New report: Procedures Are Needed to Prevent Backdating Penalty Approvals

Procedures Are Needed to Prevent Backdating Penalty Approvals Why did we do this audit? We reviewed the IRS’s compliance with Internal Revenue Code § 6751(b). It 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 leverage in negotiations during an audit. I.R.C. § 6751(b) requires supervisory approval of certain penalties before their assessment. If manager approval is not timely, managers might be tempted to backdate their approval to make it appear it was timely under the law.  In LakePoint Land II, LLC v. Comm’r, T.C.M. (RIA) 2023-111 (LakePoint), the Tax Court found that the IRS had backdated the approval of certain penalties and had misrepresented that fact to the court. What did we find? After the LakePoint decision, the IRS and the Office of the Chief Counsel reviewed 1,268 syndicated conservation easement (SCE) cases for compliance with I.R.C. § 6751(b). The IRS focused on SCE cases because they deem these transactions abusive. In 829 docketed cases, 13 lacked valid supervisory approval, including 7 with backdated approvals, resulting in over $68 million in conceded penalties. In 439 nondocketed cases, we identified 6 potential exceptions where there was missing documentation that would verify managerial approval was obtained before the summary report was mailed to the taxpayer.   Read the full report Having trouble viewing this email? View it as a Web page.

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