Professor Yin reviews the history for the provision. His concluding paragraph makes a good point about the requirement for JCT staff review of refunds but not of IRS decisions to forgo deficiencies, both of which have the same effect on the revenue and both of which could be means for effecting agency favoritism (which was the concern in enacting Section 6405). Here is the paragraph:
Congress's fixation on refunds might be of mere historical curiosity but for the fact that it had clear policy consequences: Congress gave the Joint Committee authority to review all large tax refunds, a responsibility that continues to this day. The irony of this decision is quite evident. While it was true that the Board of Tax Appeals provided independent review of certain agency decisions prior to the assessment of taxes, the only ones considered by the Board were those unfavorable to taxpayers. Agency decisions improperly favorable to taxpayers were not appealed, and therefore never reached the Board or any other independent reviewer. Yet a taxpayer-favorable decision not to assert a deficiency was directly analogous to an unjustified refund that Congress was so suspicious about. Indeed, a failure to assert a deficiency was actually much more worrisome than a refund. Because a refund involved an affirmative act that went through several levels of agency review for approval, an illegal refund required the unlikely existence of widespread corruption throughout the agency. In contrast, a decision not to assert a deficiency conceivably could have begun and ended with the inaction of a single, rogue employee. Thus, if Congress was seriously concerned with possible, corrupt favoritism by the agency (rather than mere posturing to gain political advantage), it badly missed the mark.
For those desiring an introduction to the JCT refund revise process, I cut and paste below my discussion (footnotes omitted) of Section 6405 in my Tax Procedure book:
IV. Joint Committee Review of Large Refunds.
Section 6405(a) prohibits refund of income or estate and gift taxes and most other refunds in excess of $2,000,000 until 30 days after the IRS has submitted a report to the Joint Committee on Taxation (“JCT”), where it is reviewed by the staff of the JCT. The $2,000,000 threshold is determined based on net over-assessments for the audit cycle in a multi-year review. The IRS report details the IRS's findings and conclusions with respect to the refund it proposes to make. This gives the Joint Committee Staff an opportunity to review the proposed refund and comment thereon.
Technically, § 6405(a) does not give the Joint Committee a veto power over the refund. Moreover, the statute does not prohibit the refund if the Joint Committee Staff fails to do anything in the 30 day period nor, even, does it prohibit the refund if the Joint Committee staff disapproves. Practically speaking, however, the IRS and the DOJ will almost invariably condition settlements requiring a refund over the threshold upon favorable review by the Staff of the Joint Committee.
In a case pending in a court, the report must be made with respect to any full or partial settlement or concession which would result in refunds or credits exceeding $2,000,000. For cases handled by the DOJ, DOJ will prepare and submit the report.
A return to the taxpayer of an amount held as a cash bond rather than as a payment of tax is not a refund and need not be reported to the Joint Committee.
Consider the following about the process:
First, why does Congress require such a review if there is a refund of $2,000,000 but does not require the review if the IRS foregoes a proposed deficiency of $2,000,000? Isn’t the effect on the fisc the same in either event? Although the statute does not contain an analogous requirement in a deficiency context, IRS Appeals does periodically submit reports to JCT on the largest deficiency cases.
Second, if you are representing a large taxpayer in an audit where the IRS is noising about a deficiency exceeding $2,000,000 and you think the taxpayer may have a good defense in litigation, how would the potential for Joint Committee review affect your decision as to whether to prepay or deposit (both in order to stop the running of interest which would include the hot interest penalty for large underpayments)?
Third, what is the correlation between the required Joint Committee review and the tentative refund procedure discussed above? A tentative refund for a large taxpayer may well exceed the $2,000,000 amount. If the IRS must act on the application for refund before it has performed an audit, it will not be in a position to provide a meaningful report to the Joint Committee. In that event, the refund is made within the 90 day period required by § 6411(b), and a report is made to JCT after the IRS has performed such audit as it chooses to make.