A New Year of Transition in Tax Enforcement: What Taxpayers Should Be Watching
As the new year begins, the federal tax enforcement landscape continues to shift. The IRS is operating amid workforce reductions, while enforcement and litigation resources across the federal system are being reassessed. These institutional developments follow a period in which IRS examinations—particularly for complex returns—have involved increasingly formalized and documented compliance processes, with heightened attention to penalty administration and internal approval requirements.
Against this backdrop, the U.S. House of Representatives has passed two bipartisan bills—the Fair and Accountable IRS Reviews Act (H.R. 5346) and the Tax Court Improvement Act (H.R. 5349)—that, if enacted, would materially affect how penalties are approved and how taxpayers access the U.S. Tax Court. While neither proposal is law, together they reflect a broader focus on process, timing, and procedural discipline, areas that often shape outcomes as much as substantive tax positions.
Proposed Changes to IRS Penalty Procedures
If enacted, H.R. 5346 would require written approval from an IRS employee’s immediate supervisor before any written communication is provided to a taxpayer proposing a penalty, including as part of an adjustment. The bill also clarifies who qualifies as an “immediate supervisor” and would apply to penalties assessed after December 31, 2025.
These proposed changes build on existing IRS efforts to formalize internal approval requirements for penalties—an area that has generated substantial dispute and litigation in recent years. The proposed legislation would limit the ability to assert penalties informally or retroactively and could reduce disputes centered on approval timing rather than substantive liability.
In this environment, reasonable cause arguments may be more effective when raised early in the examination process, before the IRS finalizes any internal penalty approval, rather than waiting until penalties are formally asserted or the matter reaches Appeals.
What the Proposed Tax Court Changes Could Mean for Taxpayers
If enacted, H.R. 5349 could materially affect whether a taxpayer’s dispute is heard on the merits rather than dismissed on procedural grounds.
First, the bill would grant the Tax Court explicit authority to apply equitable tolling to certain filing deadlines. In limited circumstances, this could allow a late-filed petition to proceed where a taxpayer acted in good faith but missed a deadline due to factors beyond their control.
Second, the bill would expand the Tax Court’s ability to issue third-party subpoenas to include before hearings or pretrial conferences. Earlier access to records and information may allow cases to be more fully developed at the outset, improving efficiency and reducing procedural delay.
Third, the expanded role of special trial judges would permit more cases to be handled and resolved without unnecessary delay, particularly where procedural issues drive the dispute.
Taken together, these changes could increase the likelihood that disputes are resolved on substance rather than procedural grounds alone.
Why This Matters Now
Taken as a whole suggests a period of recalibration in tax administration. As enforcement resources become more constrained and procedural requirements more explicit, early judgment, careful documentation, and strategic positioning take on heightened importance. In this environment, outcomes maybe shaped well before a matter reaches Appeals or litigation. Taxpayers facing audits, penalty exposure, or potential disputes should remain attentive not only to substantive tax positions, but also to the procedural posture of their matters as the new year unfolds.
Looking Ahead
While these legislative proposals remain pending, the direction of tax administration is already apparent. Enforcement is increasingly shaped by process, timing, and early strategic judgment. In periods of institutional transition, the most consequential decisions are often made well before a notice is issued or a case reaches Appeals or litigation.
Taxpayers and advisors would be well served to assess not only the technical merits of a position, but the procedural posture of a matter from the outset. Thoughtful documentation, timely advocacy, and informed judgment early in the process can preserve options and meaningfully influence outcomes as matters unfold.
Kundra & Associates works with clients across the United States and internationally on federal tax controversy, examinations, penalties, and related enforcement matters. From our offices in Maryland and Washington, D.C., we advise individuals and businesses at critical inflection points—where foresight, discipline, and strategic positioning matter most as the enforcement landscape continues to evolve.