Penalty Abatement Opportunities after Chai v. Commissioner

by Jed M. Silversmith, JD | Sep 03, 2019

In 2017, the U.S. Court of Appeals for the Second Circuit issued a decision that significantly affected IRS procedures for the assessment of penalties against individuals and other taxpayers. The IRS is now required to possess contemporaneous evidence that a revenue agent’s supervisor approved a penalty before it was assessed. The Tax Court has expanded this rule over the past two years, so it now has significant teeth.

Because obtaining supervisory approval had not been standard operating procedure for revenue agents at the early stages of an audit, many penalties assessed by the IRS are potentially invalid. CPAs who have clients who have been assessed penalties should familiarize themselves with this situation, as there may be an avenue for inexpensive relief for their clients.

Assessment Approval Required

As part of the 1998 IRS Restructuring and Reform Act, Congress enacted Internal Revenue Code (IRC) Section 6751(b)(1), which states the following:
No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.1

The provision applies to penalties imposed against individuals and other taxpayers, including accuracy and fraud penalties. It also applies to the responsible person penalty imposed in employment tax and other trust fund cases. The supervisory signature requirement does not apply to penalties that are automatically calculated, like the failure to pay and failure to make estimated tax penalties.

Although enacted in 1998, no court had interpreted this statute or the supervisor signature requirement until 2017.

In Chai v. Commissioner,2 the Second Circuit analyzed Section 6751(b) in the context of an appeal from an adverse decision in the Tax Court. In that case, the Tax Court had sustained the deficiencies and the accuracy penalties. On appeal, the taxpayer argued that the IRS had not established that a supervisor had approved the penalty. The IRS argued that the accuracy penalty was mechanically computed, but the court of appeals rejected this argument. The court also noted that when Congress enacted the 1998 legislation, it intended to require a supervisor to approve penalties at an early stage of the audit. Congress was concerned that revenue agents might attempt to use the threat of a penalty as leverage to negotiate other audit adjustments.

The court of appeals also focused on another provision of the 1998 act. Section 7491 states:
Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.

The court of appeals determined that these statutes meant IRS Counsel needed to introduce a signed penalty authorization in the Tax Court proceeding. If it failed to produce this document, the Tax Court could not sustain the penalty. In short, documentation of the supervisory approval was part of IRS’s burden of proof. The court found that the statute required there be a written document for when a notice of deficiency was to be sent (i.e., the 90-day letter).3

The Chai decision was significant, but it only applied to the Second Circuit, which includes Connecticut, New York, and Vermont. Since no other court of appeals had weighed in on this issue, taxpayers in the other 47 states, the District of Columbia, and U.S. territories were not bound by the decision. However, in 2017, the Tax Court issued a regular decision on this issue. A regular decision is one that is handed down by the full Tax Court, and with this one it adopted the Second Circuit’s decision and stated that it would apply to all decisions moving forward.4

The Tax Court’s regular decision on the matter immediately affected dozens, if not hundreds, of pending cases. IRS Counsel began filing motions to reopen the record for matters that had proceeded to trial to simply introduce the one document showing that a supervisor had authorized imposition of the penalty. In some cases, taxpayers have been able to raise the issue and successfully knock out penalty determinations (usually negligence penalties) based solely on the failure of the IRS supervisor to grant approval.

In April 2019, the Tax Court raised the bar for the IRS even higher. In Clay v. Commissioner, the taxpayer argued that the term “initial determination of the penalty” meant “the first time an IRS official introduced the penalty into the conversation.” In this case, the taxpayer argued that the penalties were first discussed when the IRS sent the revenue agent’s report (RAR). The Tax Court agreed, and held that an IRS supervisor needed to approve the penalty before the RAR was mailed to the taxpayer.

Impact on Taxpayers

Since these rules are applied retroactively, relief may be obtainable for taxpayers against whom penalties were assessed years ago. Taxpayers who do not have their audit file can generally get it by submitting a Freedom of Information Act request. The audit file will contain the supervisor’s written authorization for a penalty (if it was obtained). After reviewing the audit file, taxpayers may be able to obtain quick and easy relief. Specifically, taxpayers who have unpaid tax assessments may be able to file a Form 843, Claim for Refund and Request for Abatement, and argue that the penalties are invalid. Taxpayers who already paid the penalties may be able to claim a refund if the tax was paid in the past two years (or the return was filed in the past three years). Taxpayers nearing the end of the limitations period may want to file protective refund claims to preserve their ability to recover any improperly assessed penalties.

It is worth noting that there has been no analysis on the interplay between Section 6751 and the responsible person penalty. However, Section 6751 plainly applies to all penalties against individuals (i.e., all penalties in Chapter 68) other than those that are automatically calculated. The responsible person penalty is set forth in Chapter 68 and is not a penalty that is automatically calculated.

If you have clients who have paid or owe penalties, you should familiarize yourself with the potential impact of these decisions. 

1 Pub. L. 105-206, title III, Section 3306(a), July 22, 1998, 112 Stat. 744.
2 Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017).
3 Chai, 851 F.3d at 220-221.
4 Graev v. Commissioner, 149 T.C. 485 (2017) (Graev III).


Jed M. Silversmith, JD, is an attorney at Blank Rome LLP, where he specializes in representing individuals in white collar matters with an emphasis on tax and forfeiture. He can be reached at


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