Congress added a simple rule to the Code in 1998. Before the IRS can assess most penalties, a supervisor has to sign off. IRC § 6751(b)(1) says no 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." For years, it was not clear whether taxpayers could enforce that rule in Tax Court. Graev v. Commissioner settled that they can.
The Facts
Lawrence and Lorna Graev claimed charitable contribution deductions on their 2004 return of $99,000 for a cash contribution and $990,000 for a facade easement given to the National Architectural Trust, and a carryover deduction of $445,551 for 2005. The IRS disallowed both deductions.
During the audit, the revenue agent proposed 40 percent gross valuation misstatement penalties on the noncash contribution. When the proposed notice of deficiency went to IRS Area Counsel for required review, the counsel attorney directed that an alternative position be added: 20 percent accuracy-related penalties under § 6662(a) on the same items. His immediate supervisor approved that in writing. Later, in Tax Court, the IRS conceded the 40 percent penalties and amended its answer to assert 20 percent penalties on both the noncash and the cash contributions. Those penalties were also approved in writing by the appropriate supervisor.
The Graevs argued the penalties were barred by § 6751(b). In an earlier opinion in the same case, issued November 30, 2016, the Tax Court said that argument was premature in a deficiency case, which happens before assessment. Then, on March 20, 2017, the Second Circuit decided Chai v. Commissioner, 851 F.3d 190, holding that written approval under § 6751(b)(1) "is appropriately viewed as an element of a penalty claim" and must be obtained no later than the date the IRS issues the notice of deficiency, or files an answer or amended answer asserting the penalty. The Graevs' case was appealable to the Second Circuit, so the Tax Court vacated its decision and took the issue up again.
The Issue
Can a taxpayer raise § 6751(b) in a Tax Court deficiency case, who must prove compliance, and did the IRS comply here?
The Holding
In a reviewed opinion by Judge Thornton, the Tax Court held that the § 6751(b) argument "is appropriately considered in this deficiency proceeding," overruled its prior opinion in part, and held that "a showing that the written approval requirement of I.R.C. sec. 6751(b) is satisfied is part of R's burden of production under I.R.C. sec. 7491(c)." The IRS met that burden, and the Graevs were liable for the 20 percent penalties.
The Reasoning
Burden of production on penalties
IRC § 7491(c) says the IRS "shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty." To meet it, the IRS must present enough evidence to show the penalty is appropriate absent available defenses. Once compliance with § 6751(b) is properly at issue in a deficiency case, the Court held, proving it becomes part of that burden.
What the IRS has to show, and what the taxpayer has to show
The Court explained the division of labor. The IRS carries the burden of production on the penalty, which now includes evidence of written supervisory approval. Once it meets that burden, the taxpayer bears the burden of proof on defenses such as reasonable cause, except where the IRS raises a new matter, an increased deficiency or an affirmative defense in its answer, in which case the burden shifts to the IRS under the Tax Court's rules.
Why counsel was involved at all
The facts show how a penalty can originate somewhere other than with the revenue agent. Because the proposed deficiencies exceeded $250,000 for each year, IRS procedures required Area Counsel to review the proposed notice of deficiency. The deficiencies were $237,481 for 2004 and $412,620 for 2005. It was during that review that the alternative 20 percent penalties were added.
Who made the initial determination
The Graevs argued that the counsel attorney could not make an "initial determination" because his role was only to advise. The Court disagreed. IRS procedures assign review of certain proposed notices of deficiency to the Office of Chief Counsel, and any initial determination "is mere advice until it receives the" required approval. The attorney's recommendation was the initial determination of the alternative penalties, and his immediate supervisor approved it in writing. The penalties raised in the amended answer were also approved in writing.
A divided court
The opinion was reviewed by the full Tax Court. Several judges wrote separately, including Judge Lauber in a concurrence and Judge Buch dissenting in part. Judge Lauber noted the purpose Congress expressed for § 6751(b): to help ensure that penalties are imposed only where appropriate "and not as a bargaining chip."
What Happened Next
The fight moved to timing. When must approval happen? Relying on Chai, the Tax Court for a time required approval before the IRS formally communicated its initial determination of the penalty to the taxpayer. The Eleventh Circuit rejected that approach in Kroner v. Commissioner, 48 F.4th 1272 (11th Cir. 2022). It held that § 6751(b) "regulates assessments; it does not regulate communications to the taxpayer," so approval is timely if it comes before the assessment is made. "Thus, we reverse the Tax Court."
Congress has also carved out exceptions. Under § 6751(b)(2), the approval requirement does not apply to additions to tax under §§ 6651, 6654 and 6655, to certain § 6662 penalties under subsection (b)(9) or (b)(10), or to any other penalty automatically calculated through electronic means.
What It Means for Taxpayers Today
Make the IRS show the signature
If you are in Tax Court on a penalty, the IRS must produce evidence that the penalty was approved in writing by the right supervisor. Do not concede it. Ask for the approval form in discovery and check who made the initial determination, who signed, and when.
Where you live matters
The timing rule depends on which circuit your case would be appealed to. For Floridians, the Eleventh Circuit's Kroner decision controls, so approval generally needs only to precede assessment. Taxpayers in other circuits may face different rules. Check the law of your circuit before building a defense around timing.
Not every penalty is covered
The late filing and late payment additions under § 6651 and the estimated tax additions under §§ 6654 and 6655 are excluded, as are penalties computed electronically. For those, the defenses are reasonable cause and the other relief routes discussed in United States v. Boyle. For accuracy-related penalties assessed through an examination, § 6751(b) remains a meaningful check.
Penalties as bargaining chips
Congress wrote § 6751(b) because of concern that penalties were being used for leverage. If you are in an audit and a penalty appears that seems designed to pressure a settlement, ask whether it was approved and by whom. See also Neonatology Associates v. Commissioner for the substantive reliance defense to the same penalties.
The Bottom Line
Graev made a procedural safeguard enforceable in the forum where most penalty fights happen. The IRS has to prove a supervisor approved the penalty in writing. Courts still disagree about how early that approval must come, but no court disputes that it must exist.