Tuesday, May 5, 2026

TIGTA to IRS: Stop Backdating Penalty Approvals – What Practitioners Need to Know

On May 1, 2026, the Treasury Inspector General for Tax Administration (TIGTA) released a report with a blunt message for the IRS: its current procedures are not sufficient to prevent backdated penalty approvals under section 6751(b). The report grows directly out of the Tax Court’s LakePoint Land II decision, where the Court found that a supervisor had bac
kdated a penalty lead sheet and that IRS Counsel misrepresented the timing to the Court, resulting in sanctions under section 6673(a)(2).

For practitioners handling exams and Tax Court cases, especially syndicated conservation easement (SCE) matters, this report is essentially a roadmap for both IRS vulnerabilities and best practices you should be ready to leverage.

The Focus: Section 6751(b) in SCE Cases

Section 6751(b) was enacted in 1998 as a safeguard to ensure supervisory oversight of many civil penalties and to prevent penalties from being used as a “bargaining chip” in audits. It generally requires written approval of the initial penalty determination by the immediate supervisor of the IRS employee proposing the penalty, with exceptions for certain automated and basic failure‑to‑file or pay penalties.

Following the LakePoint decision, the IRS and Chief Counsel launched a special review in August 2023 of 1,268 SCE cases—829 docketed and 439 nondocketed—to assess compliance with section 6751(b). SCE transactions were chosen because the IRS has labeled them abusive and has examined or litigated more than 1,200 of them, making them a natural stress test for penalty procedures.

What TIGTA Found: Backdating, Missing Approvals, and Documentation Gaps

TIGTA’s findings will sound familiar to anyone who has litigated 6751(b) issues, but now they are documented in an official oversight report.

·         In the 829 docketed cases, the IRS identified 13 cases that did not comply with section 6751(b) due to lack of valid supervisory approval, and TIGTA agreed with those determinations.

o    In 7 of the 13 cases, supervisors backdated penalty approvals; the IRS conceded more than $68 million in penalties as a result.

o    In the remaining 6 cases, alternative penalties were added after the initial supervisory approval, and the IRS conceded those unapproved alternatives.

·         In the 439 nondocketed cases, the IRS initially reported full compliance, but TIGTA found:

o    6 cases where neither TIGTA nor the IRS could verify timely supervisory approval because key documents, such as explanatory letters to taxpayers, were missing from the case file.

o    Other documentation problems, including multiple versions of penalty lead sheets with identical digital signatures, penalties listed in taxpayer correspondence without a corresponding approved lead sheet, and summary reports reflecting penalties that lacked documented supervisory approval.

TIGTA characterizes these problems as reflecting weak supervisory oversight and systemic documentation and internal control deficiencies in the penalty approval process. The practical risk is clear: if the IRS cannot prove timely approval, penalties may be conceded or struck, and taxpayers’ confidence in the fairness of the system can erode.

TIGTA also flagged five potential unauthorized disclosure issues under section 6103, including instances where correspondence included another taxpayer’s name or TIN. One was self‑reported, and the others were referred to IRS management.

Digital Signatures: A Double‑Edged Sword for IRS (and a Tool for You)

One of the more interesting parts of TIGTA’s report is the discussion of digital signatures and document properties.

Chief Counsel’s internal review discovered cases where penalty lead sheets had been modified after being digitally signed, as shown by electronic document properties, without a new digital signature being applied. That analysis helped drive the IRS’s decision to concede penalties in 6 of the 13 noncompliant docketed cases.

TIGTA emphasizes that:

·         IRS policy does not currently require secure digital signatures that lock the document against changes or force re‑signing after edits.

·         IRS Counsel is not required by the Chief Counsel Directives Manual (CCDM) to conduct electronic document analysis in every docketed case, and current guidance on that is informal.

Yet TIGTA explicitly notes that digital signatures, combined with review of electronic document properties, provide some of the best available evidence of authentic, timely supervisory approvals in litigation. For practitioners, that is both a warning and an opportunity: the existence of digital signatures and metadata cuts both ways, and TIGTA is encouraging the IRS to use them more systematically.

Why Did Backdating Happen? TIGTA’s Diagnosis

TIGTA ties the backdating and documentation problems to two main causes:

·         Employees failed to follow existing policies, procedures, and appropriate practices.

·         The IRS lacked clear, consistent guidance on:

o    When penalties must be approved,

o    How to document penalty changes, and

o    How to hold employees accountable, including an explicit prohibition on backdating.

The LB&I Division conducted disciplinary reviews for several employees in the 13 problem docketed cases, with outcomes ranging from non‑disciplinary counseling letters to written reprimands. TIGTA notes that, given the facts, other categories of misconduct in the IRS Penalty Guide could have supported more serious discipline, including suspensions or removal.

On timing, the report walks through the current legal landscape. Courts have split on when supervisory approval is required, some allowing approval up to assessment and others requiring earlier approval in the examination process. Treasury issued regulations in 2023 that, broadly speaking, permit supervisory approval as late as the notice of deficiency for pre‑assessment penalties and any time up to assessment for post‑assessment penalties. Internal procedures were updated to align with those regulations, including changes to IRM 20.1.1.2.3 in November 2025.

At the same time, TIGTA notes a December 2025 bill—the Fair and Accountable IRS Reviews Act—proposing to amend section 6751(b)(1) to require supervisory approval before any written communication proposing the penalty is provided to the taxpayer, consistent with the National Taxpayer Advocate’s position.

TIGTA’s Five Recommenations – and IRS’s Commitments

TIGTA made five recommendations, and IRS management agreed with all of them.

1.       Promote digital approvals
TIGTA recommends that the IRS promote the use of digital approvals for penalty approval documents to enhance record integrity, accountability, and evidentiary reliability. The IRS agreed and committed to continue promoting digital signatures and other secure electronic methods, tying this to broader communications on penalty procedures.

2.      Standardize penalty procedures and documentation
TIGTA urges the Chief Tax Compliance Officer to work with SB/SE and LB&I to review and revise penalty procedures to ensure consistency in obtaining and documenting supervisory approvals and verifying section 6751(b) compliance. The IRS responded that procedures have already been updated to align with section 6751(b) and Treas. Reg. § 301.6751(b)-1, including revisions to IRM 20.1.1.2.3 (November 25, 2025), and that enhanced review procedures are in place.

3.      Formal 6751(b) checks in all docketed cases
TIGTA recommends adding explicit CCDM procedures requiring Counsel attorneys to verify section 6751(b) compliance in all docketed cases, which may include reviewing electronic document properties and corroborating materials such as activity records and emails. Chief Counsel agreed to update the CCDM accordingly.

4.      Explicitly prohibit backdating and clarify update procedures
TIGTA recommends that SB/SE and LB&I Commissioners:

o    Communicate clearly that backdating penalty approvals is not appropriate.

o    Require penalty approval documents to be dated contemporaneously.

o    Remind employees when supervisory approval is required.

o    Provide guidance on how to update signed documents when changes are needed.

5.       The IRS agreed, stating it will issue a memo advising that penalty approval documents must be contemporaneously dated, that backdating is not appropriate, clarifying timing requirements, and explaining how to properly update signed documents, with an emphasis on securing electronic approval as a best practice.

6.      Operational reviews after sanctions
Finally, TIGTA points out that the IRS did not conduct an operational review after LakePoint, even though the court imposed sanctions for inaccurate statements and a false declaration, while a contemporaneous SCE case (Everest Granite) did trigger an operational review when sanctions were threatened. TIGTA recommends updating the CCDM to require a review whenever a court imposes sanctions against Chief Counsel. Chief Counsel agreed to make that change.

Practical Takeaways for Taxpayers and Practitioners

The TIGTA report has immediate practical implications, particularly in SCE and other penalty‑heavy cases:

·         6751(b) remains a potent defense. TIGTA confirms that even in a focused review the IRS found multiple noncompliant cases and conceded tens of millions of dollars in penalties, largely because of backdating and poor documentation. Practitioners should continue to scrutinize penalty approval timing and documentation in every penalty case.

·         Ask for digital versions and metadata. TIGTA’s emphasis on digital signatures and document properties should encourage defense counsel to seek native electronic versions of penalty approval documents in discovery or informal exchanges, not just PDFs, and to consider their own metadata reviews.

·         Expect evolving IRS procedures. With IRM and CCDM updates underway and a potential legislative change on the horizon, the “when” and “how” of supervisory approval will likely become more formalized and perhaps earlier in the exam timeline. Staying current with IRM 20.1 and related CCDM provisions will be essential.

·         Document your own record. When you receive a proposed adjustment or penalty, preserve the correspondence, envelopes, and any metadata you can. Those timestamps may matter if the IRS later produces an approval that appears to post‑date the communication.

·         SCE cases are the testing ground—but not the end. Although the review focused on SCE transactions, TIGTA’s recommendations and the IRS’s responses are not limited to that area. Expect stricter documentation and more formal 6751(b) checks across all operating divisions.

If you’re representing clients facing significant penalties, this report provides both an advocacy roadmap and a preview of how IRS processes may tighten in the coming years.

Have A Tax Penalty Problem?


     Contact the Tax Lawyers at

Marini & Associates, P.A. 


for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or 
Toll Free at 888 8TAXAID (888-882-9243)



Sources:

1.       https://www.oversight.gov/sites/default/files/documents/reports/2026-01/SAR-2025-09.pdf    

2.      https://www.oversight.gov/sites/default/files/documents/reports/2025-05/GSA-OIG-SAR-Spring-2025_0.pdf        

3.      https://www.energy.gov/sites/default/files/2025-05/OIG Semiannual Report to Congress for period ending March 31, 2025.pdf   

4.      https://www.energy.gov/sites/default/files/2024-05/Semiannual Report to Congress Period Ending March 31 2024.pdf         

5.       https://www.ignet.gov/sites/default/files/files/CIGIE-Annual-Report-News-Release-2_3_2026.pdf

6.      https://www.bia.gov/sites/default/files/media_document/as-ia_foia_logs_july_2024_redacted.pdf          

7.       https://www.oig.dc.gov/sites/default/files/Reports/DCOIG_Report_2026-ES-01.pdf  

8.      https://www.fhfaoig.gov/sites/default/files/CompendiumFebruary2026.pdf  

9.      https://www.doi.gov/sites/default/files/documents/2024-12/sept-24-foia-logredacted.pdf

10.   https://www.hhs.gov/sites/default/files/fy-2026-oig-cj.pdf

11.    https://www.oversight.gov/sites/default/files/documents/reports/2025-04/OIG-A-25-05.pdf

12.   https://www.ignet.gov/sites/default/files/files/CIGIE FY 2026 Congressional Justification.pdf

13.   https://www.hud.gov/sites/default/files/CFO/documents/OIG-GAO-Rec-Report-for-Budget.pdf

14.   https://www.fhfaoig.gov/sites/default/files/CompendiumJanuary2026.pdf

15.    https://nsarchive.gwu.edu/sites/default/files/documents/4060575/Privacy-and-Civil-Liberties-Oversight-Board.pdf

16.   https://www.oversight.gov/sites/default/files/documents/reports/2026-01/SAR-2025-09.pdf 

17.    https://www.oversight.gov/sites/default/files/documents/reports/2025-05/GSA-OIG-SAR-Spring-2025_0.pdf         

18.   https://www.energy.gov/sites/default/files/2025-05/OIG Semiannual Report to Congress for period ending March 31, 2025.pdf   

19.   https://www.bia.gov/sites/default/files/media_document/as-ia_foia_logs_july_2024_redacted.pdf          

20.  https://www.energy.gov/sites/default/files/2024-05/Semiannual Report to Congress Period Ending March 31 2024.pdf     

21.   https://www.oig.dc.gov/sites/default/files/Reports/DCOIG_Report_2026-ES-01.pdf    

   22.   https://www.fhfaoig.gov/sites/default/files/CompendiumFebruary2026.pdf

Monday, May 4, 2026

Protectors as Power Players: What the X Trusts Decision Means for US Advisors

On 19 March 2026, the Judicial Committee of the Privy Council handed down its decision in A and 6 others v C and 13 others UKPC 11, the latest and most influential word on the role of protectors in offshore discretionary trusts (the “X Trusts” case). Although the appeal came from Bermuda, the court’s reasoning will be persuasive across the main offshore centers and is already being treated as a roadmap for protector powers in jurisdictions such as Jersey and the Cayman Islands.

For US advisors who routinely plug into foreign trust structures, whether in pre‑immigration planning, asset protection, or global family governance, the case matters for a simple reason: it confirms that a “protector” is often not a mere watchdog, but an independent fiduciary decision‑maker whose consent power can amount to real control. That has direct consequences for US tax classification, attribution and reporting, as well as for risk and governance conversations with clients.

Narrow vs wide protector roles: the JCPC’s answer

The X Trusts litigation crystallized a long‑running debate: when a trust deed requires protector consent to major trustee decisions, what is that consent supposed to involve?

·         Under a narrow model, the protector essentially checks legality and proper purpose: they ensure trustees act within their powers and rationally, but do not substitute their own merits‑based decision.

·         Under a wide model, consent is an independent fiduciary discretion: the protector can veto a proposal they consider contrary to the beneficiaries’ interests, even if the trustees’ decision would pass an ordinary rationality review.

Bermuda’s courts had previously steered toward a narrow view, but the Privy Council reversed course. In X Trusts, it held that where the deed requires protector consent and does not expressly confine that role to legality‑only oversight, the more natural reading is that the protector must exercise an independent fiduciary judgment, the “wider” role. At the same time, the Board stressed that there is no universal presumption: the starting point is the language and context of the specific trust instrument.

Why this matters in a US context

For US planners, the headline is that offshore protectors are now even harder to treat as “window dressing”. The decision underscores that, in many modern deeds, a protector who must consent to core powers (distributions, investments, trustee changes, amendments) is a genuine governance actor. That has several knock‑on implications:

·         Control and grantor status. When a US person (or someone within their “orbit”) holds a robust protector role, the IRS may view that person as having de facto control over distributions or key incidents of ownership, supporting grantor‑trust or retained‑interest arguments. Existing IRS commentary already recognizes that veto and removal powers can be highly significant; this judgment makes it harder to argue that consent rights are purely ceremonial.

·         Attribution and reporting. If a US client or a US‑connected party serves as protector with wide powers, that role can be relevant in assessing whether the trust is a “controlled” foreign entity, whether look‑through rules might apply, and how to describe the governance structure on Forms 3520, 3520‑A, 8938 and related filings.

·         Asset protection optics. Asset protection planners have long relied on foreign protectors to distance US settlors from direct control. X Trusts both validates the importance of that role and highlights the need to ensure that the protector is actually independent and properly documented as such; otherwise, a US court might treat the protector as a proxy for the settlor.

·         Family governance and disputes. Where different family branches occupy trustee and protector seats, X Trusts strengthens the position of protectors as active co‑decision‑makers, which can be a feature or a bug depending on family dynamics and the clarity of the drafting.

In short, if you’re advising US clients on foreign trusts, you now have strong authority to show that protector clauses are not boilerplate; they are central to questions of control, risk and disclosure.

Drafting and review points for US‑facing structures

The Privy Council’s message is not that all protectors must have the wide role, but that ambiguity will be resolved by careful construction of the deed, and that “silence” will not be used to confine them to a narrow, almost symbolic function. For US‑facing work, that suggests a few practical moves:

1.       Be explicit about the protector’s mandate.
Where possible, encourage foreign counsel to state clearly whether the protector is expected to exercise an independent merits‑based discretion or only a legality/proper‑purpose review. Clarity helps when you later need to explain the structure to the IRS, a US court, or a successor advisor.

2.      Align powers with the US tax profile.
If grantor‑trust treatment is desired, a wide protector role held by a trusted non‑US person may be acceptable or even helpful in some designs; if non‑grantor treatment is critical, you may want to avoid giving a US person strong veto or appointment powers over distributions or key incidents of ownership.

3.      Watch who holds the protector role.
X Trusts reinforces that protectors are real fiduciaries whose decisions can change outcomes. A US‑domiciled protector who is closely aligned with the settlor or primary beneficiaries will invite closer scrutiny on control, undue influence and potential agency arguments.

4.      Document information flows and decision‑making.
Because the wide role involves active fiduciary discretion, advisors should ensure that protectors have proper access to information and that key decisions are formally documented. Those records become crucial if a US court or the IRS later probes whether the protector is acting independently or as a rubber stamp.

5.       Review older deeds through a new lens.
Many pre‑existing offshore trusts have generic protector language drafted before the recent wave of case law from Jersey, Bermuda and now the Privy Council. X Trusts is a good prompt to review those instruments and, if necessary, consider variations to align the protector’s role with the family’s tax, governance and succession objectives.

How to use this with clients

For US‑based practitioners, X Trusts is also a useful conversational tool. It lets you:

·         Explain to clients why naming a sibling, advisor or family office executive as “protector” is not a casual decision in an offshore trust context.

·         Justify the time and cost spent coordinating with foreign counsel on the exact protector language.

·         Re‑frame protector discussions from “who gets a title” to “who will shoulder real fiduciary responsibility and potential scrutiny”.

An effective way to position it is: “Offshore courts are now telling us that protectors are governance actors, not mascots. If we’re going to use that role at all, we need to design it with your US tax and risk profile in mind.”

Need Experienced Advice for
Your Offshore Trust
?


   Contact the Tax Lawyers at

Marini & Associates, P.A. 


for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or 
Toll Free at 888 8TAXAID (888-882-9243)




Sources:

   1.       https://www.tridenttrust.com/knowledge/insights/march-2026-landmark-decision-rethinking-the-role-of-the-trust-protector      

2.      https://jcpc.uk/cases/press-summary/jcpc-2024-0094  

3.      https://bm.vlex.com/vid/the-x-trusts-1044668581 

4.      https://www.applebyglobal.com/publications/privy-council-decision-in-x-trusts-redefining-the-role-of-the-protector/     

5.       https://conventuslaw.com/report/bermuda-privy-council-decision-in-x-trusts-redefining-the-role-of-the-protector/     

6.      https://www.youtube.com/watch?v=GoMH8bfjobE

7.       https://www.5sblaw.com/news/the-judicial-committee-of-the-privy-council-jcpc-has-today-handed-down-its-judgment-in-a-ors-v-c-ors-2026-ukpc-11-henry-legge-kc-and-sam-chandler-appeared-for-the-protectors/ 

8.      https://supremecourt.uk/uploads/uksc_2024_0106_judgment_11cb2564b2.pdf

9.      https://www.jcpc.uk/cases/jcpc-2024-0094

10.   https://www.macfarlanes.com/insights/102l30g/macfarlanes-secures-important-judgment-in-bermuda-court-of-appeal

11.    https://supremecourt.uk/cases/judgments/uksc-2024-0047

12.   https://www.linkedin.com/posts/thomas-wk-wong-fciarb-fhkiarb-1a589467_breaking-jcpc-bermuda-activity-7440444777273122816-60oA

13.   https://www.wilberforce.co.uk/case-study/brian-green-kc-and-anna-littler-successful-in-bermuda-court-of-appeal-in-decision-on-breadth-of-standard-form-consent-powers-of-fiduciary-protectors-of-trusts/

14.   https://jcpc.uk/cases/judgments/jcpc-2024-0094

15.    https://www.gov.bm/sites/default/files/X Trusts (Final Judgment).pdf

16.   https://www.walkersglobal.com/en/Insights/2026/03/Consent-as-control-the-rise-of-the-powerful-protector            

17.    https://www.mishcon.com/news/guardian-or-governor-the-narrow-and-wide-views-of-the-trust-protectors-role           

18.   https://www.wealthbriefing.com/html/article.php/accountability-for-protectors-across-jurisdictions:-power,-abuse-and-limits-of-deference-            

19.   https://www.5sblaw.com/news/the-judicial-committee-of-the-privy-council-jcpc-has-today-handed-down-its-judgment-in-a-ors-v-c-ors-2026-ukpc-11-henry-legge-kc-and-sam-chandler-appeared-for-the-protectors/

20.  https://www.ogier.com/news-and-insights/insights/clarifying-the-protectors-role-key-takeaways-from-the-privy-councils-2026-judgment/            

21.   https://www.ogier.com/news-and-insights/insights/the-evolving-role-of-trust-protectors-case-law-developments/   

22.   https://www.conyers.com/publications/view/the-evolution-of-the-watchdog-role-of-protectors/ 

23.   https://www.wolterskluwer.com/en/expert-insights/offshore-trusts-can-offer-asset-protection    

24.  https://www.geigerlawoffice.com/blog/why-trust-protectors-are-the-wave-of-the-future.cfm 

25.   https://actecfoundation.org/wp-content/uploads/Offshore-Trusts-As-Tools-And-Strategies-For-Estates-Of-U.S.-Residents-ACTEC.pdf   

26.  https://www.offshoreaffairs.com/asset-protection/guide 

27.   https://info.wealthcounsel.com/blog/a-trust-protector-and-undue-influence

28.  https://www.hsfkramer.com/notes/pwtd/2023-04/protectors-powers-narrow-or-wide-view-the-bermuda-court-of-appeal-has-its-say

29.  https://www.gov.bm/sites/default/files/FINAL_Judgment_2018_No_40_civ_In_the_Matter_of_X_Trust_with_citation.pdf

30.  https://www.macfarlanes.com/insights/102kzc2/the-emperor-never-had-any-clothes-the-privy-council-abandons-the-shareholder-rul

31.   https://www.tridenttrust.com/knowledge/insights/march-2026-landmark-decision-rethinking-the-role-of-the-trust-protector    

32.   https://www.applebyglobal.com/publications/privy-council-decision-in-x-trusts-redefining-the-role-of-the-protector/    

33.   https://4stonebuildings.com/privy-council-judgment-on-the-role-of-a-protector-in-offshore-trusts/   

34.   https://www.ogier.com/news-and-insights/insights/the-evolving-role-of-trust-protectors-case-law-developments/

35.   https://www.collascrill.com/articles/mind-the-gap-why-the-wider-role-prevails-for-protectors/ 

36.   https://www.mishcon.com/news/guardian-or-governor-the-narrow-and-wide-views-of-the-trust-protectors-role

37.   https://jcpc.uk/cases/judgments/jcpc-2024-0094

38.  https://www.linkedin.com/posts/blake-harris-08a106b_offshoretrust-domestictrust-triggertrust-activity-7425568882314100736-IgF7

    39. https://www.stetson.edu/law/conferences/snt/media/mc_7_krooks_ppt.pdf