Kostelanetz attorneys Megan L. Brackney, Victor Suthammanont, and Gray Proctor co-wrote an article for Tax Notes Procedurally Taxing blog titled “Does Due Process Require More Than Refund Jurisdiction Over Tax Promoter Penalties?”
In the article, they discuss tax shelter promoter penalties under §6700 and how the imposition of promoter penalties violates the right to due process under the Fifth Amendment as well as the Seventh Amendment right to a jury trial, which they discussed in an earlier article.
Under §6700, the IRS may assess penalties against promoters of “abusive tax shelters” (promoter penalties). Per §6671(a), promoter penalties are assessed administratively upon notice and demand without civil enforcement or a jury trial. Importantly, taxpayers may only challenge a penalty after paying some portion of the penalty imposed by the IRS.
The trio writes, “[T]his structure creates an incentive for the IRS to impose promoter penalties so massive that the taxpayer cannot afford the prepayment requirement to be able to exhaust administrative remedies, insulating the IRS from any judicial scrutiny on the merits of the fraud finding or the amount of gross income derived from the activity.”
Megan, Victor, and Gray examine the IRS’s administratively imposed promoter penalties in light of prior Supreme Court rulings, particularly the functional balancing test articulated in Mathews v. Eldridge, 424 U.S. 319 (2976), and the Court’s recent trend towards historical-based analyses, exemplified in Cully v. Marshall, 601 U.S. 377 (2024), to determine whether the promoter penalty scheme violates the Fifth Amendment’s due process clause. As they conclude, “Because the promoter penalty scheme does not allow for a pre-deprivation notice and hearing, it is illegal despite the ‘availability’ of a post-deprivation refund action (if the taxpayer can afford the 15 percent payment of the penalty).”
You can read the complete article here.
This article is the second in a series related to the tax implications of the U.S. Supreme Court’s 2024 decision in Jarkesy v. SEC. The first article — “Do Tax Promoter Penalties Trigger the Right to a Jury Trial After Jarkesy?” — can be found here.
About Megan
Megan is a tax controversy attorney with a distinguished track record of delivering exceptional results for clients facing complicated and difficult tax issues. Megan is the Chair of the American Bar Association Section of Taxation. She is also a frequent speaker and contributor to local and national conferences on taxation, ethics in tax practice, IRS penalties, and civil tax controversy.
About Victor
Victor served for a decade as a securities enforcement attorney in the U.S. Securities and Exchange Commission, including as a Senior Trial Counsel and as the Enforcement Counsel to Chair Gary Gensler. Prior to his extensive experience in the SEC’s Division of Enforcement, Victor represented and advised clients in private practice in complex commercial disputes and litigations, as well as in internal and governmental investigations.
About Gray
Gray is an experienced and accomplished appellate advocate who represents clients facing both civil and criminal penalties. He also maintains a trial support practice focusing on dispositive motions and other key issues upon which an appeal might follow.
