Treasury FY 2025 Green Book Proposes to Essentially Eliminate Written Supervisory Approval for Penalties

On March 11, 2024, the Treasury Department released its fiscal year (FY) 2025 Green Book of revenue proposals, which includes a proposal to essentially eliminate almost all remaining requirements to obtain written supervisory approval for penalties. Rather than focus on training IRS employees and enforcing the law enacted by Congress to protect taxpayer rights, Treasury is proposing Congress basically gut the penalty approval provisions to prevent future errors by the IRS irrespective of the impact to taxpayers. Most notably, the proposal eliminates the written approval requirement for penalties imposed under IRC § 6662 for underpayments of tax, IRC § 6662A for understatements with respect to reportable transactions, and IRC § 6663 for fraud penalties. While those penalty provisions might appear to be a small portion of the penalties the IRS imposes, it is important to note that about 98 percent of penalties are already exempt from such supervisory approval requirement pursuant to IRC § 6751(b). This proposal would eliminate the requirement for almost all the remaining two percent of penalties. I would rather see the law properly applied to protect taxpayer rights rather than eliminated just because the IRS has needed to concede penalties when its employees did not follow the law. The IRS should follow and consistently apply the Internal Revenue Code to all taxpayers and the IRS.

Pursuant to the terms of the proposal, only a very limited number of penalties would remain subject to the requirement, and for those limited penalties the proposal significantly relaxes the rules in two significant ways. First, the proposal adopts the most advantageous timing for the IRS in which a supervisor can provide written approval. Pursuant to the proposal, a supervisor could approve the penalties up to the time the IRS issues the Statutory Notice of Deficiency and, if the taxpayer petitions the court, the IRS may raise a penalty in the court proceeding if there is supervisory approval before doing so. For any penalty not subject to Tax Court review prior to assessment, the proposal provides that supervisory approval could occur at any time before assessment. Thus, the proposal establishes the broadest possible window and allows the approval to occur at the latest possible time, making me ask how that protects taxpayers. Second, the proposal broadens the definition of the supervisor who can approve the penalties. Specifically, in an attempt to provide clarity, the proposal allows any supervisor to approve as opposed to the immediate supervisor or a higher-level official. Therefore, the Green Book proposal nearly eliminates the written supervisory approval requirement enacted to protect taxpayers. While it provides relative certainty to the issue, it does so by seriously eroding taxpayer protections provided by IRC § 6751. It is also in direct opposition to the views expressed by a range of stakeholders and commentators.


IRC § 6751(b)(1) provides “No 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.” The language “initial determination of such assessment” is unclear. A “determination” is made based on an IRS investigation of the taxpayer’s liability and an application of the penalty statutes. An “assessment” is merely the entry of a decision on IRS books. Therefore, it is impossible to “determine” an “assessment.” Thus, the statute is vague regarding the point at which this supervisory 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.

IRC § 6751(b)(2) carves out two categories of exceptions from this supervisory approval requirement: (i) the additions to tax for failure to file a tax return or pay the tax due (IRC § 6651), the additions to tax for failure to pay sufficient estimated tax (IRC §§ 6654 and 6655), and the penalty for the overstatement or disallowance of certain contribution deductions (IRC § 6662(b)(9) and (10)) and (ii) any other penalty that is “automatically calculated through electronic means.” Generally, a penalty is considered automatically calculated through electronic means if the penalty is proposed by an IRS computer program without human involvement. See, e.g., Walquist v. Comm’r, 152 T.C. 61 (2019).

In September 2020, the IRS issued interim guidance instructing employees to obtain supervisory approval before sending a written communication that offers the taxpayer an opportunity to sign an agreement or consent to assessment or proposal of a penalty. However, the interim guidance specifies that the employee can share written communications with the taxpayer that reflect proposed adjustments before obtaining such approval if they don’t offer the taxpayer the opportunity to sign the agreement or consent to assessment or proposal of the penalty.

In 2023, in an attempt to provide clarity regarding the timing of the supervisory approval, Treasury issued proposed regulations under IRC § 6751. The proposed regulations include language consistent with the FY 2025 Green Book proposal with respect to required time to obtain the supervisory approval. Many stakeholders submitted comments on the proposed regulations, raising concerns about Treasury’s attempt to provide clarity.

2024 Purple Book Legislative Recommendations

In my 2024 Purple Book, I included a legislative recommendation to strengthen the supervisory approval requirement. I recommended that Congress amend IRC § 6751(b)(1) to clarify that the supervisory approval is required before a proposed penalty is communicated in written form to a taxpayer. Requiring supervisory approval early enough in the process would ensure it is meaningful and not a bargaining chip or an after-the-fact rubber stamp applied to cases in which a taxpayer challenges a proposed penalty.

The 2024 Purple Book also included a legislative recommendation to amend IRC § 6751(b)(2)(B) to clarify that the exception for “other penalties automatically calculated through electronic means” does not apply to the IRC § 6662(b)(1) penalty for “negligence or disregard of rules or regulations.” To determine whether a taxpayer made a reasonable attempt to comply with the law requires an analysis of the taxpayer’s state of mind, the actions the taxpayer took to comply, and the taxpayer’s motivations for taking these actions. A computer cannot perform this analysis. Logic would not permit such an interpretation.

Which Penalties Are Subject to the Written Supervisory Approval Requirement?

Based on Table 26 of the IRS 2022 Data Book, the IRS imposed 33.5 million penalties on individuals, estates, and trusts in connection with income tax liabilities in FY 2022. In practice, most penalties imposed by the IRS are excluded from the supervisory approval requirement through one of the exceptions in IRC § 6751(b)(1). Specifically, the provision excepts the following additions to tax and penalties:

IRC § 6651, failure to file tax return or pay tax;
IRC § 6654, failure by individual to pay estimated tax;
IRC § 6655, failure by corporation to pay estimated tax;
IRC § 6662(b)(9) or (10), accuracy-related penalty on underpayments related to qualified conservation contributions or disallowances related to the above-the-line charitable contributions; and
Any other penalty automatically calculated through electronic means.

The excepted penalties accounted for about 98 percent of the total number of penalties imposed on individuals, estates and trusts in FY 2022, and include the following penalties: failure to pay (16.2 million), failure to pay estimated tax (12.2 million), failure to file (3.4 million) and bad checks (1.1 million). If about 98 percent of penalties are already excepted from the supervisory approval requirement, what penalties are included in the remaining two percent? Based on Table 26 of the 2022 Data Book, the remaining two percent include the following:

Accuracy-related penalty: 647,348 (consists mostly of penalties under IRC §§ 6662 and 6662A, but also includes underpayment of stamp tax under IRC § 6653);
Fraud penalty: 1,162; and
Other penalties: 44,289 (consists of penalties relating to federal tax deposits, failure to supply tax identification number, and failure to report tip income).

Of the remaining two percent of penalties subject to the written supervisory approval requirement, the Treasury Green Book proposal would eliminate the requirement for penalties under IRC § 6662 for underpayments, IRC § 6662A for understatements with respect to reportable transactions, and IRC § 6663 for fraud. That seems to leave only the “Other” category, which accounts for about 0.13 percent of penalties assessed against individuals, estates, and trusts. Based on this analysis, the Treasury Green Book proposal appears to eliminate the written supervisory approval requirement for almost all the remaining penalties to which it applies. If these “other penalties” are the only remaining penalties impacted by IRC § 6751(b)(1), the current statutory protections will virtually disappear.

Green Book Proposal Erodes Taxpayer Protections

As I indicated in my Purple Book Legislative Recommendation, written supervisory approval is an important taxpayer protection. The Treasury Green Book proposal would strip IRC § 6751(b) of the important statutory safeguards added by § 3306 of the Internal Revenue Service Restructuring and Reform Act of 1998. The associated 1998 Senate Finance Committee Report, S. Rep No. 105-174, provides that, “ [t]he Committee believes that penalties should only be imposed where appropriate and not as a bargaining chip.” To achieve this, the report provides that the statute “requires the specific approval of IRS management to assess all non-computer generated penalties unless excepted.”

TAS has encouraged the IRS and Congress to clarify when supervisory approval should occur. However, our recommendation concerning where to draw the line differs from Treasury’s approach. The Green Book and proposed regulations succeed in providing clarity, but they do so in a way that harms taxpayers, rather than protecting their rights. Treasury’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. As the legislative history points out, Congress was concerned about IRS examiners threatening to impose penalties in cases where they weren’t warranted and where the examiners had no intention of imposing them. In such cases, examiners would propose penalties as a bargaining chip to be negotiated away as part of the case resolution process. Some taxpayers, especially unrepresented taxpayers, likely feel pressured to resolve their cases once substantial penalties are first put on the table as proposed adjustments. The IRS response to this point is that using penalties in such a manner is unauthorized and is strongly discouraged. Nevertheless, the structure perpetuated in the Green Book and proposed regulations does nothing to protect taxpayers from potential abuse. Written supervisory approval early in the process helps ensure that penalties are used appropriately.

Issues With IRS Backdating of Supervisors’ Written Approvals

Recently, instances of IRS employees moving forward without the required supervisory approval have come to light. One case in particular received wide media coverage. In LakePoint Land II, LLC v. Commissioner, the Tax Court granted, in part, a taxpayer’s motion to impose sanctions against the IRS pursuant to IRC § 6673(a)(2)(B) and held “the objective actions of [IRS] counsel [rose] to the level of bad faith” for failing to notify the court about a backdated document and not timely correcting the error. The document related to a penalty that required timely written supervisory approval under IRC § 6751(b). It is our understanding that the IRS has conceded penalties in other docketed cases where they believe the IRS had not met the requirements of IRC § 6751(b).

The appropriate response to the IRS’s failure to comply with important taxpayer protections should not be to eliminate the protections. Rather, the IRS should take appropriate steps to take ownership of its mistakes, rectify them, and train its employees to follow the law. Such steps should include providing mandatory training on the appropriate procedures for obtaining, verifying, and utilizing written supervisory approvals, continuing its review of IRS and Chief Counsel procedures for handling penalty approval documents, reviewing open cases and withdrawing any proposed penalties that lack appropriate and timely supervisory approvals, making the findings of such a review process public, and otherwise addressing any problems identified.


The Treasury Green Book proposal attempts to provide clarity to a procedural requirement ripe with ambiguity. However, to achieve this goal, it would essentially eliminate the written supervisory approval requirement for almost all the remaining penalties to which it applies. It would also allow the IRS to assert the remaining penalties at practically any time and allow any supervisor to sign off. Without explicitly stating it, the Treasury proposal aims to virtually eliminate the requirement. While I agree the statute should provide more guardrails as to the timing of the supervisory approval, Congress should continue to protect taxpayer rights and not gut the provision when providing such clarity.

Supervisory review of penalties is an important taxpayer protection and I continue to advocate for requiring it to occur before applicable penalties are communicated to taxpayers in writing. I also believe that all negligence penalties should be presumptively subject to supervisory review. I recommend that Congress reject the proposal to substantially eliminate the supervisory approval requirement, and I urge the IRS to reexamine its policies consistent with Congress’s intent in enacting the requirement and protect taxpayers from actual or perceived abuses.

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