This bill amends the Internal Revenue Code to mandate supervisory or office-level approval for IRS tax penalties and credit disallowances while requiring increased transparency through annual reporting on penalty enforcement.
Michael Bennet
Senator
CO
This bill amends the Internal Revenue Code to require supervisory or departmental approval before the IRS can impose tax penalties or credit-blocking disallowance periods. It mandates that these approvals be secured prior to issuing appealable notices to taxpayers, while providing an exception for penalties calculated through automated systems. Additionally, the legislation requires the Treasury to publish annual reports detailing IRS penalty data and enforcement outcomes to increase transparency.
IRS Must Get Supervisor Sign-Off Before Freezing Your Tax Credits: New Accountability Rules for Penalties Set to Begin
The IRS is looking at a major change in how it handles the 'bad news' letters sent to taxpayers. This bill amends the Internal Revenue Code to require that any penalty or 'disallowance period'—that’s the technical term for when the IRS bans you from claiming certain tax credits for a few years—must be personally approved in writing by a supervisor or the IRS Office of Servicewide Penalties. This approval has to happen before they send you an 'appealable notice,' which is the first letter that officially gives you the right to fight the decision in court or through an internal appeal. Essentially, it’s putting a 'double-check' system in place to ensure a single agent can't unilaterally freeze your refunds without a second pair of eyes on the file.
The 'Wait, Who Approved This?' Check
Under the new rules, if an IRS agent decides you shouldn't be allowed to claim the Child Tax Credit (CTC), the Earned Income Tax Credit (EITC), or Education Credits for a set period, they can’t just hit 'send.' For example, if you’re a working parent relying on that CTC refund to cover summer childcare, and an agent flags your filing as potentially fraudulent, a supervisor now has to personally sign off on the decision to bar you from that credit in future years. This is a significant shift toward internal accountability, aiming to prevent individual errors from causing long-term financial headaches for families who are just trying to navigate complex tax forms.
The Automation Loophole
There is a notable catch: the bill includes an exception for 'automatically calculated disallowances.' If the IRS computer system flags an error and triggers a penalty through 'automated electronic means,' the human supervisor doesn’t need to sign off. For a software developer or a gig worker whose income fluctuates, this could be a point of frustration. If the algorithm gets it wrong, you might still find yourself stuck in a bureaucratic loop without that initial human review. The bill doesn't strictly define what counts as 'automated,' which means the IRS could potentially lean more on computer-generated penalties to bypass the extra paperwork of supervisor approvals.
Tracking the Paper Trail
To keep the agency honest, the bill mandates a massive annual 'Penalty Report' starting 24 months after it becomes law. This isn't just a summary; the Treasury Secretary will have to publish data on every single organizational unit within the IRS that has the power to assess or cancel penalties. It will track how these penalties move from the first desk all the way to the final outcome. For small business owners or taxpayers who feel like the penalty process is a black box, this report is intended to shine a light on where the system is working and where it’s bogged down in appeals, providing a rare look at the inner workings of tax enforcement.