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Imposing the Fraud Penalty after Prosecution While Satisfying IRC 6751(b)

Posted on July 23, 2020

In Minemyer v. Commissioner, T.C. Memo 2020-99 the Tax Court determined that the IRS failed to prove it made a timely approval of the fraud penalty and determined that the IRS could not assess the penalty in this case. Because Mr. Minemyer had the fraud penalty imposed after a successful prosecution of him for tax evasion under IRC 7201, I found the application of IRC 6751(b) here produced a surprising result, though I cannot say the decision is incorrect and sympathize with any effort to parse through the language of this statute. The Tax Court seeks to enforce a bright line rule even though the circumstances of this case which follows a criminal conviction present a somewhat different situation than the ordinary imposition of a civil penalty

In a case like this, IRS policy ties the hands of the revenue agent and the immediate supervisor making the imposition of the fraud penalty against Mr. Minemyer a foregone conclusion. In some respects, the imposition of the penalty here acts somewhat like the penalties imposed by computer because the IRS imposes the penalty automatically by virtue of its policy and not imposing the penalty requires the agent to obtain approvals. The apparent legislative goal in passing IRC 6751(b) was to prevent the IRS from using penalties as a bargaining chip. The goal serves a laudable purpose and a more clearly written statute enforcing that goal would receive support from everyone. We have written before on many occasions, samples found here and here, about the defects in the statutory language of IRC 6751(b).

Here, the goal of the statute really plays no part in the imposition of the penalty. If the IRS makes a determination that someone has committed tax evasion and refers the case to the Department of Justice for prosecution, the imposition of the fraud penalty could come as no surprise – and particularly so when the person is actually convicted of tax evasion. In a case such as this, the imposition of the penalty must occur pursuant to the Internal Revenue Manual unless the revenue agent or the supervisor get permission at a high level to not impose the fraud penalty.

The revenue agent apparently visited Mr. Minemyer in prison to secure his signature on Form 4549 consenting to the assessment of the tax and the fraud penalty. Mr. Minemyer apparently did sign the Form 4549 but later withdrew his consent asserting that he signed it under duress. At the Tax Court trial, the IRS did not produce the Form 4549.

This case involves the tax years 2000 and 2001. So, the years come after the passage of IRC 6751(b) in 1998 but well before the IRS focused on compliance with IRC 6751(b). The conviction here occurred in 2009 before the passage of the statute permitting restitution based assessments discussed here.

Nonetheless, the revenue agent actually obtained the signature of the immediate supervisor before the IRS sent the 30-day letter. The problem the Court has with the penalty approval here turns again on the language of the poorly crafted statute, which requires the supervisor’s signature before the “initial determination” regarding the imposition of the penalty. Here, the effort to have Mr. Minemyer sign the Form 4549 occurred prior to the sending of the 30-day letter and may have been the initial determination, which may require the IRS demonstrate supervisory approval at an earlier stage than the 30-day letter. Here’s what the Court says:

In Frost v. Commissioner, 154 T.C. ___, ___ (slip op. at 21-22) (Jan. 7, 2020), we held that “the Commissioner’s introduction of evidence of written approval of a penalty before a formal communication of the penalty to the taxpayer is sufficient to carry his initial burden of production under section 7491(c) to show that he complied with the procedural requirement of section 6751(b)(1).” As in Frost, respondent here introduced evidence of written approval of the penalty before a formal communication (i.e., the 30-day letter). Also as in Frost, petitioner has not claimed that there was a prior initial penalty determination. Unlike Frost, our record does support the conclusion that respondent may have formally communicated his initial penalty determination to petitioner before the 30-day letter. Cf. Frost v. Commissioner, 154 T.C. at ___ (slip op. at 23) (“[P]etitioner has not claimed, nor does the record support a conclusion, that respondent formally communicated his initial penalty determination to petitioner before the date that the examining agent’s manager signed the Civil Penalty Approval Form.” (Emphasis added.)).

When the revenue agent visited petitioner in prison, he provided petitioner a Form 4549, which petitioner signed. Petitioner contends that he was under duress to sign the Form 4549 and for that reason he withdrew his consent. During respondent’s counsel’s opening statement at trial he contended that petitioner [*8] received a preliminary form before the formal communication in the 30-day letter and that petitioner signed it, agreeing to the fraud penalty for 2001. This statement is an acknowledgment that the Form 4549 communicated an intention to impose a penalty.

Respondent did not offer this Form 4549 into evidence. Therefore, we cannot determine whether the Form 4549 or the 30-day letter was the initial determination for the purpose of section 6751(b). Without the Form 4549 we cannot determine whether that form clearly reflected the revenue agent’s conclusion that petitioner should be subject to a penalty. See Carter v. Commissioner, at *30. If the Form 4549 was the initial determination of the fraud penalty for 2001, there is no evidence of its timely written approval.

Accordingly, we conclude respondent has not met the burden of production for the determination of the section 6663(a) fraud penalty for 2001. Therefore, petitioner is not liable for the fraud penalty for 2001.

The tossing of the fraud penalty against someone convicted of tax evasion on this technicality seems a bit harsh and out of sync with the purpose of the statute but the Court must deal with a poorly written statute and seeks to establish bright line rules. Perhaps this situation would not occur going forward because of the heightened emphasis on IRC 6751(b) at the IRS due to all of the litigation. Maybe Congress did not care when the IRS lost lots of penalties due to the application of IRC 6751(b), since the IRS takes an approach to penalties that many might view as too zealous. Imposing the fraud penalty against someone convicted of tax evasion can hardly fall into the over-zealous category and failing to impose the penalty on a convicted tax felon for a technicality like this should cause Congress to think about writing this provision in language that fits with the language of the tax code.

As mentioned above, the imposition of the fraud penalty against Mr. Minemyer occurred as automatically as the penalty imposed by computers. Individuals convicted of violations of IRC 7201 always get the fraud penalty. The IRS views it as inappropriate to ask the Department of Justice to prosecute someone for tax evasion with a guilt beyond a reasonable doubt standard and not pursue the civil fraud penalty thereafter. My thinking on this case is no doubt colored by my view that to not impose the fraud penalty here the revenue agent and the immediate supervisor would have needed to move heaven and earth and that everyone knew this. I realize those penalty administrative norms do not match the language of this poorly worded statute, but Mr. Minemyer’s civil fraud penalty was, in reality, approved the day his case was referred to DOJ for prosecution. The revenue agent and the immediate supervisor served as no more than window dressing in the imposition of the penalty in a case such as this.

The decision in this case was entered on July 1, 2020, just three months and six days short of the 10-year anniversary of the filing of the petition in this case back in October of 2010.  The IRS must regret that the case did not reach a decision point during the first five years of its existence before the jurisprudence on Graev developed.  This would have been a slam dunk case for the IRS back during that period.

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