Unveiling the Tax Maze: Rethinking How the IRS Navigates Supervisory Reviews

In the intricate world of taxation, uncertainties surrounding IRS penalties often leave taxpayers in a state of confusion. Crystal Clear Tax, a beacon of clarity in the financial realm, delves into the complexities of proposed IRS regulations and their potential impact on taxpayers. Let’s explore the nuances of supervisory approval, the pitfalls in proposed regulations, and how Crystal Clear Tax advocates for a fairer and more transparent tax system.

Supervisory Approval: A Tangled Web of Uncertainty:

The current ambiguity in the statute regarding when supervisory approval must occur has given rise to conflicting court decisions, leaving taxpayers uncertain about their treatment by the IRS. The proposed regulations aim to bring clarity, yet Crystal Clear Tax emphasizes the need for a balance that protects taxpayers.

Under IRC § 6751(b)(1), the proposed regulations allow supervisory approval for pre-assessment penalties subject to Tax Court review up until the issuance of the statutory notice of deficiency. While this broad window provides clarity, it opens the door to potential abuse. Crystal Clear Tax advocates for supervisory approval before communicating penalties in writing to ensure fairness and prevent undue pressure on taxpayers.

Negligence Penalties: The Overlooked Challenge:

The proposed regulations introduce exceptions for certain penalties, including negligence penalties under IRC § 6662(b)(1). Crystal Clear Tax, however, points out the inherent subjectivity of negligence penalties, which demand a nuanced understanding of a taxpayer’s state of mind and efforts. Unlike mechanical penalties, negligence penalties should not be exempt from supervisory review.

Crystal Clear Tax challenges the IRS policy of incorporating supervisory review for negligence penalties only if taxpayers respond. Recognizing that taxpayers may not respond for various reasons, Crystal Clear Tax urges the IRS to require employee and supervisor involvement in determining and approving negligence penalties. This ensures a thorough assessment based on all prevailing facts and circumstances, safeguarding taxpayers’ rights.

Automated Under Reporter Penalties: An Inequitable Outcome:

The blog sheds light on the inequitable outcome faced by taxpayers, particularly lower-income individuals, who respond timely to automated under reporter notices. Delays in processing responses can result in penalties without supervisory review, contradicting the principles of fairness. Crystal Clear Tax calls on the IRS to address these situations promptly to ensure every taxpayer receives due consideration.

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Crystal Clear Tax: Your Partner in Financial Clarity:

Amidst these challenges, Crystal Clear Tax stands out as a trusted partner for individuals and businesses alike. Specializing in individual and business tax services, accounting and bookkeeping, and financial advisory, Crystal Clear Tax takes pride in tailoring its expertise to meet the specific needs of single mothers, company owners, and professionals across diverse industries.

For single-mom entrepreneurs juggling multiple responsibilities or business owners seeking efficient financial management, Crystal Clear Tax offers a comprehensive suite of services. We understand the value of your time and the importance of reliable financial support.

Conclusion: A Call for Reform:

The heavy-handed approach of the IRS in supervisory review demands reconsideration. Crystal Clear Tax urges the IRS to embrace the opportunity presented by the proposed regulations under IRC § 6751 to create a fairer system. The call for reform extends to Congress, urging them to clarify the law and protect taxpayers’ rights.

As you navigate the complexities of taxation, trust Crystal Clear Tax to provide clarity, support, and a commitment to your financial well-being. Book a discovery call with us today and experience the difference that personalized, transparent financial services can make.

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Certain penalties necessitate approval from a supervisor before the IRS can impose them. However, the relevant statute lacks clarity regarding when this approval must take place. This ambiguity has led to conflicting court decisions, leaving taxpayers uncertain about their treatment by the IRS and resulting in unnecessary litigation. To address this issue, the IRS has proposed regulations, with public comments accepted until July 10, 2023. The next step involves a public hearing scheduled for September 11, 2023.

The Taxpayer Advocate Service (TAS) has advocated for a clear resolution, but our suggested line of clarity differs from the IRS’s approach. While the proposed regulations bring clarity, there’s room for improvement to ensure they benefit taxpayers rather than causing harm.

Timing of Supervisory Approval

IRC § 6751(b)(1) generally mandates written supervisory approval before assessing any penalty. However, courts have varied in interpreting this requirement. For instance, the U.S. Tax Court in Clay v. Commissioner ruled that supervisory approval for penalties subject to deficiency procedures was needed before formally communicating with the taxpayer. Conversely, the U.S. Court of Appeals for the Second Circuit in Chai v. Commissioner held that approval could occur until the issuance of the statutory notice of deficiency.

Under the proposed regulations, for pre-assessment penalties subject to Tax Court review, supervisory approval can happen before the issuance of the statutory notice of deficiency. Penalties not subject to pre-assessment Tax Court review can be approved up until the assessment itself. While this broadens the window, TAS has consistently urged the IRS to require supervisory approval before a proposed penalty is communicated in writing to a taxpayer.

The Issue with IRS’s Approach

The IRS’s proposed approach raises concerns about potential abuse, as it allows the discussion of penalties with taxpayers without oversight. There’s a worry that IRS examiners may propose penalties as bargaining chips during case resolution, with no genuine intention of imposing them. The proposed regulations, while unauthorized, don’t safeguard taxpayers from possible misuse.

Supervisory Review of Negligence Penalties

The proposed regulations also fall short concerning negligence penalties. IRC § 6751(b)(2)(A) exempts certain penalties from supervisory review, such as failure-to-file and failure-to-pay penalties. Another exception in IRC § 6751(b)(2)(B) includes penalties calculated electronically, interpreted by the IRS to cover negligence penalties under IRC § 6662(b)(1).

Unlike mechanical penalties, negligence penalties require subjective assessment, involving the taxpayer’s state of mind and surrounding circumstances. The proposed regulations maintain a policy of incorporating supervisory review for negligence penalties only if taxpayers respond, creating potential issues for those who don’t respond for various reasons.

Impact on Automated Underreporter Penalties

Automated underreporter notices proposing tax adjustments and penalties may lead to inequitable outcomes for taxpayers, particularly lower-income individuals. In some cases, taxpayers respond timely, but the IRS fails to process and consider their responses before imposing penalties.


The IRS’s approach to supervisory review of penalties may be burdensome for taxpayers. Supervisory review should precede written communication of applicable penalties to taxpayers. Negligence penalties should presumptively undergo supervisory review rather than being automatically assessed by a computer program. The proposed regulations offer an opportunity for the IRS to reconsider its approach, and there’s a call for Congress to clarify the law to protect taxpayers’ rights.

At Crystal Clear Tax, we specialize in addressing the unique challenges faced by diverse professionals, single mothers entrepreneurs, and small businesses. Our comprehensive services encompass expert accounting, personalized financial advisory, and tax solutions, ensuring compliance and optimization for individuals and corporations alike. Partner with us for financial clarity and success.

Ready to navigate complex tax matters with confidence? Book a discovery call today and let Crystal Clear Tax tailor its expertise to meet your unique needs. Your path to financial peace of mind starts here.

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