The Tax Court’s recent decision in Walquist v. Commissioner, 152 T.C. No. 3, further clarified the application of the supervisor approval requirement under section 6751(b)(1), which has been a key issue since Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017). In Walquist, the Tax Court held that accuracy-related penalties determined by an IRS computer program without human review are “automatically calculated through electronic means” under section 6751(b)(2)(B). As a result, those penalties are exempt from the written supervisor approval requirement under section 6751(b)(1).
The petitioners in Walquist failed to report compensation for 2014. The IRS’ computer document matching recognized the underreporting, and the IRS processed the examination of the Walquist’s return through its Automated Correspondence Exam system using its Correspondence Examination Automated Support (CEAS) software program. The Tax Court explained that this software is designed to process cases “with minimal to no tax examiner involvement until a taxpayer reply is received.” The CEAS program eventually issued the petitioners a general 30-day letter, which systematically included an accuracy-related penalty. The petitioners failed to respond to the 30-day letter, so the CEAS program issued them a notice of deficiency, which included the accuracy-related penalty from the 30-day letter.
The petitioners filed a purported petition with the Tax Court, which consisted of the notice of deficiency and appended various documents containing assertions commonly advanced by tax protesters. Even in such cases, the IRS’ burden of production generally includes establishing compliance with section 6751(b), which requires that penalties be “personally approved (in writing) by the immediate supervisor of the individual making such determination.” See Chai, 851 F.3d at 217.
Supervisor approval, however, is not required for “any other penalty automatically calculated through electronic means.” IRC 6751(b)(2)(B). The Tax Court held that an accuracy-related penalty determined by an IRS computer program is a “penalty automatically calculated through electronic means.” The Tax Court pointed out that if the penalty at issue was not a “penalty automatically calculated through electronic means,” it would be difficult to conceive what type of penalty would qualify for the statutory exception to the supervisor approval requirement.