Last week in Mohamed v Commmssioner, the Tax Court sustained $7,000 of EITC due diligence penalties against a preparer. The preparer, who was a CPA, had an active business preparing individual tax returns, including many EITC returns. The opinion provides a rare court review of the imposition of these penalties.
The EITC due diligence penalty has been on the books for a while; the current penalty is $500 for each failure to comply. Requirements include preparing and retaining forms like the Paid Preparer’s Earned Income Credit Checklist, and the Earned Income Credit Worksheet. In addition, the rules require that tax return preparer must not know, or have reason to know, that any information pertaining to the EITC is incorrect.
This penalty is even more important for preparers, as Congress recently expanded the scope of due diligence penalties to include the child tax credit and the American opportunity tax credit.
There are not many cases involving the penalty, and while Mohamed is a summary opinion, it does provide some insights into the process and limits on Tax Court review of the penalty.
The opinion discusses how IRS examined a number of Mohamed’s clients as part of its EITC due diligence audit program. He was visited by a tax compliance officer, who reviewed 50 of Mohamed’s returns. The audit report proposed a penalty on 20 of the 50 returns; while the penalty is not subject to deficiency procedures, the IRM provides and IRS allowed for Mohamed to challenge the proposed assessment before Appeals.
Mohamed met with an Appeals Officer for 6 hours to discuss the penalty; after the meeting Appeals agreed to remove the penalty from 5 of the returns. Appeals also asked for more information on 4 other returns. Mohamed sent documents to Appeals and also had a follow up phone conversation. The correspondence and phone call led Appeals to remove the penalty from another return, bringing the penalty down to 14 returns, or $7,000.
Appeals sent a closing letter indicating that it was recommending a penalty assessment on 14 of the returns; it also let Mohamed know that he could pay the penalty and file a refund claim and eventually sue in district court or the Court of Federal Claims if he wanted court review of the penalty.
IRS assessed the penalty and issued a notice of intent to levy. Mohamed did not pay and instead filed a CDP request. In the hearing he asked to challenge the underlying assessment. The settlement officer refused that request on the theory that he had a prior opportunity to challenge the penalty in the preassessment Appeals hearing.
PT readers are likely familiar with the legal issue; namely whether a prior opportunity to dispute the amount or existence of the liability includes for these purposes an administrative preassessment Appeals hearing. Taxpayers have lost in Tax Court and circuit courts on this issue (For more see Keith’s discussion Continued Developments in Taxpayer Attempts to Litigate the Merits in CDP Cases.)
Given the Tax Court and appellate courts’ views on this issue, it is not surprising Mohamed had an uphill battle. He gamely attempted to distinguish the adverse authority, arguing that Appeals did not give him a chance to rebut its conclusions and that it terminated the process prematurely.
The Tax Court disagreed, emphasizing that he participated fully in the examination process, had a long in-person meeting with Appeals and follow up conversations and correspondence:
In sum, the record shows that in 2015 petitioner was provided a full and fair opportunity to challenge the imposition of the disputed penalties before the Appeals Office and he meaningfully participated in that proceeding. Although petitioner would have preferred to continue to dispute his liability, we are satisfied hat the Appeals Office conducted a fair and comprehensive review of the matter and acted properly in concluding the matter by issuing its closing letter.
That the Tax Court looked into the process that Appeals provided in the preasessment hearing is a slight opening for other taxpayers who may not have had the same opportunities with Appeals. Yet Mohamed is another in the growing line of cases that show that CDP is not an avenue for challenging the amount or existence of a liability even if there is no prior opportunity for court review.
There is one other aspect of the case worth noting. Mohamed also challenged the penalty under Section 6751(b) which requires that no IRC penalty “shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate…”
The court considered this issue on the merits and found that the compliance officer had prepared a Form 8484, which is used to refer preparers for possible discipline to the Return Preparer Office. That form was where the compliance officer proposed the penalties, and the supervisor signed that form and approved referral. Interestingly the record did not include a Form 8278, which is what IRS typically uses to propose preparer penalties. The lack of that form did not trouble the Tax Court:
On its face, Form 8484 is a report that IRS personnel are encouraged to use to convey information to the OPR about questionable practitioner conduct. Although the form does not function to authorize the assessment of a penalty, in this case the TCO’s acting immediate supervisor placed her digital signature on the Form 8484 indicating that she agreed with the referral of the matter to the OPR and that she approved the audit report (attached to the Form 8484) which recommended that 20 section 6695(g) penalties be assessed against petitioner. The audit report included a detailed explanation in support of each of the 20 penalties. Under the circumstances of this case, we conclude that the TCO’s initial determination to assess the penalties in dispute was personally approved in writing by her immediate supervisor within the meaning of section 6751(b).
As this is a summary opinion not subject to further review, there is no chance to in this case see if the IRS’s failure to seek penalty approval in the proper manner amounted to compliance with Section 6751(b). As we have discussed (most recently in Samantha Galvin’s Designated Order post from a few weeks ago), the 6751(b) issue is one that the Tax Court and other courts are increasingly facing.