Courts and Congress say IRS must approve civil tax penalties in writing before they are asserted

For the last decade, the IRS has proactively asserted discretionary civil tax penalties that can be as high as 40 percent of the proposed tax liability. Oftentimes, the IRS has used penalties as bargaining chips to get taxpayers to capitulate with their assessment of additional tax liabilities. This is because when interest is computed on these penalties, the additional liability asserted by the IRS can increase substantially. Recognizing that civil tax penalties could be perceived to be abusive, in 1998 Congress enacted Internal Revenue Code (“IRC”) section 6751 to offer some protections to taxpayers.

Generally, IRC section 6751 provides that no civil tax penalty “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.” There are exceptions to the statute, including certain failure to pay tax penalties and “any other penalty automatically calculated through electronic means.”

After its enactment, and for the last more than 25 years, there has been significant controversy over the seemingly ambiguous terms in IRC section 6751. The finalization of regulations in 2024 has not halted the disputes over the application of the provision.

The U.S. Tax Court’s decision in Computer Sciences Corp. v. Commissioner, 165 T.C. No. 8 (Oct. 6, 2025) is the most recent judicial interpretation of IRC Section 6751. Much of the opinion focuses on rejecting a challenge under the Administrative Procedure Act (“APA”) to the assertion of a penalty. In Computer Sciences, the Tax Court held that the APA does not apply to supervisory approvals under IRC section 6751, and that the taxpayer would have to show a violation of IRC section 6751’s requirements themselves.

Central to the substantive dispute was the question of “when” supervisory approval is required for a civil tax penalty to be sustained. The Tax Court noted that IRC section 6751 itself is silent on this point, although every appellate court that has considered the question has determined that there is some implicit timing requirement. While the appellate courts have not been consistent on when approval must occur, the courts seem to agree that approval for the assertion of a penalty must be before the supervisor loses authority over the case, which can be quite late in the examination process, including up to the actual assessment of the penalty.

Because of the incredible amount of controversy that has occasioned civil tax penalty assertions and the application of IRC section 6751, Congress appears poised to act again, to clarify the statute. Presently, the Fair and Accountable IRS Reviews Act, H.R. 5346, 119th Cong. (2025) is currently making its way through Congress. The bill would amend IRC section 6751 in two ways: the amendment would define “immediate supervisor” and provide an explicit timing requirement. Under the bill, “immediate supervisor” means the person to whom the IRS personnel making the penalty determination actually reports. The amendment also addresses the timing of such approval, requiring approval of a penalty “before any written communication with respect to such penalty (including proposal of a penalty as an adjustment) is sent to the taxpayer.” In many cases, this would require approval significantly earlier than required by either the current, final regulations or current judicial interpretations. The amendment has been approved by the House Ways & Means Committee, and it appears likely to be passed in some form in the near future.

Practice point

When a taxpayer is under IRS examination, it is already an uphill battle; the burden of proving your tax return positions generally remains with the taxpayer throughout the audit. The assertion of civil tax penalties can be an additional tool that the IRS uses to get the taxpayer to agree to pay additional tax. Although there are numerous defenses to penalties, including, for example, by showing that the taxpayer had “reasonable cause” for the reporting infirmity and acted in good faith, Congress recognized there should be some procedural hurdles that the IRS must clear before a penalty is appropriately assessed. Clarifying who must approve the penalty and requiring supervisory review to the penalty assertion before the IRS agent starts to hammer on the taxpayer appears to be the balance Congress deems appropriate. If the IRS asserts a civil tax penalty, it is important to determine whether the IRS has met its procedural requirements as stated in IRC section 6751, as well as to explore what substantive defenses you have against those penalties.

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