In last week’s blog, I discussed my concerns regarding the failure of the IRS Office of Appeals (Appeals) and Wage & Investment (W&I) to adequately identify the particular frivolous position prompting mailing of a notification letter. This letter provides taxpayers with 30 days to withdraw the frivolous position included on an income tax return or in a submission to the IRS, and thereby avoid application of the $5,000 frivolous return penalty imposed by IRC § 6702. The lack of clear identification regarding the objectionable issue, however, can sometimes make it very difficult for taxpayers to timely determine and correct the frivolous position.
In this blog, I will discuss another problem involving the IRC § 6702 penalty: specifically, Appeals’ refusal to review whether the frivolous return penalty was properly imposed by W&I. Keep in mind that just because W&I initially says a position is frivolous, doesn’t—or at least shouldn’t—make it so. My office has seen a number of cases in which good-faith taxpayers with reasonable objections regarding the substantive or procedural correctness of the IRC § 6702 penalty imposed by W&I have sought review by Appeals of a rejected penalty abatement request. Such consideration would represent taxpayers’ last and only opportunity to obtain independent administrative review of W&I’s decision to assess the frivolous return penalty.
Appeals, however, has adopted the policy of refusing to review all IRC § 6702 cases, even those abatement requests that are determined by W&I to be non-frivolous. Appeals takes this position notwithstanding W&I’s IRM (184.108.40.206.4) and letters informing taxpayers that they have a right to an appeal of good-faith challenges to the penalty, assuming that the penalty has first been fully paid. In the absence of this review, taxpayers who believe that the decision by W&I to reject the abatement request was unfair or inaccurate are left with no recourse other than to seek judicial review in the Court of Federal Claims or the applicable Federal District Court.
Realistically, very few taxpayers, particularly lower income taxpayers, possess the financial resources or the remaining energy to continue fighting the frivolous return penalty in federal court. Further, in many cases, the legal expenses and other related costs required to contest the penalty may exceed the amount of the penalty itself. Appeals’ non-review policy with respect to IRC § 6702 penalties is depriving taxpayers of the right to appeal an IRS decision in an independent forum and the right to challenge the IRS’s position and be heard, which have been adopted by the IRS and codified by Congress.
Appeals previously accepted and considered non-frivolous appeals of the IRC § 6702 penalty. It then made the “business decision” to stop hearing any appeals relating to that penalty. This policy ultimately was implemented through revised guidance in IRM 220.127.116.11, which now states, “Penalties assessed under IRC § 6702(a) or IRC § 6702(b) are not subject to administrative appeal rights.”
TAS subsequently has issued a number of Operations Assistance Requests (OARs) and Taxpayer Assistance Orders (TAOs) to Appeals on behalf of taxpayers raising non-frivolous challenges to application of the IRC § 6702 penalty. Despite the often-compelling circumstances described in many of these OARs and TAOs, Appeals has remained unwilling to revise its blanket policy of rejecting all such reviews. Taxpayer rights should not be disregarded in furtherance of a “business decision.”
Congress did not intend that the IRC § 6702 penalty be applied in a way that is draconian or that harms good faith taxpayers. As Congress originally explained, “The committee believes that an immediately assessable penalty on the filing of protest returns will help deter the filing of such returns, and will demonstrate the determination of the Congress to maintain the integrity of the income tax system…The penalty will be imposed, therefore, only on purported returns that are patently improper and not in cases involving valid disputes with the Secretary. This penalty will not be imposed, of course, in the case of innocent or inadvertent mathematical or clerical errors…” Moreover, Congress did nothing to limit good faith, non-frivolous appeals regarding application of the IRC § 6702 penalty.
As I mentioned above, Appeals previously has accepted non-frivolous requests seeking review of the IRC § 6702 penalty. Nevertheless, over TAS objections and without seeking stakeholder comment or providing a meaningful explanation, it later unilaterally barred all such reviews. This reversal of policy, however, is not required by the law, and Appeals has legal authority to conduct non-frivolous reviews of the IRC § 6702 penalty. Even so, Appeals has stripped good-faith taxpayers of their right to file a non-frivolous appeal of the penalty. The adoption and continuation of this policy represent a punitive and unnecessary denial of fundamental taxpayer rights that Appeals should rectify.
I understand that Appeals is concerned about resources and has articulated fears that it will receive a flood of frivolous appeals. I am not, however, suggesting that Appeals begin considering frivolous protests or claims of taxpayers who have repeatedly filed returns with frivolous positions. Rather, it should review good-faith, non-frivolous challenges regarding the correctness or fairness of the IRC § 6702 penalty. This distinction is significant, as Appeals would only be reviewing protests filed in good faith and that manifest an intent neither to impede nor delay tax administration; moreover, as noted above, the W&I IRM (18.104.22.168.4) requires the taxpayer to first fully pay the penalty and then seek a refund. (I can, however, envision some exigent circumstances under which both W&I and Appeals should consider facilitating review of these cases without mandating full payment of the penalty). The availability of an appeal in these cases, which likely would be relatively few in number, is essential not only to protect taxpayer rights, but also to preserve the integrity of the IRC § 6702 penalty program itself.
W&I already makes the determination, on a case-by-case basis, regarding which IRC § 6702 abatement requests are frivolous and which are non-frivolous. In turn, this distinction is reflected in the different Letters 105C issued to taxpayers by W&I (as reflected in linked IRM 22.214.171.124.4). When taxpayers file a non-frivolous request for abatement of an IRC § 6702 penalty that will not be granted by W&I, those taxpayers, who have paid the assessment, already receive a Letter 105C nominally granting them appeal rights. Appeals should recommence provision of this review, which W&I already facilitates, and which considerations of fairness, taxpayer rights, and quality tax administration recommend. I urge Appeals to return to its prior policy of accepting this category of cases, thereby making available to qualifying good-faith taxpayers the independent administrative recourse that Appeals was created to provide in the first place.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.
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