Administrative Procedure and the Internal Revenue Service: Delimiting the Substantial Understatement Penalty

Abstract

In the early 1980's, Congress faced the mounting problems of tax shelters and other forms of tax avoidance. It responded by passing a series of laws.' One of these provisions, section 6661 of the Internal Revenue Code, penalizes of tax liability.2 While section 6661 may appear to be a typical, innocuous tax code provision, close examination reveals that the substantial understatement penalty threatens to expand quietly the power of the Internal Revenue Service (IRS) over taxpayers, violating the spirit of the Administrative Procedure Act (APA) in the process. In exercising their rulemaking power, agencies must generally observe the notice and comment proceedings mandated by the APA in 5 U.S.C. ? 553.3 There are, however, a number of exceptions to the APA's notice and comment requirement,4 one of the most important of which covers inter-