Received an IRS Penalty Notice? What You Need to Know Before You Respond
Many taxpayers assume that if the IRS made a procedural mistake while examining a return, any resulting penalties can automatically be overturned. Recent court decisions suggest that argument is becoming increasingly difficult.
In two significant cases, Swift v. Commissioner and Battat v. Commissioner, taxpayers challenged IRS penalties based on Internal Revenue Code Section 6751(b), which generally requires written supervisory approval before certain penalties are assessed. Both taxpayers argued that the IRS failed to obtain timely approval. The courts rejected those arguments, and the United States Supreme Court declined to review the issue.
The result is an important reminder for taxpayers: procedural challenges still exist, but they are rarely the strongest defense against an IRS notice. In most cases, success comes from attacking the underlying tax adjustment or establishing reasonable cause.
What Is Section 6751(b)?
Congress enacted Section 6751(b) to help prevent IRS agents from using penalties as leverage during examinations. The statute generally requires written supervisory approval before certain penalties may be assessed.
For years, taxpayers and the IRS have disagreed about exactly when that approval must occur.
The taxpayer position was that supervisory approval must occur before the IRS formally communicates a penalty determination to the taxpayer.
The IRS position was that approval is timely as long as it occurs before the penalty is assessed, or at least before the IRS loses discretion regarding whether to assert the penalty.
That disagreement generated years of litigation in the Tax Court and federal appellate courts.
The Swift Case
In Swift v. Commissioner, the Fifth Circuit considered whether the IRS properly obtained supervisory approval before imposing accuracy related penalties under Section 6662. The taxpayers argued that an IRS examination letter proposing penalties was sent before supervisory approval occurred.
The Fifth Circuit rejected that argument and held that Section 6751(b) requires supervisory approval before assessment of the penalty or before the supervisor loses discretion regarding the penalty determination. Approval obtained before issuance of the notice of deficiency satisfied the statute. The court specifically rejected the argument that approval must occur before the taxpayer receives a formal communication discussing penalties.
The Fifth Circuit also observed that every federal appellate court to address the issue had moved away from the earlier Tax Court interpretation requiring approval before formal communication with the taxpayer.
The Battat Case
The Eleventh Circuit reached a similar conclusion in Battat v. Commissioner. The taxpayers argued that an IRS examination report proposing penalties was issued before written supervisory approval.
Relying on its earlier decision in Kroner v. Commissioner, the Eleventh Circuit held that Section 6751(b) was satisfied because supervisory approval occurred before the penalties were assessed. The court declined to invalidate the penalties based on the timing of the IRS communications with the taxpayers.
The Department of Justice later opposed Supreme Court review, noting that every federal circuit court to address the issue had reached substantially the same conclusion.
Why This Matters for Taxpayers Receiving IRS Notices
These cases do not mean taxpayers should stop scrutinizing IRS procedures. IRS notices still contain errors, and procedural defenses remain available in the right circumstances.
However, the decisions demonstrate that courts increasingly focus on the substance of the tax dispute rather than technical arguments regarding internal IRS approval processes.
If you receive an IRS notice proposing additional tax, penalties, or interest, stronger defenses often include:
- Demonstrating that the IRS adjustment is factually incorrect.
- Showing that the law supports the position reported on the return.
- Establishing reasonable cause under Section 6664.
- Proving reliance on qualified professional advice.
- Correcting factual misunderstandings during Appeals.
- Negotiating penalty relief through administrative procedures.
What Defenses Still Work?
Many taxpayers are surprised to learn that penalties can often be reduced or eliminated without relying on procedural arguments.
Depending on the facts, common defenses include:
- Reasonable cause.
- Good faith reliance on a CPA, attorney, or other qualified advisor.
- Substantial authority for the tax position taken.
- First Time Penalty Abatement.
- Administrative waiver programs.
- Errors in the IRS calculation of tax or penalties.
In practice, these defenses are frequently more successful than technical challenges involving internal IRS approval procedures.
Need Help Responding to an IRS Notice?
An IRS notice does not automatically mean the IRS is correct. Many assessments can be reduced, modified, or eliminated when challenged properly.
Whether you are dealing with an examination, proposed penalty, notice of deficiency, or IRS Appeals matter, understanding your available defenses is critical.
Contact MeFinal Thoughts
The Supreme Court's decision not to review the recent Swift and Battat cases leaves taxpayers with a clear message. Courts are becoming less receptive to attempts to invalidate IRS penalties based solely on the timing of supervisory approval under Section 6751(b).
That does not mean taxpayers should simply accept an IRS notice. It means the focus should shift to the strongest available arguments: the facts, the law, reasonable cause, and effective representation during the examination and Appeals process.
