Penalty approvals for credits

Summary#

This bill changes when and how the IRS may assess penalties and when certain credit disallowance periods may take effect. It requires written supervisory approval before a penalty or a defined “disallowance period” can be applied, and it requires public reporting on penalties. The goal is to add a pre-approval step and increase transparency about penalties.

• Main change: No penalty or specified disallowance period may take effect unless a written approval (on an electronic form) is personally signed by the decision-maker’s immediate supervisor or by the IRS Office of Servicewide Penalties (or a successor), and that approval must be obtained on or before the date the taxpayer first gets an appealable notice.
• Which credits are covered as “disallowance periods”: the credits governed by the code sections for the child credit, certain education credits, and the earned income tax credit (the bill names the specific code sections that set those periods).
• Automated disallowances: The bill says that an existing exception (for disallowance periods calculated automatically by electronic systems) does not apply — meaning approval is required even when a disallowance is calculated electronically.
• Timing: The rules apply to notices sent more than 12 months after the bill becomes law.
• Reporting requirement: The Treasury must publish, within 24 months and then yearly, a public report on all penalties assessed during the prior year, with data broken out by each IRS unit that can assess or enforce penalties and showing the progression of each penalty through determination, assessment, review, and final result.
• What is unclear: The bill does not give detailed rules on how the electronic written approval must be stored, how supervisors should document their decisions, or how this will work in automated systems in day-to-day operations.

What it means for you#

• Taxpayers (individuals and businesses):

  • You must get the first appealable written notice only after a supervisor (or the Office of Servicewide Penalties) has approved the penalty or covered disallowance period in writing. This could change when you receive notices about penalties or credit disallowances.
  • If you lose a credit covered by the bill (child credit, certain education credits, or the earned income credit), the agency must have supervisory approval in place before the taxpayer receives the first appealable notice.

• People claiming child, education, or earned-income credits:

  • Disallowances of these credits that trigger an appealable notice will require supervisory approval even when the disallowance was produced by an automated calculation.

• Tax preparers and practitioners:

  • You may see changes in timing and documentation of penalty notices you receive for clients. Supervisory approval may be a new step the IRS must complete before issuing certain notices.

• IRS employees and offices:

  • Immediate supervisors will need to provide written (electronic) approval for penalties and covered disallowance periods. The IRS Office of Servicewide Penalties can also provide approvals.
  • The IRS must collect data and produce annual public reports on penalties by organizational unit and by stage of processing.

Expenses#

No publicly available information.

• The bill itself does not include a fiscal note or a cost estimate in the text provided.
• This could mean additional administrative costs for the IRS to:
  • implement and track required electronic approvals,
  • change IT workflows that now produce automated notices,
  • prepare and publish the required annual penalty reports.
• There may also be staffing impacts if supervisors or a central office must review and sign many more decisions.

Proponents' View#

• The bill appears intended to require a supervisory check before penalties or key credit disallowances take effect.
• A possible argument for the bill is that requiring written supervisory approval could reduce mistaken or improperly issued penalties and improper disallowances.
• The required public reports are likely intended to increase transparency about how penalties are assessed and reviewed across IRS units and decision stages.
• Requiring approval even for electronically calculated disallowances could be seen as closing a gap where automated processes acted without human sign-off.

Opponents' View#

• One concern is that adding a formal supervisory approval step could slow down IRS processing and delay notices to taxpayers, which could affect collections or timely resolution of disputes.
• The bill may increase administrative and technology costs for the IRS; the text does not estimate those costs or specify funding.
• It is unclear how the approval requirement will be implemented for high-volume automated systems without causing backlogs.
• The bill does not specify standards for supervisors’ reviews, recordkeeping rules for approvals, or penalties for failing to obtain required approvals, leaving operational details unresolved.
• The public reporting requirement could raise questions about privacy or data handling unless the Treasury defines what data will be published and how taxpayer information will be protected.