The Internal Revenue Service sometimes backdated tax penalty approvals in at least seven cases involving syndicated conservation easements, according to a new report.
The
Section 6751(b) requires the IRS to provide taxpayers with an explanation of how penalties are imposed upon them, to ensure they are imposed where appropriate, and to ensure penalties are not used as bargaining chips or leverage in negotiations during an audit. It also requires supervisory approval of certain penalties before they're assessed.
If manager approval is not timely, the report noted that managers might be tempted to backdate their approval to make it appear it was timely under the law. In a 2023 case,
After the LakePoint decision, the IRS and the Office of the Chief Counsel reviewed 1,268 syndicated conservation easement cases for compliance with that section of the Tax Code. The IRS focused on those types of cases because it deems those transactions to be abusive. In 829 docketed cases, 13 of them lacked valid supervisory approval, including seven with backdated penalty approvals in which the the IRS conceded over $68 million in penalties, withdrawing its position in the taxpayer's favor. In 439 nondocketed cases, TIGTA identified six potential exceptions where there was missing documentation that would verify managerial approval was obtained before the summary report was mailed to the taxpayer.
"The purpose of tax-related penalties is to encourage taxpayer compliance," said the report. "When IRS supervisors backdate penalty approvals, it undermines confidence in both the fairness of tax administration and the integrity of the IRS. This can make it less likely that taxpayers voluntarily comply with their tax obligations."
TIGTA also identified other documentation issues, including multiple versions of penalty lead sheets with identical digital signatures; penalties listed in taxpayer correspondence not documented on an approved lead sheet; and summary reports reflecting penalties without supervisory approval. The IRS also reviewed the conduct of several employees involved in some of the 13 docketed cases that lacked valid supervisory approval and issued some of them counseling letters and written reprimands.
The report found the IRS lacked clear and consistent internal guidance for when penalties must be approved and how to hold employees accountable at the time.
TIGTA made five recommendations for improvements in the report, including that the IRS should update its procedures to align with the regulations and communicate to compliance employees that it's not appropriate to backdate penalty approvals documents and promote the use of digital approvals on all penalty lead sheets and key documents. IRS management agreed with all five of TIGTA's recommendations.
The IRS pointed out that 13 out of 1,268 cases is a small percentage of cases with a penalty approval discrepancy, and in 12 of those cases, the IRS argued the employee received "timely written supervisory approval" of the penalties since the statute doesn't provide a time by which a penalty must be approved.
"The IRS remains committed to strengthening documentation practices, reinforcing training, and ensuring penalties are asserted and approved in accordance with the law," wrote IRS chief tax compliance officer Jarod Koopman in response to the report.
