Supervisory Approval of Penalties: The Section 6751(b) Defense

Most penalty defenses are about you: what you did, what you knew, what happened to you. This one is about the IRS.

IRC 6751(b)(1) says, in general, that no penalty shall be assessed unless the initial determination of the assessment is personally approved in writing by the immediate supervisor of the individual making the determination, or by a higher level official the Secretary designates. It is a procedural requirement Congress imposed on the IRS. When the IRS does not meet it, the penalty is vulnerable no matter how strong the IRS's case on the merits.

Which penalties it covers

Section 6751(c) defines penalty to include any addition to tax or additional amount, so the rule reaches broadly. But section 6751(b)(2) and Treas. Reg. 301.6751(b)-1(a)(2) carve out exceptions. According to IRM 20.1.1.2.3, written supervisory approval is not required for:

• The failure-to-file and failure-to-pay additions under IRC 6651.
• The estimated tax penalties under IRC 6654 and IRC 6655.
• Sanctions and costs awarded by courts under IRC 6673.
• Accuracy-related penalties under IRC 6662(b)(9) and (b)(10) for certain charitable deduction issues described in the manual.
• Any penalty automatically calculated through electronic means.

The manual adds that, as an administrative matter, the IRS still requires supervisory approval for the fraudulent failure-to-file penalty under IRC 6651(f).

So this defense rarely helps with an ordinary late-filing or late-payment penalty. Where it matters most is penalties determined by an IRS employee in an examination: the 20 percent accuracy-related penalty under IRC 6662, the civil fraud penalty, and many others.

The 2024 regulations

On December 23, 2024, Treasury published final regulations at Treas. Reg. 301.6751(b)-1. The IRM summarizes what they do: list the exempt penalties, define terms such as immediate supervisor and higher level official, and set rules for when approval must happen.

The definitions matter. The manual says the individual who first proposed the penalty is the one making the initial determination, and a proposal can be made to the supervisor or to the taxpayer. The immediate supervisor is any individual with responsibility to review another individual's proposal of penalties without the proposal being subject to an intermediary's approval. For Large Business and International examinations, the case manager is designated as a higher level official.

The form of approval is flexible. The IRM says it may be documented on a penalty approval form, by email, by memo to file or electronically, and that no signature or particular words are required as long as the circumstances show it was intended as approval. It must be dated, retained in the case file, and cover all tax years and all penalties.

Timing

Timing has been the most litigated part of this statute, and the regulations now set a rule. Under IRM 20.1.1.2.3.1, for penalties assessed on or after December 23, 2024:

• For a penalty not subject to pre-assessment review in the Tax Court, written approval is required before the penalty is assessed.
• For a penalty subject to pre-assessment Tax Court review, approval is required on or before the date the pre-assessment notice is mailed, such as a statutory notice of deficiency.
• For a penalty raised in the Tax Court after a petition, approval is required no later than the date the Commissioner asks the court to determine the penalty.

For penalties assessed before December 23, 2024, the manual says approval was required before the IRS issued any written communication offering the taxpayer a chance to sign an agreement or consent to the penalty. The manual also says the IRS's general practice is to secure approval as soon as practicable once the initial determination is made. If your penalty predates the regulations, the older timing rule and the case law under it may matter; that is a question for careful review of your specific case.

The automated notice exception, and how a response changes it

The exception for penalties automatically calculated through electronic means is where many taxpayers first meet this issue, usually on a CP2000 notice or a correspondence audit.

The IRM says a penalty is automatically calculated through electronic means if an IRS computer program automatically generates a notice proposing it. But it stops being automatic if two things happen: the taxpayer challenges the proposed penalty or the tax it is based on, and an IRS employee considers the response before assessment or before a notice of deficiency that includes the penalty.

IRM 20.1.1.2.3.2 applies this to the Automated Underreporter program and campus examinations. If you do not respond to the letter proposing the penalty, it can be assessed without written supervisory approval. If you respond, orally or in writing, challenging the penalty or the underlying tax, and an examiner considers the response, written supervisory approval is required.

That is a practical reason to respond to a proposed penalty in writing, even briefly, rather than letting it be assessed by default.

How to use this defense

You cannot evaluate this issue without seeing the IRS's file. The approval, if it exists, is in the administrative file, not in your notices.

• In an examination or Appeals case, ask for the documentation of written supervisory approval for each penalty. The manual requires Appeals files to include it when IRC 6751(b)(1) applies.
• Request your file. A Freedom of Information Act request or, in Tax Court, the discovery process can produce the approval form or email.
• Compare dates. Who first proposed the penalty, to whom, and when? When was it approved, by whom, and was that person the immediate supervisor or a designated higher level official?
• Check coverage. The IRM says approval must cover all tax years and all penalties. An approval for one year does not cover another.

If the approval is missing, late under the applicable rule, or signed by the wrong person, raise it. In Appeals, it is a hazard of litigation the government has to weigh. In court, it can be decisive.

Who is the immediate supervisor

Disputes sometimes turn on whether the person who approved the penalty was the right person. The regulation's definition, as summarized in the IRM, focuses on function rather than title: the immediate supervisor is any individual with responsibility to review another individual's proposal of penalties without the proposal being subject to an intermediary's approval.

The IRM also addresses acting supervisors. An employee serving as acting supervisor with an approved designation to act or notification of personnel action on file is considered an immediate supervisor for this purpose, and if the designation was made on Form 10247, the approved form must be saved in the administrative file.

So when you review an approval, look past the signature. Was the approver actually responsible for reviewing this employee's penalty proposals? If an acting supervisor signed, is the designation in the file?

Keep it in proportion

Supervisory approval is a real defense, but it is a procedural one. In most well-run examinations, the approval exists and is timely. Treat it as one item on your review list, alongside the substantive defenses: reasonable cause and good faith, substantial authority and disclosure, and whether the underlying adjustment is even right.

But check it every time. The statute says no penalty shall be assessed without it. When the IRS cannot show it, that sentence does the work for you. It costs nothing to ask for the approval documentation, and the answer tells you something either way.