On January 30, 2025, a bipartisan group of US Senators released a discussion draft of the Taxpayer Assistance and Service Act ("TAS Act"), a legislative proposal that, if passed, could significantly alter tax controversy procedure, in addition to modernizing certain functions of the Internal Revenue Service and providing additional taxpayer services.
While it is uncertain whether the TAS Act will become law (and, if so, in what form) the enactment of the Act in its current form could streamline multiple areas of taxpayer interactions and disputes with the IRS, and permit easier settlement of federal tax controversies. A selection of the most material changes to federal tax controversy follows.
Simplifying Interactions with the IRS
The TAS Act would include at least two taxpayer-friendly changes to IRS procedures.
Combined foreign financial account reporting. U.S. persons with foreign bank accounts and similar assets generally must file a Foreign Bank Account Report ("FBAR") Form 114 to the Financial Crimes Enforcement Network ("FINCEN") and file a Form 8938, Statement of Specified Financial Assets, to the IRS with an annual return. The Form 114 and Form 8938 have some but not total overlap in the foreign assets that are required to be reported on each. The IRS does not presently accept FBAR forms. This leads to taxpayer confusion and has resulted in significant penalties against taxpayers who reported foreign assets on one form but not the other. Under the TAS Act, this reporting would be combined and the IRS would accept FBAR forms and transmit them to FINCEN directly.
Improved procedures for math or clerical errors. The IRS has authority to correct math or clerical errors on a return. Under current law, when correcting a math error, the IRS generally provides a taxpayer with a "math error notice" that provides few (or sometimes no) details regarding the error that was corrected, why, or how the IRS reached its results. The IRS is then permitted to assess the additional tax without allowing the taxpayer to utilize deficiency procedures (which includes petitioning the U.S. Tax Court for an independent determination). Under the TAS Act, the IRS would be required to enhance math error notices and math error abatement notices, by providing information including: (i) the type and nature of the error; (ii) the code section(s) to which the error relates; and (iii) the IRS's computation of the correct treatment. The notice would also have to provide a response deadline.
Baker Botts Note: The number of issues that constitute math errors on federal tax returns are increasing. This much needed change would streamline the process for resolving alleged math errors.
New procedural tools for tax controversies.
The TAS Act would increase access to, and the powers of, the Tax Court, an expert tax forum to litigate disputes.
Tax Court jurisdiction to hear Collection Due Process Appeals. A collection due process hearing is a hearing before IRS Appeals at which a taxpayer can contest a potential levy. At the hearing, the taxpayer can either explore collection alternatives or dispute the tax that is alleged to be owed. Under current law, a taxpayer may not contest his tax owed at a collection due process hearing if (1) the tax liability is fully paid at any time before the case is over, or (2) he ever had a chance to present his case to IRS Appeals, even if the determination of IRS Appeals could not be appealed to any Federal court. In those cases, a taxpayer could end up in a situation where his only way to contest a tax or penalty was to pay it and then sue for refund, which suit must occur in the plenary Federal District Court or U.S. Court of Federal Claims. The forums generally result in more expensive litigation due to differences in the Tax Court's rules from the Federal Rules of Civil Procedure. The TAS Act would permit a taxpayer to dispute the IRS's determination of tax owed at a collection due process hearing for any case in which the taxpayer has not already had an opportunity to dispute the tax before the Tax Court.
Baker Botts Note: Because the results of a collection due process hearing can be appealed to the Tax Court, this change provides a taxpayer with a path to Tax Court review of any determination of taxes or penalties owed if the IRS commences collection procedures. This also dovetails with another change in the TAS Act that would permit the Tax Court to issue refunds in all Collection Due Process cases, where appropriate.
Tax Court jurisdiction to hear refund claims. Under current law, the Tax Court only has jurisdiction to hear cases where the IRS asserts that a taxpayer owes more tax than he has already paid. If a taxpayer has paid his tax and is seeking a refund, the Tax Court does not have jurisdiction. The TAS Act would expand the Tax Court's jurisdiction to include refunds for overpayment of taxes that could before only be heard before the U.S. Court of Federal Claims or a U.S. District Court.
Baker Botts Note: Due to the reduced expense of litigating before the Tax Court versus other Federal courts, Baker Botts anticipates that most refund litigation will shift to Tax Court if the TAS Act passes.
Improved deficiency procedures for certain penalties. Under current law, the IRS is permitted to begin collections procedures for certain "assessable" penalties regardless of whether the taxpayer has been issued a notice of deficiency and given an opportunity to contest the penalty before the Tax Court. The TAS Act would permit (but not require) the IRS to use deficiency procedures for all penalties, permitting them to be disputed before the Tax Court. The IRS will also be permitted to issue multiple notices of deficiency for the same tax year if one or more of them relates to assessable penalties.
Baker Botts Note: The Tax Court held in Farhy v. Commissioner, 160 T.C. No. 6 (April 3, 2023) that the IRS lacked authority to directly assess penalties under I.R.C. section 6038(b)(1)-(2) for a taxpayer's failure to file Form 5471, reporting foreign corporation assets. The Tax Court later reached the same result in a case appealable to a different circuit in Mukhi v. Commissioner, No. 4329-22L, 162 T.C. No. 8 (April 8, 2024). This TAS Act change provides a workaround for the IRS to enforce those same penalties through deficiency procedures, rather than direct assessment. We believe that all penalties should ultimately follow deficiency procedures, rather than direct assessment.
Increased Tax Court subpoena power. Under current law, in cases before the Tax Court, the IRS can only subpoena third parties upon the occurrence of a hearing. The TAS Act would authorize subpoenas in cases before the Tax Court before a hearing date, on the theory that this would facilitate settlement.
Baker Botts Note: Although the TAS Act frames this increased subpoena power as helpful to taxpayers, this is likely more helpful to the IRS. Taxpayers generally already can access their information held by third parties, so this change could result in more aggressive IRS enforcement earlier in the controversy process.
Improvements to IRS Appeals Procedures
The TAS Act aims to increase access to and the independence of IRS Appeals.
Creation of Appeals Chief Counsel position. Under current law, IRS Appeals relies on the IRS Office of Chief Counsel for legal analysis of complex tax issues. This results in IRS Appeals often assessing cases from the perspective of Exam, who provide their views to IRS Appeals. The TAS Act would authorize IRS Appeals to hire their own attorneys to independently review cases and make independent determinations as to the law.
Clarification of role of IRS Appeals. Under current law, there are exceptions to a taxpayer's right to present a case to Appeals. The most significant of these is that Exam can argue that presentation of a case to Appeals is "not in the interest of sound tax administration." The TAS Act would codify and limit exceptions to access to Appeals.
Baker Botts Note: Both of these changes are taxpayer-friendly. Most cases settle at IRS Appeals, so increasing access to Appeals and making Appeals more independent of Exam could increase settlement opportunities and improve taxpayer opportunities to dispute IRS determinations without the expense of litigation.
Baker Botts believes the TAS Act, if passed, has significant potential to improve taxpayer interactions with the IRS, increase access to the Tax Court, and ensure that tax disputes are reviewed by an unbiased eye. The above-discussed changes are in addition to taxpayer friendly changes bolstering the Taxpayer Advocate's office, simplifying rules for international taxpayers, increasing the power of Tax Court special trial judges, and others. We will continue to monitor developments and will provide further updates as more details are released. In the meantime, Baker Botts would be pleased to assist you in your analysis of these proposals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
