Execution of Closing Agreement for Tax Return Preparer Penalties Waived Supervisory Approval Requirement

Eli Noff, Esq., Partner
Mary F. Lundstedt, Esq., Associate

Generally, per Internal Revenue Code (IRC) §6751(b)(1), the Internal Revenue Service (IRS) is precluded from assessing a penalty unless the initial determination 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.”

Recently, the Tax Court in Rockafellor v. Commissioner,[1]considered this IRC §6751(b)(1) supervisory approval requirement in the context of tax return preparer penalties for which taxpayer signed a closing agreement determining those penalties and relinquishing her ability to pursue abatement or refund of them later. The Court determined that: (1) deficiency procedures are inapplicable to the assessment or collection of tax return preparer penalties, and (2) execution of a “final and conclusive” closing agreement waived the procedural requirement of IRC §6751(b)(1).


Taxpayer and her father ran a tax return preparation partnership, which dissolved in 2010. In 2013, the IRS issued taxpayer a notice of deficiency (NOD) regarding tax years 2007 and 2010. The NOD asserted tax deficiencies and penalties for both years.

Taxpayer timely filed a petition for redetermination with the Tax Court. While the matter was pending in court, the IRS also examined her business clients’ returns and determined taxpayer was liable for tax return preparer penalties under IRC §6694(b) for tax years 2012 and 2013.

Ultimately, the parties reached a settlement comprised of a signed “closing agreement” and a stipulated decision. The closing agreement accomplished two things. First, it resolved taxpayer’s IRC §6694(b) tax return preparer penalties such that: (1) taxpayer was liable for an amount of $40,000 for 2012 and $10,000 for 2013, and (2) no abatement or refund claim would be filed or considered regarding those penalties. Additionally, the closing agreement “specified that it was ‘final and conclusive’ except that the matter could ‘be reopened in the event of fraud, malfeasance, or misrepresentation of fact.'”[2]

The second component of the settlement-the stipulated decision-resulted in taxpayer agreeing to: (1) a $53,466 tax deficiency and an IRC §6662(a) accuracy-related penalty in the amount of $10,693 for tax year 2007, and (2) a $19,575 tax deficiency and IRC §6662(a) accuracy-related penalty in the amount of $3,915 for tax year 2010.

Subsequently, the IRS began collection activities for the settled liabilities-filing a notice of federal tax lien (NFTL) for the years at issue and notifying her of her right to a Collection Due Process (CDP) hearing. Taxpayer timely filed the request for a hearing, highlighting her desire for an installment agreement and lien withdrawal. Taxpayer did not identify any other issues on the form or dispute the underlying liability.

The CDP Settlement Officer (SO) reviewed the case and noted the agreement pertaining to the tax return preparer penalties and the signed closing agreement. The SO then mailed taxpayer-emphasizing that she must provide proof of estimated tax compliance before any collection alternative could be considered.

During the CDP hearing, taxpayer’s representative proposed a $500 per month installment agreement and stated that taxpayer was not challenging the lien filing. The SO rejected the proposal due to a financial analysis provided a few months earlier, which showed that she could pay over $3,000 per month. The SO further noted that he was unable to consider an installment agreement, because taxpayer had still not made her estimated tax payments. The SO provided taxpayer additional time for her to make her estimated tax payment.

Taxpayer notified SO that she had made a partial payment of her estimated tax liability on the date required by the SO, so the SO gave taxpayer another extension of time to pay it in full. However, taxpayer failed to do that.

Thereafter, the taxpayer did not communicate with the SO for two months. She also failed to provide the requested updated financial information. Eventually, the SO closed the case, and the IRS Office of Appeals issued a NOD. This NOD sustained the filing of the NFTL and rejected taxpayer’s request for a collection alternative.

Taxpayer timely filed a petition with the court for review of the NOD.

Analysis and Holding

The Court first noted that taxpayer’s petition raises challenges to tax years for which tax return preparer penalties were fixed in the closing agreement. Specifically, the Court noted that taxpayer challenged: (1) the underlying tax liabilities for tax years 2012 and 2013; (2) that she was coerced into executing the closing agreement; (3) that the tax return preparer penalties were improper due to the fact that the IRS did not obtain proper IRC §6751(b)(1) supervisory approval for determination of those penalties pertaining to tax years 2012 and 2013.

The Court clarified that if the underlying tax liability is not raised in the CDP hearing, then the taxpayer is precluded from disputing it thereafter. The Court stated that:

An issue is not properly raised if the taxpayer does not request consideration of the issue by the Office of Appeals, or if consideration is requested but the taxpayer did not present to the Office of Appeals any evidence regarding the issue after being given a reasonable opportunity to do so.[3]

Since taxpayer did not raise her underlying tax liability challenge before the Office of Appeals, the Court concluded that it could not review them now.

In the context of its review of whether or not the SO abused his discretion, the Court proceeded to consider taxpayer’s supervisory approval argument-i.e., that the tax return preparer penalties were improper because IRC §6751(b)(1) supervisory approval for determination of those penalties was not obtained. Here, the Court focused on the “final and conclusive” closing agreement, which both determined the penalties and expressly removed her ability to seek abatement or refund of those penalties. Citing McAvey v. Commissioner,[4]the Court stated that:

Deficiency procedures do not apply to the assessment or collection of section 6694 penalties, see sec. 6696(b), and thus in signing the agreement Ms. Rockafellor effectively consented to assessment and gave up any post assessment challenge. In doing so, she agreed to waive the procedural requirement of section 6751(b)(1).

Furthermore, the Court noted its agreement withMcAvey v. Commissionerthat if any verification error relating to IRC §6751(b)(1) existed, then it was “harmless error” because neither the IRS nor the Tax Court can set aside the closing agreement and taxpayer’s “implicit consent to assessment.”[5]Additionally, the court stated that, again, even assuming the SO failed to verify the supervisory approval-“no bona fide interest would be served by remanding for verification as to this issue.”[6]

The Court also ruled that taxpayer abandoned her claims as to: (1) lien withdrawal, which she did not raise in her petition, and (2) SO abuse of discretion for rejecting installment agreement, which she did not pursue in her brief. Significantly, the Court emphasized that even if taxpayer had properly prosecuted these issues, the Court would have been justified in sustaining the SO’s rejection, because she failed to submit financial information and remained noncompliant with estimated tax payments.

Similarly, as for “coercion,” the Court noted in footnote 3 that she didn’t raise that issue in her petition which “arguably” forecloses review per pleading rules, and that since “the challenge to her underlying liability is barred in toto, we need not tarry on this point.”[7]

Ultimately, finding no abuse of discretion, the Court sustained the NOD upholding the NFTL.


In light of this ruling, taxpayers considering a settlement regarding tax penalties should remember that the language of an executed closing agreement must be carefully drafted. According to the Court, a final, executed closing agreement, which both establishes the penalties and expressly removes the ability to seek abatement or refund of those penalties, can not be set aside and waives the supervisory approval requirement. Additionally, this decision should also convey the importance to readers that taxpayers must maintain communication with SOs, supply requested information, and raise issues in the hearing.

If you have questions or concerns regarding tax penalties, settlements, or Appeals processes, contact Attorney Eli Noff at Frost Law today at 410-497-5947.

[1]T.C. Memo 2019-160 (Dec. 11, 2019).

[2]Id. at 3.

[3]Id. at 8-9.

[4]T.C. Memo. 2018-142 (Aug. 30, 2018).

[5]Rockafellor v. Commissioner, at 11.

[6]Id. at 12.

[7]Id. at 8.

For reprint and licensing requests for this article, click here.

Tags: Articles, Tax Controversies