Although it's often pointed out that the Internal Revenue Code has become lengthy and complicated due to all of the things that Congress tries to accomplish through the code other than simply raising revenue, it's less often observed that a complicated Tax Code also puts a tremendous burden on the Treasury and IRS to interpret it and provide timely guidance.
However, as we have seen in several instances in the recent past, the burden on the IRS to provide guidance goes even beyond the Tax Code. As perhaps the federal agency best equipped for communicating with the largest number of U.S. citizens and residents, the IRS is often tasked with duties beyond the Tax Code, such as distributing stimulus checks and administering foreign bank account reporting.
The IRS currently has a significant backlog of regulatory projects. Many projects already on the IRS to-do list get carried over from year to year as more pressing matters come to the fore to demand the use of limited IRS resources. There are many proposed and temporary regulations that have sat on the books for years without final regulations being issued.
Not helping matters is the fact that Congress, in their own rush to pass additional tax legislation, often does not have time to work out all of the details of a new provision in statutory language, and increasingly uses the device of stating in the statute that the Treasury is authorized to spell out the details in ensuing regulations. These grants of authority give such legislative regulations greater authority than mere interpretative regulations, but they do not do much to ease the burden on the IRS to fill in those details before returns must be filed or taxpayer actions must be taken under the new statute.
It is a common argument in tax litigation that a particular regulation exceeded the regulatory authority of the IRS and is not consistent with the intent of Congress or the statute. It is also common to complain about lack of guidance in an area or retroactive application of guidance to upset transactions that relied on a different interpretation of the statute. Recently, a couple of additional challenges to IRS guidance have emerged that point to additional opportunities for taxpayers to contest guidance when it is adverse to their position.
Authority for enforcing foreign bank account reporting requirements was transferred to the IRS from the Treasury's Financial Crimes Enforcement Network in 2003. The delegation of enforcement power was not, however, accompanied by the delegation of interpretive power. As the IRS ramps up the enforcement of FBAR, many taxpayers are raising legitimate complaints about the lack of clarity as to whom the FBAR reporting burden should fall upon. The onerous penalties associated with FBAR filings are pushing taxpayers to file FBARs whenever there is any doubt as to the obligation. The result is likely to be an IRS further overwhelmed with duplicative and ignored filings that contribute nothing to, and may even detract from, the IRS's efforts to track down unreported foreign income.
Although the IRS has issued a set of frequently asked questions and answers with respect to FBAR, much of the guidance remains contained in the instructions to the form and occasional responses to questions by IRS personnel at tax conferences. The IRS has waived or postponed FBAR filing requirements three times in recent months for different types of taxpayers and has solicited requests for input on some of the outstanding issues, but any issuance of regulatory guidance on those issues could open up those regulations to a challenge that they exceeded the IRS's authority in the FBAR area.
COHEN V. COMMISSIONER
In a reversal of a lower court decision, the D.C. Circuit Court, in Cohen v. Commissioner (D.C. Cir., Aug. 7, 2009), has ruled that the regulations that the IRS set up for refunding the telephone excise tax in Notice 2006-50 violated the Administrative Procedure Act. The APA specifies the rulemaking procedures for federal agencies. The Treasury has long taken the position that it is not subject to the APA to the extent that it is issuing interpretative, rather than legislative, regulations.
It was being alleged in Cohen that the procedures set up by the IRS resulted in a significant under-refunding of telephone excise taxes previously paid without any further recourse. The D.C. Circuit agreed that the IRS had taken a final agency action with respect to the telephone excise tax refund procedures and that APA requirements had been violated. The court also chastised the IRS for arguing that the taxpayer should have known that normal administrative options were available to them in spite of the mandatory language included in Notice 2006-50.
Some commentators have suggested that the Cohen case may open a door for taxpayers to challenge IRS regulations at an early stage on the basis of violation of the APA.
The IRS does not face any shortage of burdens as it attempts to interpret and explain not only the tax law, but the other government enforcement functions thrust upon it. It faces the responsibility of ensuring a smooth and efficient tax filing season as Congress passes year-end and sometimes after-year-end changes to the tax law affecting the current filing season. The IRS faces legislation put together at the last minute that specifically delegates to the IRS the task of working out the details.
At the same time, the IRS receives letters from members of the congressional leadership stating that a particular law provision was not drafted as Congress had intended, and could the IRS please enforce it as it was intended until Congress has a chance to correct the law. The IRS also receives many complaints, often in the form of litigation but sometimes as letters from members of Congress or the tax profession, stating that regulations do not conform to the intent of the statute. Sometimes these issues can be resolved when proposed regulations are issued, but they also often emerge after final regulations or rulings are issued.
Add to all of this some new areas of concern. In the case of FBAR enforcement, the IRS is being pressured to provide needed interpretations of the filing requirements where it lacks the clear authority to do so. In the case of Cohen, the IRS is being forced to also conform its guidance to the requirements of the Administrative Procedures Act.
All of these situations highlight possible openings for taxpayers and their representatives to challenge regulations and rulings that have an adverse impact on the taxpayer in question.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.
(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.
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