"Her plan was terminated after 6 weeks/3 payroll periods."
That's certainly improper. (I read your original post as indicating that she terminated employment rather than the plan being terminated.) Beginning in 2024 a SIMPLE IRA plan can be replaced with a 401(k) plan mid-year (terminating the SIMPLE IRA plan), but that tax code change doesn't apply to 2023.
The IRS is doing nothing more than enforcing the tax code with regard to this. The requirements for deductibility of a traditional IRA contribution were established by law beginning in 1987 and only the cost-of-living-adjusted thresholds have changed since then.
"I have done a what-if on TurboTax and we are paying $1900 more tax than we would be if her original contribution of $1200 had been taxed and the additional $7500 was then considered deductible."
That's not really accurate. If deductible, it would just be taxed in a later year rather than in 2023. You don't get double taxed on the contribution.
I'm not sure how your investment/tax advisor is involved in any of this. A traditional IRA contribution might be a good thing even if not deductible.
