IRS issues final rules for supervisory approval of penalties

ARTICLE | January 21, 2025

Authored by RSM US LLP

Executive summary

Treasury and IRS issued final regulations 301.6751(b)-1 on supervisory approval of certain penalties, which adopt the proposed regulations released last year with minor modifications. The final regulations adopt three rules on timing of supervisor approval; clarify to whom an initial proposal for penalty is made; and modify the definition of immediate supervisor.

Reporting requirements

The Department of the Treasury and the Internal Revenue Service (IRS) issued final regulations section 301.6751(b)-1 regarding supervisory approval of certain penalties assessed by the IRS. Many comments expressed concerns and suggestions to the proposed regulations. Treasury and the IRS ultimately disagreed with most comments and finalized the regulations with minor adjustments. Refer to a detailed analysis of the proposed regulations.

The final regulations do not change the three timing rules for written supervisory approval of penalties contained in the proposed regulations. Penalties not subject to pre-assessment review in the Tax Court require approval by the immediate supervisor of the person who proposed the penalty before the penalty is assessed. Penalties subject to pre-assessment review in the Tax Court require approval by the immediate supervisor of the person who proposed the penalty on or before the IRS mails a statutory notice of deficiency. Penalties raised in the Tax Court after a petition is filed requires approval by the immediate supervisor of the person who proposed the penalty no later than the date on which the Commissioner requests that the court determine the penalty.

The final regulations contain the same exceptions to written supervisory approval as the proposed regulations. These exceptions include (1) a list of ‘additions to tax’ and (2) those penalties ‘calculated through electronic means.’

Most of the definitions in the final regulations are the same as the proposed regulations except for the modification of the definition of immediate supervisor. The proposed regulations defined immediate supervisor as any individual with responsibility to ‘approve’ another individual’s proposal of penalties. But in the final regulations, the IRS modified it to read, any individual with responsibility to ‘review’ another individual’s proposal of penalties.

The proposed regulations provided five examples to illustrate the rules, exceptions, and definitions. The final regulation retained the same examples one through four but added a fifth new example. The new example clarifies that in the case where an immediate supervisor suggests a new penalty to the agent, this supervisor does not become the person who makes the initial determination because the supervisor is not the individual who first proposed the penalty.

The final regulations are an IRS response to the previously developing case law that had been taxpayer favorable. The regulations now set forth bright line rules for determining IRS compliance with the supervisory approval provision of code section 6751(b).