There is a procedural rule that has knocked out a lot of IRS penalties over the years, and it applies squarely to crypto cases: written supervisory approval. Congress decided that a single IRS employee should not be able to impose most penalties alone. A supervisor has to approve the initial determination, personally and in writing.

When the IRS misses that step, the penalty fails, regardless of the merits. Here is how the rule works after Treasury’s 2024 regulations.

The statute

IRC 6751(b)(1): “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.” Under IRC 6751(c), “penalty” includes any addition to tax or additional amount.

IRC 6751(b)(2) lists the exceptions. The rule does not apply to any addition to tax under IRC 6651, 6654 or 6655; to a 6662 penalty only by reason of 6662(b)(9) or (b)(10), which concern certain charitable deduction issues; or to any other penalty automatically calculated through electronic means.

For crypto cases, that means the penalties that most often matter, the 6662 negligence and substantial understatement penalties and the 6663 fraud penalty, are generally subject to the approval rule. The failure to file and pay additions under 6651, including the fraudulent failure to file increase under 6651(f), are not.

The regulation: Treas. Reg. 301.6751(b)-1

Treasury finalized regulations in T.D. 10017, published December 23, 2024, at 89 FR 104423. They apply to penalties assessed on or after December 23, 2024. See Treas. Reg. 301.6751(b)-1(f).

The regulation defines the key terms. “Personally approved (in writing)” means any writing, including electronic, that signifies the writer’s assent; no signature or particular words are required if the circumstances show it was intended as approval. The “immediate supervisor” is anyone with responsibility to review another individual’s penalty proposals without an intermediary’s approval. And a designated higher-level official includes anyone directed by the IRM or job duties to approve another individual’s penalty proposals.

The deadlines

The regulation sets different timing rules depending on how the penalty reaches you.

  • Penalties not subject to pre-assessment Tax Court review, for example where you agreed to the assessment: approval any time before the penalty is assessed. Treas. Reg. 301.6751(b)-1(b).
  • Penalties included in a pre-assessment notice that provides a basis for Tax Court jurisdiction, such as a notice of deficiency: approval on or before the date the notice is mailed. Treas. Reg. 301.6751(b)-1(c).
  • Penalties the IRS raises in Tax Court after you petition: approval no later than the date the IRS asks the court to determine the penalty. Treas. Reg. 301.6751(b)-1(d).

Example 2 in the regulation involves a Letter 915, Examination Report Transmittal, with a proposed substantial understatement penalty. The taxpayer agreed and signed, the supervisor approved after the signature but before assessment, and the requirement was satisfied.

The automated notice exception and crypto mismatches

This is where crypto cases get interesting. Many crypto penalties arrive in CP2000 notices generated by the Automated Underreporter program when a Form 1099-DA or other information return does not match your return.

Under Treas. Reg. 301.6751(b)-1(a)(3)(vi), a penalty is “automatically calculated through electronic means” if an IRS computer program automatically generates a notice to the taxpayer that proposes it. Those penalties do not need supervisory approval.

But the same paragraph continues: if the taxpayer responds in writing or otherwise and challenges the proposed penalty, or the tax it is based on, and an IRS employee considers the response before assessment or before issuing a notice of deficiency including the penalty, “then the penalty is no longer considered ‘automatically calculated through electronic means.’”

Example 6 shows the other side. A taxpayer got a CP2000 with a proposed 6662(d) penalty, asked only for more time, never challenged anything, and the penalty stayed automatic. No approval required.

The practical lesson for a crypto CP2000: if you dispute the adjustment or the penalty, say so in writing, with your reasons. That response can take the penalty out of the automated exception. See transferred-in crypto and zero-basis forms.

Who “first proposed” the penalty

The regulation ties approval to “the individual who first proposed the penalty,” defined as the person who first proposed it to the taxpayer or to their own supervisor. Requests for information about a possible penalty, or inquiries about participating in a general settlement initiative, are not proposals. Offering the taxpayer the chance to agree to a particular penalty in a particular amount is.

Example 5 makes the point: a supervisor who suggested adding a penalty in an email was not the one who “first proposed” it; the revenue agent who proposed it to the taxpayer was. Example 4 shows that when Chief Counsel independently raises a penalty in Tax Court, the Counsel attorney is the proposer and needs her supervisor’s approval before the answer is filed.

How to check in your crypto case

In an examination or Appeals case, ask for the penalty approval form or other written approval and the date it was signed. Compare that date to the relevant event: the date you were first offered the chance to agree to the penalty, the date of the notice of deficiency, or the date the IRS raised the penalty in court.

In Tax Court, IRC 7491(c) puts the burden of production on the IRS for any individual’s penalty. Where 6751(b) applies, that includes producing evidence of compliance.

Do not treat this as a technicality to be embarrassed about. Congress put it in the Code to protect taxpayers. Using it is exactly what the rule is for.

A crypto timeline to test

Here is how the analysis runs on a typical field examination of unreported crypto gains.

  • March: the revenue agent sends you a report proposing tax and a 6662 penalty, and offers you the chance to agree. Under the regulation, that is when the agent first proposed the penalty to you.
  • April: you decline and request Appeals.
  • June: the case goes to Appeals with a cover memo signed by the agent’s supervisor. In Example 1 of the regulation, a supervisor’s signature on a cover memo informing Appeals of a proposed penalty was treated as personal written approval, because the regulation accepts any writing that signifies assent.
  • Later: if Appeals does not settle and the IRS mails a notice of deficiency including the penalty, approval must exist on or before the mailing date under Treas. Reg. 301.6751(b)-1(c).

In that sequence, the question is whether a qualifying written approval exists, by the right person, before the deadline that applies. Get the documents and check each one against the dates.

Common problems I look for: an approval dated after the notice of deficiency was mailed, an approval by someone who was not the proposer’s supervisor or a designated official, and a mismatch between the penalty that was approved and the penalty the notice actually asserts. Each is a factual question, and each can decide whether the penalty survives.

What 6751(b) cannot do

It does not touch the tax itself, or interest. It does not apply to the 6651 additions. And with the 2024 regulation’s flexible definition of a writing, an approval does not have to be a signed form; an email that shows assent may be enough.

So check it, raise it when it fails, and keep fighting the underlying tax and the merits of the penalty at the same time. See the crypto accuracy penalty and the reasonable cause defense.