IRS Ordered to Identify When Staff Learned of Penalty Backdating

The US Tax Court ordered the IRS on Tuesday to identify when various agency personnel became aware of misstatements to the court about the date that a $15.2 million penalty against a conservation easement donor was approved.

The court said the dates that IRS personnel became aware of the misstatements are relevant to its consideration of whether to sanction the agency. The IRS has already admitted an employee backdated a signature on a penalty approval form, and that its earlier statements to the court “fall short of the level of excellence and professionalism that the Court has a right to expect,” while denying it acted fraudulently or in bad faith.

The penalty approval date concerns a requirement under tax code Section 6751(b) for an immediate supervisor at the IRS to give written approval of the initial determination to assess various penalties. In a March ruling that the Tax Court has been asked to revisit, the court said the agency obtained timely approval on a date that the IRS and easement donor LakePoint now agree was backdated.

In its motion for sanctions, LakePoint asked the court to void the penalty and order the IRS to pay the attorney’s fees and other expenses that it said it incurred as a result of agency misconduct. It alleged the agency not only submitted a false declaration and a backdated document that the court pointed to in ruling the penalty approval was timely, but also that it multiplied the case proceedings “unreasonably and vexatiously” and tried to “commit a fraud” on the court.

In ordering the IRS to “make a forthright and comprehensive response” to LakePoint’s question about when employees learned of the misstatements, Judge Christian N. Weiler said he expects explanations if no dates are given. The agency will have to certify it made a reasonable search or information request and, if it claims the information is privileged, provide a detailed log about the claimed privilege, he said.

Lakepoint is represented by Skadden, Arps, Slate, Meagher & Flom LLP, Chamberlain, Hrdlicka, White, Williams & Aughtry, and Todd Welty PC.

The case is Lakepoint Land II, LLC v. Commissioner, T.C., No. 13925-17, 8/22/23.