45 CFR §264.31

1. (a)
   1. (1)If we find that, for a fiscal year, the State IV-A agency did not enforce the penalties against recipients required under § 264.30(c), we will reduce the SFAG payable for the next fiscal year by one percent of the adjusted SFAG.
   2. (2)Upon a finding for a second fiscal year, we will reduce the SFAG by two percent of the adjusted SFAG for the following year.
   3. (3)A third or subsequent finding will result in the maximum penalty of five percent.
2. (b)We will not impose a penalty if:
   1. (1)The State demonstrates to our satisfaction that it had reasonable cause pursuant to § 262.5 of this chapter; or
   2. (2)The State achieves compliance under a corrective compliance plan pursuant to § 262.6 of this chapter.