The requirement that penalties are approved in writing by IRS supervisors under Internal Revenue Code Section 6751(b) doesn't apply to those early communications, the appeals court found. It instead applies to the actual assessment, meaning the penalty was properly approved by an agency supervisor in a second letter that followed the initial communication of the penalties to Burt Kroner, according to the opinion.
"The statute prohibits assessing a penalty unless a
condition has been met, supervisory approval of the initial determination of
assessment," the opinion said. "But the statute regulates
assessments; it does not regulate communications to the taxpayer."
"Because The IRS
Did Not Assess Kroner's
Penalties Without A Supervisor Approving
An 'Initial Determination of Such Assessment,'
We Hold That The IRS Has Not Violated
Section 6751(B)," It Added.
The Tax Court found in June 2020 that Kroner couldn't treat $24.8 million in transfers from a British business partner as gifts for tax purposes. It determined that Kroner's story advocating for treating the funds as gifts wasn't credible, and they're better considered income, according to the opinion.
But the Tax Court found that a Letter 915 — a
30-day letter the IRS sends out that proposes tax adjustments and penalties —
constituted an initial determination under Section 6751(b). Since that letter
was sent in August 2012, before an IRS supervisor signed off on the penalties
in October 2012, the penalties can't stand, the court said.
In its opinion Tuesday, the Eleventh Circuit said the Tax Court's interpretation didn't pass muster based on the text of the statute. Communications to taxpayers and actual tax assessments are distinct from each other, and Section 6751(b) doesn't address communications, according to the opinion.
The Ninth Circuit has also determined that Section 6751(b) doesn't require initial IRS determinations of penalties to be approved by IRS supervisors, but instead requires actual assessments to be authorized with a manager's signature.
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