The IRS Chief Counsel plans to take steps to minimize the risk of outside influence by tax practitioners on its letter rulings, according to a new report from the Treasury Inspector General for Tax Administration.
The report noted that the IRS issues letter rulings that interpret and apply the tax laws to a specific set of facts provided by corporations, individuals and international entities.
“Because each letter ruling can impact millions of dollars of tax collections, the IRS must protect the integrity and independence of the letter ruling process,” said the report. “The appearance that practitioners could possibly manipulate the letter ruling process may result in the risk that inappropriate favorable rulings could cost the government substantial tax revenues.”
TIGTA initiated the audit to assess the IRS Chief Counsel’s policy to limit the number of letter ruling requests handled by its attorneys from the same taxpayer or practitioner. The Chief Counsel implemented this policy in order to address a strategy that taxpayers and practitioners reportedly use to increase their chances of obtaining expeditious, favorable letter rulings by having their requests handled by a preferred attorney.
TIGTA pointed out that the IRS Chief Counsel does not have written policies or an effective management information system to prevent practitioners or taxpayers from having letter ruling requests assigned to a preferred attorney. Five of the six associate offices that provide rulings had no written policies and insufficient management information to assess the potential risk of outside influence on the assignment of their letter rulings.
The remaining associate office responsible for corporate tax issues developed a written policy to limit the number of rulings assigned to an attorney from the same taxpayer or practitioner.
However, TIGTA found that this policy was not effectively implemented due to the lack of complete management information on its letter rulings inventory. Instead, IRS management relied on each attorney to determine whether he or she should work directly assigned letter rulings or have them assigned to another attorney through the normal case assignment process. However, the attorneys did not always provide specific information about their decisions to work or not work the ruling to the front office for input in its inventory system.
TIGTA recommended that the Chief Counsel develop written policies for all Associate Chief Counsel offices to oversee, manage, and, as appropriate, limit the number of letter ruling assignments from the same practitioner. It also suggested that the IRS Chief Counsel establish a centralized processing location for receipt and review by the Office of the Associate Chief Counsel (Corporate) for letter rulings sent directly to attorneys and require management to periodically review the inventory system to ensure that established policies and procedures are effective in limiting the number of letter rulings assigned to a specific attorney that originates from the same practitioner.
In addition, the TIGTA report also recommended that the IRS Chief Counsel periodically review the Technical Management Information System to ensure that front-office staff is receiving and inputting all of the applicable letter ruling requests and related information in the inventory system.
The IRS agreed with all of TIGTA’s recommendations and plans to revise the written procedures on letter rulings to formalize and strengthen management oversight of its case assignment process.
“The Office of Chief Counsel takes seriously our obligation to provide taxpayers with prompt, unbiased, and legally correct interpretations of the law,” wrote IRS deputy chief counsel Erik H. Corwin in response to the report. “We strongly believe that our existing processes for assigning letter ruling requests, as well as our pre¬ issuance review processes and public disclosure (in redacted form) of issued letter rulings, provide reasonable and adequate safeguards against attempts by practitioners to inappropriately influence the system. Indeed, your report does not identify any situations in which practitioner influence led to the issuance of inappropriate favorable rulings, nor are we aware of any such occurrence.”
Corwin added that under the revised written procedures that the IRS is developing for letter rulings, the extent to which an attorney has previously been assigned ruling requests from the same practitioner will be taken into account in the assignment process, along with other relevant considerations, including the specialized expertise of particular attorneys and the need to balance workload among attorneys, in order to minimize the risk of manipulation of the assignment process” in a manner consistent with sound tax administration and the efficient use of the Office’s limited resources.”
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