What Is Memorandum 6751 for IRS Penalty Approval?

The term “Memorandum 6751” is a common misnomer for a rule in the U.S. tax code. The correct reference is Internal Revenue Code (IRC) Section 6751, a statutory mandate establishing a procedural requirement for the IRS when it applies penalties against a taxpayer.

The purpose of this rule is to ensure penalties are not asserted arbitrarily by a single IRS employee. It acts as a safeguard by requiring internal review before the agency formally proposes a penalty. Understanding this rule is valuable for any taxpayer facing an IRS penalty, as it provides a basis for challenging the penalty if the proper procedure was not followed. The law dictates who must approve a penalty, which penalties are covered, and when that approval must occur.

The Supervisory Approval Requirement

The supervisory approval requirement states that no penalty shall be assessed unless the initial determination is personally approved in writing by the immediate supervisor of the individual making the determination. The goal is to prevent an agent from unilaterally deciding to impose a penalty without oversight. This promotes a more considered application of the tax laws by ensuring a second, more experienced individual concurs with the proposed penalty.

The term “supervisor” refers to the direct manager of the IRS employee who first concludes that a penalty is warranted. The “written approval” is a documented action, not a verbal agreement. It must be a physical or electronic signature on a specific document, such as a Civil Penalty Approval Form, that shows the supervisor’s assent to the specific penalty.

This written approval serves as the official record that the procedural safeguard has been met. Without this documented sign-off, the IRS’s authority to assess the penalty is undermined. The process is designed to ensure the decision to penalize a taxpayer is deliberate and has been subject to a supervisory check, adding a layer of accountability.

Penalties Covered by the Requirement

The supervisory approval rule applies broadly to most penalties that involve an element of judgment by an IRS agent. This includes accuracy-related penalties under IRC Section 6662, for reasons such as negligence or a substantial understatement of income tax. More severe penalties, like the civil fraud penalty under IRC Section 6663, also require prior supervisory approval.

There are specific, statutory exceptions to this requirement. The most common exceptions are penalties calculated automatically that do not involve an agent’s discretion. This includes the penalty for failure to file a tax return under IRC Section 6651 and penalties for failure to pay estimated taxes. These are calculated mathematically by IRS computer systems based on the dates and amounts on a tax return.

Timing of the Supervisory Approval

The timing of supervisory approval is important because it ensures the review is meaningful and not just an after-the-fact formality. For years, the precise timing was the subject of litigation, with courts establishing that approval must come before the IRS formally communicates the penalty to the taxpayer in a document with legal significance.

Final regulations have since clarified the standard. For most penalties subject to pre-assessment review in the U.S. Tax Court, written supervisory approval is timely if it is obtained on or before the date the IRS mails the notice of deficiency. The notice of deficiency, also known as a 90-day letter, is the legal notice that the IRS has determined a tax deficiency and gives the taxpayer the right to challenge it in Tax Court. This rule prevents the IRS from using a penalty as a bargaining chip.

Consequences of Non-Compliance

If the IRS fails to adhere to the supervisory approval requirement, the proposed penalty is invalidated. If the IRS cannot prove that it obtained timely, written supervisory approval, it is legally barred from assessing that penalty, even if the taxpayer was otherwise liable for it. This provides a procedural defense for taxpayers.

A taxpayer can challenge a penalty on these grounds during the administrative process with the IRS Independent Office of Appeals or in a petition filed with the U.S. Tax Court. It is the taxpayer’s responsibility to raise the issue of non-compliance as part of their case.

Once the taxpayer raises the issue, the burden of proof shifts to the IRS. The IRS must produce evidence, such as the signed and dated approval form, showing the supervisor approved the penalty on or before the date the notice of deficiency was issued. If the IRS cannot produce this documentation, the court will concede the penalty.