Prominent Senate Finance Committee Members Offer Discussion Draft of Bill to Fix Certain IRS Procedure and Administration Issues (2/2/25)

Note to Readers: This blog entry was posted yesterday to a page rather than a blog page. I have moved it to the blog page. I will leave the page error up with a link to this blog entry. Please comment on this blog page.

Senators Crapo (R) and Wyden (D), prominent Senate Finance Committee members, have proposed a discussion draft, here, of a proposed bill making what Senator Wyden says would be “common-sense fixes to Internal Revenue Service (IRS) procedure and administration.” The proposed bill is nonpartisan. Many of the proposals address issues presented in cases that I have blogged about on the Federal Tax Procedure Blog. Senators Crapo and Wyden’s section-by-section explanation of the proposal is here. The announcement of this initiative, here, seeks comments by March 31, 2025; comments may be sent to discussiondraft@finance.senate.gov.

I have reviewed the section-by-section explanation and parts of the draft bill. For what it is worth, I applaud the proposal. It indeed does provide “common-sense” fixes to problems that have unnecessarily vexed tax procedure. It does not fix all problems, but it fixes a fair number of them. Nor does it fix issues the way I or other practitioners or interested parties would have fixed them, but the fixes are pretty good. With appropriate comments, perhaps other problems could be fixed, and of course the proposals may be fine-tuned and improved.

I link here to the Table of Contents for the proposed bill which I encourage readers to review.

JAT Comments:

My comments are necessarily selective for proposals that particularly interest me (based on my blogging). I encourage readers to read the entire bill and/or the section-by-section explanation.

1. Fixing the supervisor written approval timing requirement in § 6751(b). Sec. 113. Modification of procedural requirements for penalties and disallowance periods.

As I have noted before, current § 6751(b) is poorly drafted. See e.g., Eleventh Circuit Makes Clarity from Confusion as to the Written Supervisor Approval in § 6751(b) (Federal Tax Procedure Blog 9/20/22), here. Poor draftsmanship is not surprising given its genesis in the IRS Restructuring and Reform Act of 1998. See Federal Tax Procedure (2024 Practitioner Ed.) pp. 345 and (2024 Student Ed.) 22. I have posted 26 blog entries, here, on the Federal Tax Procedure Blog discussing § 6751(b). The poor draftsmanship has given hope to those who have abused the tax system that they can avoid penalties for playing the audit lottery for a real or perceived IRS footfault in the assertion of penalties. This hope has played itself out in, for example, syndicated conservation easement cases as recently as January 30 in Park Lake II v. Commissioner, T.C. Memo. 2025-11, GS here (finding no footfault, so that the case can proceed on the merits which may be not much but will chew up a lot of IRS, taxpayer, and Court time and resources).

The solution in the proposed bill is to amend § 6751(b) to require that the supervisor approval must occur before the initial determination of the penalty (much like the current law) but defines initial determination by adding at the end of § 6751(b):

‘‘(3) INITIAL DETERMINATION.—   

          ‘‘(A) IN GENERAL.—For purposes of this subsection, the term ‘initial determination’ means the first determination, provided in a written notice to a taxpayer, that, based on specific facts and circumstances with respect to such taxpayer—

                   ‘‘(i) a specific penalty applies to such taxpayer for a specific amount,

 * *  * *

          ‘‘(B) REQUESTS OR INQUIRIES.—No request or inquiry made by the Secretary shall be deemed to be an initial determination unless such request or inquiry provides the taxpayer with an offer to agree to a specific penalty for a specific amount (with the exception of any [*30] penalty offered under a settlement initiative to a class of taxpayers) or a disallowance period for a specific period.’’.

Hence, for example, IRS written correspondence that simply announces that penalties may be considered in the audit is not an initial determination. I suppose a belt and suspenders approach would be to add that no determination of a penalty has been made and may be made only in the context of relevant facts and circumstances yet to be determined and assessed.

2. Combining Form 8938 and FBAR filing with IRS. Sec. 201. Combined tax and foreign bank and financial account reporting.

The proposal is to amend 31 USC § 5314 to have the FBAR filed with the IRS along with the tax return (including Form 8938), or if no return is filed, then at the time prescribed for filing. The IRS will then forward the FBAR to the FinCEN. 

3, De Novo Review in Tax Court On All Relevant Evidence for Innocent Spouse Claims. Sec. 306. Authorization of de novo review of innocent spouse relief by the Tax Court and other courts.

The proposal amends § 6015(e)(7) to state only that the Tax Court review is de novo, and eliminating the requirement that Tax Court review be limited to the administrative record except for newly discovered or previously unavailable evidence. The determination will be made on the entire record made before the Tax Court.

4. Equitable Tolling of Time to Petition in Deficiency Cases. Sec. 307. Clarification of Tax Court jurisdiction to apply equitable tolling in deficiency cases.

The proposal would amend § 7451(b) to permit equitable tolling of the 90-day or 150 day time period in § 6213(a) for petitions to redetermine deficiencies. The proposal states that the amendment does not permit any inference as to the pre-amendment law. Readers will recall that, in Hallmark Res. Collective v. Commissioner, 159 T.C. 126 (2022), the Tax Court denied equitable tolling in deficiency cases, but that, in Culp v. Commissioner , 75 F.4th 196 (2023), the Third Circuit permitted equitable tolling. The Supreme Court denied the Government petition for certiorari in Culp. See Government Files Petition for Cert on Issue of Whether 90-day Period for Tax Court Petitions is Jurisdictional (3/26/24; 6/26/24), here. If this proposal is enacted, under its Golsen rule, the Tax Court may continue to apply Hallmark to deny equitable tolling in cases not appealable to the Third Circuit in pre-enactment petitions. It is an open issue as to whether the IRS will ask the Tax Court to apply Hallmark or whether the Tax Court will get the message sent by Senators Crapo and Wyden.

5. Other discussions of the Discussion Draft are:

• Crapo, Wyden Issue Discussion Draft to Improve IRS Administration (Senate Finance Committee 1/30/25), here.
•  Senate Finance Committee Chairman Crapo and Ranking Member Wyden Release Discussion Draft of “Taxpayer Assistance and Service Act” (NTA Blog 1/30/25), here.
• Maureen Leddy, Draft Bill Aims to Strengthen Taxpayer Rights (ThomsonReuters 1/31/25), here.
• Martha Waggoner, AICPA supports Senate discussion draft to help taxpayers, preparers (J. Accountancy 1/20/25), here.