On December 23, 2024, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) published final regulations under section 6751(b), which provides that "[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher-level official as the Secretary may designate." Over the past several years, three Circuit Courts of Appeal — the Ninth, Tenth, and Eleventh Circuits — have rejected the Tax Court's interpretation of section 6751(b), creating significant uncertainty regarding the IRS's procedural obligations and taxpayers' liability for penalties as to the deadline supervisory approval must occur, what that approval must look like, and even, what qualifies as a penalty for purposes of the statute. 

On April 11, 2023, Treasury and the IRS issued proposed section 6751(b) regulations in an effort to address this uncertainty. See REG-121709-19; 88 F.R. 21564. Under the proposed regulations, Treasury and the IRS created three new rules, one for pre-assessment notices subject to the Tax Court's review, another for penalties raised in an answer, amended answer, or amendment to the answer to a Tax Court petition, and a final rule for penalties assessed without prior opportunity for review by the Tax Court. The proposed rules also expanded the list of excepted penalties to cover those imposed by a court. In addition to the three (four, with the expansion of the excepted penalties) proposed rules, the proposed regulations clarified or expanded the definitions of certain terms, including "immediate supervisor," "higher level official authorized to approve an initial penalty determination," "personally approved (in writing)," and "automatically calculated by electronic means." For additional details as to the proposed regulations, see our prior coverage here.

As expected, the final regulations generally follow the proposed regulations, with minor modifications responsive to comments received in the notice and comment period. See T.D. 10017; 89 F.R. 104419. The preamble to the final regulations state that eight comment letters were received and fell under two categories – those which discuss proposed timing rules, and those which address definitions. Notably, the final regulations retained the timing rules in the proposed regulations: (1) for penalties not subject to pre-assessment Tax Court review, such as assessable penalties, the IRS must obtain approval on or before the date of assessment of the penalty, (2) for penalties subject to pre-assessment Tax Court review, the IRS must obtain written approval on or before the date the notice of deficiency (or other notice giving the Tax Court jurisdiction) is issued, and (3) for penalties subject to pre-assessment Tax Court review that are raised in the government's answer in a docketed case, the Chief Counsel attorney serving as attorney of record must receive written approval from a supervisor on or before the date they assert the penalty in court. Treasury and the IRS declined to follow comments requesting earlier deadlines because (1) they concluded that earlier deadlines would not prevent bargaining, even cast doubt on whether any bargaining occurred at all, and (2) because they take the position that specifically requiring approval before a 30-day letter is issued is contrary to existing caselaw, which state that penalties must be approved before the supervisor loses discretion over whether to approve imposition of the penalty.

As to the updated definitions, the final regulations include a new example illustrating the definition of "individual who first proposed the penalty." Generally, the individual who first proposed the penalty must have proposed the penalty to either a taxpayer or to the individual's supervisor or designated higher official. In the new example, an individual who did not make the proposal to the proper individuals is not considered the "individual who made the initial determination of a penalty assessment." The final regulations also amended the definition of "immediate supervisor" in response to comments. Finally, Treasury and the IRS declined to adopt comments requesting that certain formal methods of showing written approval are required.

These regulations provide much needed clarity in an area that is often the source of litigation. The regulations are effective as to penalties assessed on or after December 23, 2024. Taxpayers currently under audit should review their facts and documents carefully to identify the individuals involved in their case, and whether such individuals properly approved penalties in light of these new rules. 

For more information, please contact:

George A. Hani, ghani@milchev.com, 202-626-5953

Samuel A. Lapin, slapin@milchev.com, 202-626-5807

Omar M Hussein, ohussein@milchev.com, 202-626-1578

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