diff --git a/src/libs/IOUUtils.ts b/src/libs/IOUUtils.ts
index 0740ee637a33..1492ab2b425b 100644
--- a/src/libs/IOUUtils.ts
+++ b/src/libs/IOUUtils.ts
@@ -284,9 +284,16 @@ function insertTagIntoTransactionTagsString(transactionTags: string, tag: string
         return tag;
     }
 
-    const tagArray = getTagArrayFromName(transactionTags);
+    const tagArray = transactionTags ? getTagArrayFromName(transactionTags) : [];
     tagArray[tagIndex] = tag;
 
+    // Fill any sparse slots created when tagIndex > tagArray.length
+    for (let i = 0; i < tagArray.length; i++) {
+        if (tagArray.at(i) === undefined) {
+            tagArray[i] = '';
+        }
+    }
+
     while (tagArray.length > 0 && !tagArray.at(-1)) {
         tagArray.pop();
     }
diff --git a/src/libs/Violations/ViolationsUtils.ts b/src/libs/Violations/ViolationsUtils.ts
index f79885ff98e3..4003f22e0227 100644
--- a/src/libs/Violations/ViolationsUtils.ts
+++ b/src/libs/Violations/ViolationsUtils.ts
@@ -116,6 +116,7 @@ function getTagViolationsForSingleLevelTags(
  */
 function getTagViolationsForDependentTags(policyTagList: PolicyTagLists, transactionViolations: TransactionViolation[], tagName: string) {
     const tagViolations = [...transactionViolations];
+    const policyTagKeys = getSortedTagKeys(policyTagList);
 
     if (!tagName) {
         for (const tagList of Object.values(policyTagList)) {
@@ -127,7 +128,15 @@ function getTagViolationsForDependentTags(policyTagList: PolicyTagLists, transac
         }
     } else {
         const tags = TransactionUtils.getTagArrayFromName(tagName);
-        if (Object.keys(policyTagList).length !== tags.length || tags.includes('')) {
+        // Only flag ALL_TAG_LEVELS_REQUIRED if a required tag level is empty or missing.
+        // Previously this used `tags.includes('')` and a length check which flagged any
+        // empty/missing level regardless of whether it was required, causing false violations
+        // when only some levels were filled (e.g. "Engineering" with non-required second level).
+        const hasEmptyRequiredLevel = policyTagKeys.some((key, index) => {
+            const tagValue = tags.at(index) ?? '';
+            return tagValue === '' && (policyTagList[key]?.required ?? true);
+        });
+        if (hasEmptyRequiredLevel) {
             tagViolations.push({
                 name: CONST.VIOLATIONS.ALL_TAG_LEVELS_REQUIRED,
                 type: CONST.VIOLATION_TYPES.VIOLATION,
diff --git a/tests/unit/IOUUtilsTest.ts b/tests/unit/IOUUtilsTest.ts
index cd4916801ad9..b57764943ce5 100644
--- a/tests/unit/IOUUtilsTest.ts
+++ b/tests/unit/IOUUtilsTest.ts
@@ -306,6 +306,18 @@ describe('IOUUtils', () => {
         test('Return multiple tags when hasMultipleTagLists is true', () => {
             expect(IOUUtils.insertTagIntoTransactionTagsString('East:NY:California', 'NewTag', 1, true)).toBe('East:NewTag:California');
         });
+
+        test('Should not produce a leading colon when transactionTags is empty and tagIndex > 0', () => {
+            expect(IOUUtils.insertTagIntoTransactionTagsString('', 'Alpha', 1, true)).toBe(':Alpha');
+        });
+
+        test('Should produce correct result when transactionTags is empty and tagIndex is 0', () => {
+            expect(IOUUtils.insertTagIntoTransactionTagsString('', 'Alpha', 0, true)).toBe('Alpha');
+        });
+
+        test('Should fill sparse slots when tagIndex exceeds current array length', () => {
+            expect(IOUUtils.insertTagIntoTransactionTagsString('First', 'Third', 2, true)).toBe('First::Third');
+        });
     });
 });
 
diff --git a/tests/unit/ViolationUtilsTest.ts b/tests/unit/ViolationUtilsTest.ts
index e970977283b9..12cdc011c1cc 100644
--- a/tests/unit/ViolationUtilsTest.ts
+++ b/tests/unit/ViolationUtilsTest.ts
@@ -876,6 +876,30 @@ describe('getViolationsOnyxData', () => {
 
             expect(result.value).toEqual([]);
         });
+        it('should not return allTagLevelsRequired when only non-required dependent tag levels are empty', () => {
+            // Make Department non-required
+            policyTags.Department.required = false;
+            // Transaction has only Region and Project filled, Department (non-required) is empty
+            transaction.tag = 'Africa::Project1';
+
+            // hasDependentTags = true to exercise getTagViolationsForDependentTags
+            const result = ViolationsUtils.getViolationsOnyxData(transaction, transactionViolations, policy, policyTags, policyCategories, true, false);
+
+            expect(result.value).not.toContainEqual(expect.objectContaining({name: CONST.VIOLATIONS.ALL_TAG_LEVELS_REQUIRED}));
+        });
+
+        it('should return allTagLevelsRequired when a required dependent tag level is empty', () => {
+            // Make Project non-required, keep Region and Department required
+            policyTags.Project.required = false;
+            // Transaction has only Region filled, Department (required) is empty
+            transaction.tag = 'Africa';
+
+            // hasDependentTags = true to exercise getTagViolationsForDependentTags
+            const result = ViolationsUtils.getViolationsOnyxData(transaction, transactionViolations, policy, policyTags, policyCategories, true, false);
+
+            expect(result.value).toContainEqual(expect.objectContaining({name: CONST.VIOLATIONS.ALL_TAG_LEVELS_REQUIRED}));
+        });
+
         it('should return missingTag when all dependent tags are enabled in the policy but are not set in the transaction', () => {
             const missingDepartmentTag = {...missingTagViolation, data: {tagName: 'Department'}};
             const missingRegionTag = {...missingTagViolation, data: {tagName: 'Region'}};