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[Federal Register Volume 89, Number 246 (Monday, December 23, 2024)]
[Rules and Regulations]
[Pages 104419-104425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-29074]

[[Page 104419]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 10017]
RIN 1545-BP63

Rules for Supervisory Approval of Penalties

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations regarding supervisory 
approval of certain penalties assessed by the IRS. The final 
regulations are necessary to address uncertainty regarding various 
aspects of supervisory approval of penalties that have arisen due to 
recent judicial decisions. The final regulations affect the IRS and 
persons assessed certain penalties by the IRS.

DATES: 
    Effective Date: These regulations are effective December 23, 2024.
    Applicability Date: For date of applicability, see Sec.  
301.6751(b)-1(f).

FOR FURTHER INFORMATION CONTACT: William Prater, (202) 317-6845 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

    This document amends the Regulations on Procedure and 
Administration (26 CFR part 301) by adding final regulations under 
section 6751(b) of the Internal Revenue Code (Code) relating to 
supervisory approval of certain penalties assessed by the IRS. Section 
6751(b)(1) expressly delegates to the Secretary of the Treasury or her 
delegate the authority to designate, for purposes of approving the 
initial determination of a penalty assessment under the Code, a higher 
level official other than the immediate supervisor of the individual 
making that initial determination. In addition, section 7805(a) of the 
Code authorizes the Secretary to ``prescribe all needful rules and 
regulations for the enforcement of [the Code], including all rules and 
regulations as may be necessary by reason of any alteration of law in 
relation to internal revenue.''

Background

    On April 11, 2023, a notice of proposed rulemaking (REG-121709-19) 
relating to supervisory approval of certain penalties under section 
6751(b) was published in the Federal Register (88 FR 21564). See the 
Background and the Explanation of Provisions sections of the preamble 
to REG-121709-19 for a discussion of the proposed regulations, which 
are incorporated in this document to the extent not inconsistent with 
the Summary of Comments and Explanation of Revisions section of this 
preamble.
    Eight comments responding to the notice of proposed rulemaking were 
received and are available at https://www.regulations.gov or upon 
request. A public hearing was held on September 11, 2023, and four 
speakers provided testimony. After careful consideration of all of the 
written comments and testimony, the proposed regulations are adopted by 
this Treasury decision with minor modification. The public comments are 
summarized and discussed in the Summary of Comments and Explanation of 
Revisions.

Summary of Comments and Explanation of Revisions

    Many of the comments addressed similar issues and expressed similar 
points of view. The comments largely opposed the proposed timing rules 
and many of the proposed definitions. Comments expressed concern that 
the proposed regulations would not implement what the comments viewed 
as the purpose of section 6751(b). The Treasury Department and the IRS 
disagree with these comments' characterization of the text and effect 
of the proposed regulations, as well as their characterization of the 
statute's text and scope, its legislative history, and the caselaw 
interpreting it.
    As explained in the preamble to the proposed regulations, the 
purpose of these rules is to clarify application of section 6751(b) in 
a manner that is consistent with the statutory text and that promotes 
nationwide uniformity, administrability for the IRS, and ease of 
understanding by taxpayers. Several comments suggested alternative 
rules that would impose extra-statutory formalities on IRS employees 
that would increase the probability of appropriate penalties being 
avoided if IRS employees do not satisfy those formalities. By contrast, 
the adopted rules faithfully interpret the statutory text, ensure 
penalties are imposed where appropriate, and guard against 
inappropriate use of penalties.

1. Comments on Proposed Timing Rules

    The proposed regulations included three rules regarding the timing 
of supervisory approval of penalties under section 6751(b). Proposed 
Sec.  301.6751(b)-1(c) provided that, for penalties that are included 
in a pre-assessment notice issued to a taxpayer that provides the basis 
for jurisdiction in the United States Tax Court (Tax Court) upon timely 
petition, supervisory approval must be obtained at any time before the 
notice is mailed by the IRS. Proposed Sec.  301.6751(b)-1(d) provided 
that, for penalties raised in the Tax Court after a petition, 
supervisory approval may be obtained at any time prior to the 
Commissioner requesting that the court determine the penalty. Finally, 
proposed Sec.  301.6751(b)-1(b) provided that supervisory approval for 
penalties that are not subject to pre-assessment review in the Tax 
Court may be obtained at any time prior to assessment.
    Comments argued that the proposed timing rules should be rejected 
in favor of earlier deadlines for supervisory approval of penalties, 
which the comments asserted would more effectively prevent bargaining 
by the IRS. The comments' suggested deadlines, however, lack any basis 
in the statutory text, and are supported by reasoning that has been 
rejected by three United States Circuit Courts of Appeals (circuit 
courts). Moreover, the suggested earlier deadlines would not do 
anything to prevent bargaining, as the preamble to the proposed 
regulations explained. Despite the comments' stated concerns about the 
existence of bargaining, no comment identified a specific example of 
bargaining, and no court has ever found that an IRS employee attempted 
to use a penalty as a bargaining chip.
    Some comments suggested that the timing rule should require 
supervisory approval before issuance of a 30-day letter \1\ (or 
substantive equivalent). As support for this suggestion, one comment 
stated that caselaw supported the assertion that the statute is 
ambiguous regarding when approval must occur. This comment 
misinterprets the existing caselaw, which has focused on an ambiguity 
as to what the ``initial determination'' is that must be approved, not 
on when the approval must occur. On the question of when approval must 
occur, the circuit courts that have considered the issue have uniformly 
held that a supervisor can approve a penalty at any point before losing 
discretion over whether to approve imposition of the penalty. The 
comments advocating for requiring approval before issuance of a 30-day 
letter (or substantive equivalent) rest heavily on a misunderstanding 
of a supervisor's authority and on policy reasons that are not in fact 
served by the

[[Page 104420]]

suggested deadline. The comments also fail to address the circuit 
courts' opinions that are contrary to their recommendations on this 
issue.
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    \1\ Typically a 30-day letter proposes penalties and gives the 
taxpayer an opportunity to request an administrative appeal.
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    As multiple circuit courts have explained, the statute lacks an 
``express timing requirement,'' and the Tax Court's ``formal 
communication'' rule has no basis in the text of the statute. Kroner v. 
Commissioner, 48 F.4th 1272, 1276 (11th Cir. 2022); Laidlaw's Harley 
Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1072 (9th Cir. 
2022), reh'g en banc denied, No. 20-73420 (9th Cir. July 14, 2022); 
Minemyer v. Commissioner, Nos. 21-9006 & 21-9007, 2023 WL 314832 (10th 
Cir. January 19, 2023). As explained in the preamble to the proposed 
regulations, the lack of any deadline in the statute other than 
assessment indicates that the provision did not intend an earlier 
deadline.
    Despite this, the Tax Court has continued to apply its own 
precedent in cases appealable to circuits other than the Ninth, Tenth, 
and Eleventh. See Aldridge v. Commissioner, T.C. Memo. 2024-24 
(appealable to the Eighth Circuit); Swift v. Commissioner, T.C. Memo. 
2024-13 (appealable to the Fifth Circuit); Bachner v. Commissioner, 
T.C. Memo. 2023-148; Robinson v. Commissioner, T.C. Memo. 2023-147 
(appealable to the Fourth Circuit); Jadhav v. Commissioner, T.C. Memo. 
2023-140; Conrad v. Commissioner, T.C. Memo. 2023-100; Braen v. 
Commissioner, T.C. Memo 2023-85 (appealable to the Third Circuit). For 
cases appealable to the Ninth Circuit, the Tax Court has held that it 
will follow the timing rule of Laidlaw's, which the Tax Court 
interpreted to require a case-by-case analysis of whether a particular 
supervisor retained the discretion to approve penalties when they did 
so. See Kraske v. Commissioner, 161 T.C. 104 (2023). In Kraske and 
Pangelina v. Commissioner, T.C. Memo. 2024-5, the Tax Court suggested 
that an IRS Examination Division (Exam) supervisor's discretion may be 
lost when a case is transferred to the Independent Office of Appeals 
(Appeals), but this is factually incorrect. As the Ninth Circuit 
recognized in Laidlaw's, it is only ``once the notice is sent'' that 
``the Commissioner begins to lose discretion over whether the penalty 
is assessed.'' Laidlaw's, 29 F.4th at 1071 n.4. Even when a case is 
transferred from Exam to Appeals, the Exam supervisor still has 
discretion to provide the required approval because the penalty is 
still before the IRS as a whole. As the preamble to the proposed 
regulations noted, a supervisor's discretion is lost only after the IRS 
issues a pre-assessment notice subject to Tax Court review to a 
taxpayer. Because a supervisor retains discretion to approve a penalty 
until that point, issuance of the pre-assessment notice subject to Tax 
Court review remains the appropriate deadline for obtaining supervisory 
approval of penalties included in such a notice.
    The earlier deadlines that comments recommended and that the Tax 
Court continues to impose do not serve the legislative purpose that 
penalties be imposed where appropriate. By contrast, the proposed 
timing rules serve the legislative purpose of imposing penalties where 
appropriate while ensuring the requirement for supervisory approval can 
prevent bargaining. The proposed timing rules are consistent with all 
of the circuit-level authority interpreting the statute and provide a 
bright-line rule that is administrable for the IRS and fair to 
taxpayers. Accordingly, this Treasury decision adopts the proposed 
timing rules without modification.

2. Comments on Proposed Definitions

A. Individual Who First Proposed the Penalty
    The proposed regulations provided that the individual who first 
proposes a penalty is the individual who section 6751(b)(1) references 
as the individual making the initial determination of a penalty 
assessment. A proposal can be made either to a taxpayer (or the 
taxpayer's representative) or to the individual's supervisor or a 
designated higher level official. One comment agreed with the proposed 
definition of ``individual who first proposed the penalty,'' while two 
others disagreed.
    The proposed regulations illustrated the effect of this definition 
in an example in which a Revenue Agent proposes a penalty to her 
immediate supervisor, but the supervisor does not approve the penalty 
and it does not appear in the statutory notice of deficiency; the 
penalty is then raised by an IRS Office of Chief Counsel (Counsel) 
Attorney in a Tax Court Answer and that attorney is considered the 
``individual who first proposed the penalty.'' Those disagreeing with 
the proposed definition argued that, in that example, it was the 
Revenue Agent and not the Counsel attorney that made the initial 
determination of the penalty. Such a view is at odds with the statutory 
text, which references (with respect to the penalty) the ``initial 
determination of . . . assessment'', and caselaw. See North Donald LA 
Property, LLC v. Commissioner, T.C. Memo. 2023-50 (citing multiple 
cases before concluding that ``[w]e have never held that the exam 
team's decision not to assert a penalty has any bearing on Chief 
Counsel's ability to assert that penalty later''). As the preamble to 
the proposed regulations explained, an initial determination that does 
not ultimately result in an assessment of a penalty is not an ``initial 
determination of . . . assessment.'' In addition, adopting the 
comments' suggested interpretation would render section 6214, which 
allows Counsel to raise a penalty in an answer, amended answer, or 
other pleading, meaningless because it would remove Counsel's ability 
to make an independent evaluation of whether a penalty is appropriate.
    By contrast, the proposed definition harmonizes the statutory 
scheme and allows the IRS the flexibility to pursue penalties when 
appropriate. The IRS should not be prevented from asserting a penalty 
solely because an individual IRS employee involved earlier in the 
process did not determine that the penalty was appropriate at the time 
such employee considered it, a result that would follow from adopting 
the comments' suggestions. Instead, the IRS should be permitted to 
assert penalties that both a Counsel attorney and the attorney's 
supervisor believe are warranted.
    Comments' concerns about the proposed definition of ``individual 
who first proposed the penalty'' have led the Treasury Department and 
the IRS to conclude that language is needed to clarify that, for 
purposes of determining which individual first proposed a penalty, the 
individual must have proposed the penalty either to a taxpayer (or the 
taxpayer's representative) or to the individual's supervisor or 
designated higher level official. This requirement is to preclude 
informal suggestions of coworkers or supervisors as being treated as 
the initial determination of a penalty assessment when those 
individuals had no official responsibility with respect to a penalty 
determination or the responsibility was a supervisory one. This 
interpretation also allows supervisors to do their job of reviewing and 
directing a subordinate's work, which may include suggesting that their 
subordinates propose a penalty. It also eliminates those who are not 
assigned responsibility for making an initial penalty determination 
from being treated as having done so by virtue of having made an 
informal comment about a penalty to a coworker. An example is added to 
these final regulations to illustrate the effect of the definition. 
Specifically, the new example highlights that an individual

[[Page 104421]]

who did not make a proposal to a taxpayer, supervisor, or designated 
higher level official is not the individual who made the initial 
determination of a penalty assessment.
B. Immediate Supervisor and Designated Higher Level Officials
    The proposed regulations defined the term ``immediate supervisor'' 
as any individual with responsibility to review another individual's 
proposal of penalties without the proposal being subject to an 
intermediary's approval.
    Some comments argued that the proposed definition of ``immediate 
supervisor'' was too vague, and that it could allow non-managerial, 
non-supervisory personnel to approve penalties. Some argued that the 
definition should be revised to mean any individual who ``directly 
supervises the substantive work'' of an individual, while others 
recommended that it be limited to a single individual that meets the 
definition of a ``supervisor'' or ``manager'' under other provisions of 
Federal law related to labor and employment matters.
    These alternative suggestions focus on substantive work generally, 
rather than penalty review specifically. Because supervisory approval 
in this context relates only to penalties, this broader focus is not 
appropriate. By looking to an individual's assigned job duties rather 
than their title, the proposed definition takes a functional approach 
that is consistent with the statutory purpose of ensuring that a person 
that is familiar with the penalty aspects of a case be the one to give 
approval to assert penalties. See Sand Inv. Co. v. Commissioner, 157 
T.C. 136, 142 (2021) (holding that the legislative history supports the 
conclusion that the person with the greatest familiarity with the facts 
and legal issues presented by the case is the ``immediate supervisor'' 
for purposes of section 6751(b)). Moreover, unlike some of the 
suggested alternatives, the proposed definition recognizes that IRS 
employees often have multiple supervisors with different roles for 
different parts of an examination.
    After consideration of the comments, the final regulations adopt 
the proposed definition with one modification. Rather than defining 
``immediate supervisor'' as ``any individual with responsibility to 
approve another individual's proposal of penalties,'' the adopted 
definition defines it as ``any individual with responsibility to review 
another individual's proposal of penalties.'' This definition 
recognizes that a person assigned to review a penalty proposal has the 
responsibility to make a judgment call about the appropriateness of the 
penalty. Responsibility to review another's work is the hallmark of 
being a supervisor. The definition adopted in the final regulations 
takes a practical approach that is consistent with the statute's focus 
on supervision of the penalty proposal.
    Pursuant to the grant of authority in section 6751(b)(1) to 
designate which higher level officials may approve the initial 
determination, in addition to the general grant of authority in section 
7805(a), the proposed regulations defined a ``higher level official'' 
as any person who has been directed via the Internal Revenue Manual or 
other assigned job duties to approve another individual's proposal of 
penalties before they are included in a notice that is a prerequisite 
to Tax Court jurisdiction, an answer to a Tax Court petition, or are 
assessed without the need for such inclusion.
    Some comments disagreed with this definition, arguing that it is 
too vague and should be narrowed to only a small group of upper-level 
management. But these comments' suggested alternatives reject a 
functional approach in favor of unnecessary formalities that could 
result in appropriate penalties being eliminated. They are also 
inconsistent with section 6751(b)'s provision of discretion to 
designate which higher level officials may designate a penalty. 
Accordingly, the final regulations adopt the proposed definition 
without change.
C. Personally Approved (in Writing)
    The proposed regulations define ``personally approved (in 
writing)'' to mean any writing, including in electronic form, that is 
made by the writer to signify the writer's assent and that reflects 
that it was intended as approval.
    Comments argued that the definition of ``personally approved (in 
writing)'' should be revised to require that the approval, if made 
electronically, be made through a digital signature that includes a 
software-generated timestamp indicating when the document was signed 
and who signed it. One comment also argued that, alternatively, the IRS 
should require that a statement of signing accompany the request for a 
supervisor's approval of a penalty.
    After consideration of the comments, the proposed definition is 
adopted without change. Adopting the comments' suggestions would impose 
formalities that frustrate imposition of appropriate penalties. The 
statute does not mandate the use of a particular type of signature, 
only that the approval be in writing. While it may be a best practice 
to use digital signatures with software-generated timestamps, mandating 
their use would go beyond the scope of the statute and these 
regulations. Nor does the statute require the immediate supervisor to 
use any particular format when approving the penalty, such as with a 
statement of signing. The functional approach adopted in these final 
regulations ensures that written approval, which is all the statute 
requires, is obtained. See PBBM-Rose Hill, Ltd. v. Commissioner, 900 
F.3d 193, 213 (5th Cir. 2018) (rejecting an argument that section 
6751(b)(1) was not satisfied because the penalty was not on the same 
page as the signature); Deyo v. Commissioner, 296 F. App'x 157 (2d Cir. 
2008) (rejecting an argument that section 6751(b)(1) was not satisfied 
because the approval was provided by a stamp rather than a manual 
signature); Thompson v. Commissioner, T.C. Memo. 2022-80 (rejecting the 
argument that cross-examination of a revenue agent and his supervisor 
was needed because it ``would be immaterial and wholly irrelevant'' 
where there was written approval in the record); Raifman v. 
Commissioner, T.C. Memo. 2018-101 (same).
D. Automatically Calculated Through Electronic Means
    The proposed regulations provide that a penalty is ``automatically 
calculated through electronic means'' if it is proposed by an IRS 
computer program without human involvement. A penalty is no longer 
considered ``automatically calculated through electronic means'' if a 
taxpayer responds to a computer-generated notice proposing a penalty 
and challenges the penalty or the amount of tax to which the penalty is 
attributable, and an IRS employee works the case.
    Some comments argued that the proposed definition of 
``automatically calculated through electronic means'' is too broad and 
encompasses penalties that, in the comments' view, should never be 
exempt from supervisory approval for various reasons. As explained in 
the preamble to the proposed regulations, the scope of this definition 
is limited to identifying when a penalty should be considered exempt 
from the supervisory approval requirements of section 6751(b)(1) by 
operation of section 6751(b)(2)(B). Comments sought to narrow the 
proposed definition and impose additional requirements on the IRS that 
are divorced from the statutory requirements. The comments were 
directed to whether proposal and assessment of certain penalties should

[[Page 104422]]

ever be automated, as opposed to whether a specific penalty was in fact 
``automatically calculated through electronic means'' within the 
meaning of section 6751(b)(2)(B). As such, the comments go beyond the 
scope of the regulations.
    One comment recommended that the proposed definition be revised to 
eliminate the requirement that an IRS employee consider a taxpayer's 
response to an automatically-generated notice in order to remove the 
penalty from the automatically-calculated exception. In this comment's 
view, this requirement could lead to situations where the IRS ignores 
correspondence and asserts penalties without proper consideration of 
the taxpayer's response to an automatically-generated penalty notice. 
The Treasury Department and the IRS are sensitive to the comment's 
concerns but consider this a matter outside of the scope of these 
regulations. The stated concerns are policy considerations about how 
the IRS should handle correspondence. They are not within the scope of 
these regulations, which seek only to interpret and define the 
statutory text of section 6751(b). As stated in the preamble to the 
proposed regulations, it is the policy of the IRS to give ``full and 
fair consideration to evidence in favor of not imposing [a] penalty, 
even after the [IRS']s initial consideration supports imposition of a 
penalty . . . .'' This policy should prohibit the type of conduct with 
which the comment is concerned. Finally, even if the IRS did fail to 
consider a taxpayer's response to an automatically-generated penalty 
notice, there would be no bargaining nor would there be an individual 
who made an initial determination with respect to the penalty at issue. 
Accordingly, it would be impossible for the IRS to obtain supervisory 
approval from the (non-existent) individual's supervisor. As the 
preamble to the proposed regulations explains, requiring supervisory 
approval in that situation would disrupt the automated process and 
would not square with the statutory text. For these reasons, the 
proposed definition is adopted without modification.

3. Other Comments

    Comments made a number of other recommendations that went beyond 
the scope of the proposed regulations. These recommendations related to 
the types of forms the IRS should use in documenting supervisory 
approval and how those forms should be provided to taxpayers, the 
internal practices the IRS should follow to ensure compliance with 
section 6751(b) among its employees, and the types of employees that 
should be permitted to approve certain penalties over a certain dollar 
threshold. Other comments also criticized the existing penalty approval 
process as ineffective and stated that pending legislation would soon 
obviate the need for these regulations. Finally, one comment was 
submitted that did not relate to section 6751(b).
    Aside from being outside of the scope of these regulations, 
adopting these recommendations would impose laborious formalities that 
are not required by section 6751(b) and that would give taxpayers and 
their representatives more opportunities to avoid the penalties that 
Congress intended be asserted against them. The final regulations 
therefore do not adopt these recommendations.

Special Analyses

I. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6(b) of Executive Order 12866, as amended. Therefore, a 
regulatory impact assessment is not required.

II. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that these regulations will not have a significant 
economic impact on a substantial number of small entities. This 
certification is based on these regulations imposing no obligations on 
small entities and therefore no economic impact on those entities. 
Because these regulations ensure that only appropriate penalties will 
apply by imposing requirements on the IRS and do not otherwise bear on 
the applicability of any penalty, the final regulations do not impose a 
significant economic impact on a substantial number of small entities.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for the Office of Advocacy of the Small Business Administration 
for comment on its impact on small businesses, and no comments were 
received.

III. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. This rule does not include any Federal mandate that may 
result in expenditures by State, local, or Tribal governments, or by 
the private sector in excess of that threshold.

IV. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These final regulations do not have 
federalism implications and do not impose substantial direct compliance 
costs on state and local governments or preempt State law within the 
meaning of the Executive order.

V. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs has designated this 
rule as not a ``major rule,'' as defined by 5 U.S.C. 804(2).

Drafting Information

    The principal author of these regulations is William Prater of the 
Office of the Associate Chief Counsel (Procedure and Administration). 
However, other personnel from the Treasury Department and the IRS 
participated in their development.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 is amended by adding 
an entry for Sec.  301.6751(b)-1(a)(4) in numerical order to read in 
part as follows:

    Authority:  26 U.S.C. 7805.
* * * * *
    Section 301.6751(b)-1(a)(4) also issued under 26 U.S.C. 
6751(b)(1).
* * * * *

[[Page 104423]]

0
Par. 2. Section 301.6751(b)-1 is added to read as follows:

Sec.  301.6751(b)-1   Supervisory and higher level official approval 
for penalties.

    (a) Approval requirement--(1) In general. Except as provided in 
paragraph (a)(2) of this section, section 6751(b) of the Internal 
Revenue Code (Code) generally bars the assessment of a penalty unless 
the initial determination of the assessment of the penalty is 
personally approved (in writing) by the immediate supervisor of the 
individual making the initial determination or such higher level 
official as the Secretary of the Treasury or her delegate may 
designate. Paragraph (a)(2) of this section lists penalties not subject 
to section 6751(b)(1) and this paragraph (a)(1). Paragraph (a)(3) of 
this section provides definitions of terms used in section 6751(b) and 
this section. Paragraph (a)(4) of this section designates the higher 
level officials described in this paragraph (a)(1). Paragraphs (b) 
through (d) of this section apply section 6751(b)(1) and this paragraph 
(a)(1) to penalties not subject to pre-assessment review in the United 
States Tax Court (Tax Court), penalties that are subject to pre-
assessment review in the Tax Court, and penalties raised in the Tax 
Court after a petition is filed, respectively. Paragraph (e) of this 
section provides examples illustrating the application of section 
6751(b) and this section. Paragraph (f) of this section provides dates 
of applicability of this section.
    (2) Exceptions. Under section 6751(b)(2), section 6751(b)(1) and 
this section do not apply to:
    (i) Any penalty under section 6651, 6654, 6655, 6673, 6662(b)(9), 
or 6662(b)(10) of the Code; or
    (ii) Any other penalty automatically calculated through electronic 
means.
    (3) Definitions. For purposes of section 6751(b) and this section, 
the following definitions apply--
    (i) Penalty. The term penalty means any penalty, addition to tax, 
or additional amount under the Code.
    (ii) Individual who first proposed the penalty. Except as otherwise 
provided in this paragraph (a)(3)(ii), the individual who first 
proposed the penalty is the individual who section 6751(b)(1) and 
paragraph (a)(1) of this section reference as the individual making the 
initial determination of a penalty assessment. For purposes of this 
section, a proposal of a penalty can be made only to either a taxpayer 
(or the taxpayer's representative) or to the individual's supervisor or 
designated higher level official. A proposal of a penalty, as defined 
in paragraph (a)(3)(i) of this section, to a taxpayer does not include 
mere requests for information relating to a possible penalty or 
inquiries of whether a taxpayer wants to participate in a general 
settlement initiative for which the taxpayer may be eligible, but does 
include offering the taxpayer an opportunity to agree to a particular 
penalty in a particular amount other than a penalty under a settlement 
initiative offered to a class of taxpayers. An individual who first 
proposed the penalty is not the individual whom section 6751(b)(1) and 
paragraph (a)(1) of this section reference as the individual making the 
initial determination of a penalty assessment if the assessment of the 
penalty is attributable to an independent proposal made by a different 
individual.
    (iii) Immediate supervisor. The term immediate supervisor means any 
individual with responsibility to review another individual's proposal 
of penalties, as defined in paragraph (a)(3)(i) of this section, 
without the proposal being subject to an intermediary's approval.
    (iv) Higher level official. The term higher level official means 
any person designated under paragraph (a)(4) of this section as a 
higher level official authorized to approve a penalty for purposes of 
section 6751(b)(1).
    (v) Personally approved (in writing). The term personally approved 
(in writing) means any writing, including in electronic form, made by 
the writer to signify the writer's assent. No signature or particular 
words are required so long as the circumstances of the writing reflect 
that it was intended as approval.
    (vi) Automatically calculated through electronic means. A penalty, 
as defined in paragraph (a)(3)(i) of this section, is automatically 
calculated through electronic means if an IRS computer program 
automatically generates a notice to the taxpayer that proposes the 
penalty. If a taxpayer responds in writing or otherwise to the 
automatically-generated notice and challenges the proposed penalty, or 
the amount of tax to which the proposed penalty is attributable, and an 
IRS employee considers the response prior to assessment (or the 
issuance of a notice of deficiency that includes the penalty), then the 
penalty is no longer considered ``automatically calculated through 
electronic means.''
    (4) Higher level official. Any person who has been directed by the 
Internal Revenue Manual or other assigned job duties to approve another 
individual's proposal of penalties before they are included in a pre-
assessment notice prerequisite to Tax Court jurisdiction, an answer, 
amended answer, or amendment to the answer to a Tax Court petition, or 
are assessed without need for such inclusion, is designated as a higher 
level official authorized to approve the penalty for purposes of 
section 6751(b)(1).
    (b) Penalties not subject to pre-assessment review in the Tax 
Court. The requirements of section 6751(b)(1) and paragraph (a)(1) of 
this section are satisfied for a penalty that is not subject to pre-
assessment review in the Tax Court if the immediate supervisor of the 
individual who first proposed the penalty personally approves the 
penalty in writing before the penalty is assessed. Alternatively, a 
person designated as a higher level official as described in paragraph 
(a)(4) of this section may provide the approval otherwise required by 
the immediate supervisor.
    (c) Penalties subject to pre-assessment review in the Tax Court. 
The requirements of section 6751(b)(1) and paragraph (a)(1) of this 
section are satisfied for a penalty that is included in a pre-
assessment notice that provides a basis for Tax Court jurisdiction upon 
timely petition if the immediate supervisor of the individual who first 
proposed the penalty personally approves the penalty in writing on or 
before the date the notice is mailed. Alternatively, a person 
designated as a higher level official as described in paragraph (a)(4) 
of this section may provide the approval otherwise required by the 
immediate supervisor. Examples of a pre-assessment notice described in 
this paragraph (c) include a statutory notice of deficiency under 
section 6212 of the Code, a notice of final partnership administrative 
adjustment under former section 6223 of the Code, and a notice of final 
partnership adjustment under section 6231 of the Code.
    (d) Penalties raised in the Tax Court after a petition. The 
requirements of section 6751(b)(1) and paragraph (a)(1) of this section 
are satisfied for a penalty that the Commissioner raises in the Tax 
Court after a petition (see section 6214(a) of the Code) if the 
immediate supervisor of the individual who first proposed the penalty 
personally approves the penalty in writing no later than the date on 
which the Commissioner requests that the court determine the penalty. 
Alternatively, a person designated as a higher level official as 
described in paragraph (a)(4) of this section may provide the approval 
otherwise required by the immediate supervisor.
    (e) Examples. The following examples illustrate the rules of this 
section.
    (1) Example 1. In the course of an audit regarding a penalty not 
subject to pre-assessment review in the Tax Court,

[[Page 104424]]

Revenue Agent A concludes that Taxpayer T should be subject to the 
penalty under section 6707A of the Code for failure to disclose a 
reportable transaction. Revenue Agent A sends T a letter giving T the 
option to agree to the penalty; submit additional information to A 
about why the penalty should not apply; or request within 30 days that 
the matter be sent to the Independent Office of Appeals (Appeals) for 
consideration. After T requests that Appeals consider the case, A 
prepares the file for transmission, and B (who is A's immediate 
supervisor, as defined in paragraph (a)(3)(iii) of this section) signs 
a cover memorandum informing Appeals of the proposed penalty and asks 
Appeals to consider it. The Appeals Officer upholds the penalty, and it 
is assessed. The requirements of section 6751(b)(1) are satisfied 
because B's signature on the cover memorandum is B's personal written 
assent to the penalty proposed by A and was given before the penalty 
was assessed.
    (2) Example 2. In the course of an audit, Revenue Agent A concludes 
that Taxpayer T should be subject to an accuracy-related penalty for 
substantial understatement of income tax under section 6662(b)(2). 
Revenue Agent A sends T a Letter 915, Examination Report Transmittal, 
along with an examination report that includes the penalty. The Letter 
915 gives T the option to agree to the examination report; provide 
additional information to be considered; discuss the report with A or B 
(who is A's immediate supervisor, as defined in paragraph (a)(3)(iii) 
of this section); or request a conference with an Appeals Officer. T 
agrees to assessment of the penalty and signs the examination report to 
consent to the immediate assessment and collection of the amounts shown 
on the report. B provides written supervisory approval of the penalty 
after T signs the examination report, but before the penalty is 
assessed. Paragraph (b) of this section applies because T's agreement 
to assessment of the penalty excepts it from pre-assessment review in 
the Tax Court. Because B provided written supervisory approval before 
assessment of the penalty, the requirements of section 6751(b)(1) are 
satisfied.
    (3) Example 3. In the course of an audit of Taxpayer T by a team of 
revenue agents, Revenue Agent A concludes that T should be subject to 
an accuracy-related penalty for negligence under section 6662(b)(1) and 
(c). Supervisor B is the issue manager and is assigned the duty to 
review the Notice of Proposed Adjustment for any penalty A would 
propose. Revenue Agent A reports to B, but B is not responsible for the 
overall management of the audit of T. C is the case manager of the team 
auditing T and is responsible for the overall management of the audit 
of T. C may assign tasks to A and other team members, and has 
responsibility for approving any examination report presented to T.
    (i) Alternative Outcome 1: Only B approves the penalty in writing 
before the mailing to T of a notice of deficiency that includes the 
penalty. Under paragraph (a)(3)(iii) of this section, B qualifies as 
the immediate supervisor of A with respect to A's penalty proposal, and 
the requirements of section 6751(b)(1) are met.
    (ii) Alternative Outcome 2: Only C approves the penalty in writing 
before the mailing to T of a notice of deficiency that includes the 
penalty. Because C has responsibility to approve A's proposal of the 
penalty as part of approving the examination report, C qualifies as a 
higher level official designated under paragraph (a)(4) of this section 
to approve the penalty proposed by A, and the requirements of section 
6751(b)(1) are met.
    (4) Example 4. In the course of an audit, Revenue Agent A concludes 
that Taxpayer T should be subject to a penalty for negligence under 
section 6662(c). Revenue Agent A recommends the penalty to her 
immediate supervisor B, who thinks more factual development is needed 
to support the penalty but must close the audit immediately due to the 
limitations period on assessment expiring soon. The IRS issues a 
statutory notice of deficiency without the penalty and T files a 
petition in the Tax Court. In reviewing the case file and conducting 
discovery, IRS Chief Counsel Attorney C concludes that the facts 
support imposing a negligence penalty under section 6662(c). Attorney C 
proposes to her immediate supervisor, D, that the penalty should apply 
and should be raised in an Answer pursuant to section 6214(a). D agrees 
and signs the Answer that includes the penalty before it is filed. The 
section 6662(c) penalty at issue is subject to pre-assessment review in 
the Tax Court and was raised in the Tax Court after a petition was 
filed under paragraph (d) of this section. Therefore, written 
supervisory approval under paragraph (d) of this section was required 
prior to filing the written pleading that includes the penalty. 
Attorney C is the individual who first proposed the penalty for 
purposes of section 6751(b)(1) and paragraphs (d) and (a)(3)(ii) of 
this section, and she secured timely written supervisory approval from 
D, the immediate supervisor, as defined in paragraph (a)(3)(iii) of 
this section. As a result, the requirements of section 6751(b)(1) are 
met. Revenue Agent A did not make the initial determination of the 
penalty assessment because any assessment would not be attributable to 
A's proposal but would be based on the independent proposal of Attorney 
C raised pursuant to section 6214(a).
    (5) Example 5. In the course of an audit, Revenue Agent A concludes 
that Taxpayer T should be subject to a penalty for negligence under 
section 6662(c). Revenue Agent A includes the penalty in a draft report 
that she sends for review to her immediate supervisor B. B reviews A's 
recommendation and notices that A did not consider whether a penalty 
for a substantial understatement of income tax under section 6662(d) 
should apply in the alternative. B sends an email to A telling her to 
``add a section 6662(d) penalty if the math checks out.'' Revenue Agent 
A reviews the facts, determines that the imposition of the section 
6662(d) penalty is warranted, and adds the penalty to a report she 
issues to the taxpayer. Revenue Agent A is the individual who first 
proposed both of the penalties for purposes of section 6751(b)(1) and 
paragraphs (d) and (a)(3)(ii) of this section because she is the 
individual who first proposed the penalty to the taxpayer. Supervisor B 
did not make the initial determination of the section 6662(d) penalty 
because, even though she first thought of and suggested it, she did not 
propose it to the taxpayer or her supervisor (or designated higher 
level official).
    (6) Example 6. The IRS's Automated Underreporter (AUR) computer 
program detects a discrepancy between the information received from a 
third party and the information contained on Taxpayer T's return. AUR 
automatically generates a CP2000, Notice of Underreported Income, that 
includes an adjustment based on the unreported income and a proposed 
penalty under section 6662(d) that is mailed to T. The CP2000 gives T 
30 days to respond to contest the proposed adjustments and the penalty. 
T submits a response to the CP2000, asking only for more time to 
respond. More time is granted but no further response is received from 
T, and a statutory notice of deficiency that includes the adjustments 
and the penalty is automatically generated and issued to T. The section 
6662(d) penalty at issue is automatically calculated through electronic 
means under paragraphs (a)(2)(ii) and (a)(3)(vi) of this section. The 
penalty was proposed by the AUR computer program, which generated a 
notice to T that proposed the penalty. Although T submitted a response 
to the CP2000, the response

[[Page 104425]]

did not challenge the proposed penalty, or the amount of tax to which 
the proposed penalty is attributable. Therefore, the penalty was 
automatically calculated through electronic means and written 
supervisory approval was not required.
    (f) Applicability date. The rules of this section apply to 
penalties assessed on or after December 23, 2024.

Douglas W. O'Donnell,
Deputy Commissioner.
    Approved: December 2, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-29074 Filed 12-20-24; 4:15 pm]
BILLING CODE 4830-01-P
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