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Published:   |   Last Updated: February 9, 2024

Reconsidering the IRS’s Approach to Supervisory Review

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Some penalties require supervisory approval before they can be assessed by the IRS. The applicable statute, however, is vague regarding the point at which this approval must occur. This statutory ambiguity has generated conflicting decisions among the courts, which leaves taxpayers unsure about how they should be treated by the IRS and leads to unnecessary litigation that is bad for everyone. In hopes of bringing additional certainty to this area, the IRS has proposed regulations, for which public comments were open until July 10, 2023. The next step in this regulatory process will be a public hearing to be held on September 11, 2023.

TAS has encouraged the IRS and Congress to draw a clear line in the sand to clarify the issue, but our recommendation of where to draw the line is different than the IRS’s approach. The proposed regulations succeed in providing clarity, but it would be nice if they did so in a way that helps taxpayers rather than harming them.

Timing of Supervisory Approval

IRC § 6751(b)(1) generally requires that no penalty be assessed unless the initial penalty determination has been approved in writing by an applicable supervisor. Courts, however, have been all over the map when it comes to interpreting this requirement. For example, the U.S. Tax Court, in Clay v. Commissioner, held that supervisory approval for penalties subject to deficiency procedures was required prior to sending the taxpayer a formal communication that included the right to go to the IRS Independent Office of Appeals. On the other hand, the U.S. Court of Appeals for the Second Circuit held in Chai v. Commissioner that approval for these penalties could occur anytime up until issuance of the statutory notice of deficiency.

Under the proposed regulations, for pre-assessment penalties subject to Tax Court review, supervisory approval can be obtained anytime before issuance of the statutory notice of deficiency. Penalties not subject to pre-assessment Tax Court review can be approved up until the time of the assessment itself. Thus, the proposed regulations establish the broadest possible window and allow the requisite supervisory approval to occur at the latest possible moment. On the other hand, TAS has long urged the IRS to require supervisory approval before a proposed penalty is communicated in writing to a taxpayer.

This is not just an academic debate. The IRS’s proposed approach is problematic because the ability to raise potential penalties with taxpayers in the absence of oversight could lend itself to the improper assertion of penalties. Practitioners and Congress expressed concerns that some IRS examiners may be tempted to propose a penalty with no real intention of actually imposing it. Rather, the penalty is put forth as a bargaining chip to be negotiated away as part of the case resolution process. The IRS is quick to point out that this practice is unauthorized and is strongly discouraged. Nevertheless, the structure perpetuated in the proposed regulations does nothing to protect taxpayers from potential abuse.

Supervisory Review of Negligence Penalties

The proposed regulations also miss an opportunity when it comes to negligence penalties. IRC § 6751(b)(2)(A) provides an exception to the supervisory review requirement in the case of certain penalties, such as the failure-to-file and failure-to-pay penalties. Another exception is established in IRC § 6751(b)(2)(B) for penalties that are automatically calculated through electronic means, which the IRS has interpreted as including negligence penalties under IRC § 6662(b)(1).

Unlike the more mechanical penalties contemplated in IRC § 6751(b)(2)(A), negligence penalties are inherently subjective and should not be exempt from supervisory review. To assess whether a taxpayer made a “reasonable attempt to comply” with the law, IRS personnel must assess the taxpayer’s state of mind, the nature of the taxpayer’s efforts, and all of the surrounding facts and circumstances. A computer simply cannot do this.

IRS policy, reiterated in the proposed regulations, is to incorporate supervisory review for the negligence penalty only if taxpayers respond. Nevertheless, taxpayers may not respond for a number of understandable reasons. For example, they may have moved and not received the notice, or they may just be confused by the notice and its requirements.

In such cases, taxpayers may face a negligence penalty without any IRS analysis of their reasonable attempts to comply with the tax laws. Allowing a computer to determine negligence in the absence of employee involvement harms taxpayers and undermines the protections that should be afforded by IRC § 6751(b). Accordingly, to protect taxpayers’ right to pay no more than the correct amount of tax legally due, including interest and penalties, I have previously recommended that the IRS should require an employee to determine and a supervisor to approve negligence penalties before they are imposed. This determination should be made based on all of the prevailing facts and circumstances, which, under current policy, does not occur when negligence penalties are electronically generated.

Impact on Automated Underreporter Penalties

Sometimes taxpayers receive automated underreporter notices proposing tax adjustments and penalties, and they respond timely, but this is not always enough. This inequitable outcome, often occurring in the case of lower-income taxpayers, can occur when the IRS receives a taxpayer response but fails to process and consider it before imposing a penalty. In these situations, which may arise from IRS paper processing backlogs, taxpayers are subject to penalties without supervisory review, even though they have submitted responses that should entitle them to this review and consideration of their specific facts.


The IRS’s approach to supervisory review of penalties is heavy-handed and burdensome on taxpayers. Among other things, supervisory review should occur before applicable penalties are communicated to taxpayers in writing. Negligence penalties should also be presumptively subject to supervisory review and not automatically assessed by a computer program. The proposed regulations under IRC § 6751 provide the IRS with an excellent chance to reconsider its approach to supervisory review. This is an opportunity that the IRS has so far declined to embrace, but there is still time. I urge the IRS to reexamine its policy and I request that Congress consider clarifying the law to protect taxpayers’ rights.

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The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

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