Court's findings, Silversmith said. Given that some $1 million in penalties are at stake in the case, an appeal may be likely, he said.

"Tax Court Case May Bolster Penalties as IRS Bargaining Chip" by Amy Lee Rosen was published in Law360 Tax Authority on January 23, 2020.