House passes bills on IRS penalties and Tax Court

The House of Representatives approved two pieces of legislation this week to ensure Internal Revenue Service agents aren't levying fines and penalties on taxpayers without supervisory approval, and to strengthen taxpayer rights in judicial proceedings before the U.S. Tax Court.

The first bill, known as the Fair and Accountable IRS Reviews (FAIR) Act (H.R. 5346), introduced by Rep. Glenn Grothman, R-Wisconsin, would clarify that supervisory approval of a penalty would be considered to be timely only if the person who proposed the penalty obtained approval in writing prior to any written communication to a taxpayer with respect to the penalty. 

Currently, an IRS agent's immediate supervisor provides a signature of approval for the initial determination of a tax penalty. However, an IRS rule under the Biden administration weakened taxpayer protections by allowing IRS agents to shop around for sympathetic supervisors, enabling IRS agents to get approval to apply tax penalties on taxpayers from virtually any other employee. Under the bill, written approval of the penalty must be provided by the immediate supervisor of the person proposing the penalty or another higher supervisory person that the Treasury Secretary may identify. The bill defines the immediate supervisor as the person to whom the individual making the determination reports. 

"For decades, federal laws required that before the IRS can impose penalties on a taxpayer, an agent must first receive written approval from that agent's immediate supervisor," said Grothman during the debate Monday. "Congress put this safeguard in place to ensure that penalties are imposed fairly, consistently and with appropriate oversight."

Grothman continued: "A supervisor's signature helps prevent the use of penalties as a pressure tactic and creates a transparent record that benefits both taxpayers and the government in collection and appeals proceedings. In recent years, unfortunately, a regulatory interpretation complicated the intent of this longstanding statute. Instead of adhering to the clear requirement that an agent's immediate supervisor must approve a penalty at the time of the initial determination, supervisory appeal could be obtained at any point in the process and the term 'immediate supervisor' was broadened beyond Congress' original intent. As a result, an agent could propose a penalty without prior review and later seek approval from a wide range of individuals, weakening the transparency and accountability that the law was designed to ensure. The Fair and Accountable IRS Reviews Act restores clarity. It reaffirms that an IRS agent's actual immediate supervisor must provide written approval at the initial determination of a penalty, ensuring proper oversight from the start. This simple clarification strengthens the taxpayer protections and promotes a consistent and reliable penalty process."

He thanked House Ways and Means Committee chairman Jason Smith, R-Missouri, for getting it passed on a bipartisan basis from the committee before it was passed by the House.

"American taxpayers should not be at the mercy of rogue IRS agents who are handing out fines without reasonable due process," said Smith during the debate. "At the very least, agents ought to have actual prior approval before issuing a penalty and should not be allowed to go around looking for a sympathetic employee to grant them that approval."

The bill has been endorsed by groups such as Americans for Tax Reform, the National Federation of Independent Business, the National Taxpayers Union, the Small Business and Entrepreneurship Council and the Taxpayers Protection Alliance.

Tax Court Improvement Act

The other bill passed by the House, the Tax Court Improvement Act (H.R. 5349), authorizes the Tax Court to sign subpoenas to produce books, papers, documents, electronically stored information or tangible items for purposes of discovery or evidence, prior to a hearing. The bill would also ensure Tax Court judges are held to the same standards for disqualification as other federal judges. The bill would also clarify that the Tax Court has jurisdiction to extend a taxpayer's deadline where timely filing was impossible or impractical. The bill has been endorsed by the National Taxpayers Union, the Small Business and Entrepreneurship Council and the Taxpayers Protection Alliance.

"This bill strengthens taxpayer rights during judicial proceedings before the U.S. Tax Court," said Smith during the floor debate Monday. "The court will be able to more expeditiously resolve cases as the legislation enhances the efficiency of its judicial review to the benefit of the taxpayer. This will increase the court's productivity, and Tax Court judges will also be held to the same disqualification standards as other judges. Finally, the court will now have the ability to extend taxpayer deadlines where timely filing is impractical. The U.S. Tax Court is the only venue where taxpayers can dispute a tax estimate without first paying that tax. Taxpayers must stand on equal footing when going toe-to-toe with the IRS. Without the guarantee of rights, taxpayers are put in a situation where the IRS is essentially saying: Heads, I win. Tails, you lose."

The bipartisan bill was introduced by Reps. Terri Sewell, D-Alabama, and Nathaniel Moran, R-Texas. 

"The Tax Court has a very important impact on everyday Americans," said Sewell. "It provides individuals and businesses with an opportunity to be heard in court to challenge the Internal Revenue Service before paying a disputed tax. Our committee is always looking for ways to make the Tax Court more efficient and fairer for the taxpayer, and that is why we are here today.  The Tax Court Improvement Act will strengthen Tax Court procedures and practices by making four commonsense reforms. The act will accelerate the collection of documents, expand the types of cases assigned to special trial judges, hold Tax Court judges to the same recusal standards as other federal judges, and allow the deadline for petitions to be extended in certain circumstances."

She predicted the improvements to the Tax Court in the bill would have a tangible impact on thousands of taxpayers, and would raise $6 million over the next 10 years.

"For too long, the Tax Court has operated under preexisting rules that do not mirror many of the well-established procedures for other courts and rules that are antiquated in their application," said Moran. "In short, changes need to be made so that the Tax Court process works better for the people that it serves. When a system is slow or confusing, the burden falls on taxpayers, often at moments when they are already under stress. This bill provides practical updates that help the court do its job more effectively, and it helps taxpayers find resolution more easily and quickly."

Both bills have been sent to the Senate Finance Committee for further action.