The Internal Revenue Service and the U.S. Tax Court are seeing their caseloads pile up as taxpayers, interest groups, tax attorneys and Congress let loose with a volley of lawsuits and legal challenges.
IRS and Tax Court officials addressed some of the issues at New York University’s 8th Annual Tax Controversy Forum in New York last week. IRS Chief Counsel William Wilkins delivered a keynote address in which he discussed how his office has been seeing an uptick in Tax Court cases involving relatively small amounts of money that resulted from document mismatches detected by the IRS.
While the number of Tax Court petitions has remained relatively consistent in recent years, Wilkins has needed to deal with constant staff turnover and budget cuts. Hence, the Office of Chief Counsel has been expanding a pilot program in which it brought in “term attorneys” who are limited to a two-year term, with a possibility for one two-year extension, dedicating them to the docket of comparatively small cases, while limiting the number of permanent hires.
It’s not only the legal caseload that’s a big concern for Wilkins. Legal challenges from advocacy groups have also slowed down rulemaking at the IRS.
“What I’m particularly watching now are trends that threaten to tie up the regulatory process in ever more red tape and litigation,” Wilkins said. “As tax practitioners, we have come to expect that the IRS and Treasury will get tax regulations proposed and finalized relatively soon after enactment of major tax legislation and in other cases relatively soon after serious problems are identified and prioritized for action. And we have come to expect that the ability to challenge the final regulation will be confined to taxpayers with an actual tax controversy. In the tax world we have not expected tax regulations to be subjected to lengthy executive branch processes involving scientific research, economic impact studies, cost/benefit analysis and routine involvement of the Office of Management and Budget. We haven’t expected the courts to accept tax regulation challenges filed by advocacy organizations as soon as the regulation is published. When a case does proceed on the merits, we have expected the courts to analyze regulations based on the quality and reasonableness of the legal interpretations, the quality of the regulatory deliberations and fair consideration of significant comments. We generally have not seen the courts holding the IRS and the Treasury to requirements of fact findings, scientific review, economic analysis and the like, but yet all of these things exist in the rest of the federal regulatory ecosystem. There are more than a few straws in the wind that should make us less certain that the tax regulatory system can resist becoming more like the world of the EPA or SEC or DOL regulation.”
Meanwhile, the Office of Chief Counsel has needed to deal with complicated tax cases that can also strain the IRS’s resources.
“In recent years, we’ve litigated more complex cases with foreign multinational taxpayers marked by long trials and heavy use of experts on both sides,” said Wilkins. “This kind of trial activity appears likely to persist for a number of years to come, and both the Office of Chief Counsel and the LB&I [Large Business and International] Operating Division are reviewing resource allocations to address the need to develop and litigate these cases properly. Criminal tax enforcement has also been an increasing focus of our office through our Office of Criminal Tax Counsel, CT. Recent developments have heightened the sensitivity and impact of this criminal law, from offshore accounts to refund crimes to employment tax crimes. IRS and Justice have overseen development of new and better approaches to dealing with criminal noncompliance. Our counsel attorneys at CT continue to play a leading role in the legal, tactical and strategic development of all of these approaches.”
The Office of Chief Counsel has also needed to devote resources to responding to Freedom of Information Act cases, congressional investigations and other litigation calling for collection, review and production of voluminous IRS internal documents. “For the moment, we are past the time when we had over 100 attorneys working on responses to congressional investigations,” said Wilkins. “However, outside demand for IRS documents seems likely to persist as a general matter, so we have accordingly expanded the number of employees devoted to electronic discovery matters and the Freedom of Information Act. Also at our request, the budgeters and IT planners in the IRS are prioritizing upgrades in our technological capacity to retain, search, store and manage voluminous electronic document projects.”
Wilkins’s office also works on the IRS’s annual Priority Guidance Plan. He noted that the most recent plan was the first in many years to have well under 300 projects as opposed to well over 300. He anticipates the number of guidance projects will remain under 300 in plans for the foreseeable future.
“Our guidance priorities are always going to be heavily influenced by enactment of new tax legislation,” said Wilkins. “The 2010 enactments of the Affordable Care Act and FATCA have been the most important drivers of guidance activity during my tenure as Chief Counsel. At this point there are far fewer published guidance projects being driven by these statutes than in prior years. International guidance work in particular has shifted significantly away from FATCA towards other projects grounded in basic income tax rules. Beyond implementing new legislation we expect to focus significant short-term effort on finishing what has already been started in a number of areas.”
He pointed to several items where there are either proposed regulations that need to be finalized or notices that need to be turned into proposed regulations. These include the Net Investment Income Tax regulation, regulations affecting key definitions for real estate investment trusts and publicly traded partnerships, some significant partnership regulations, inversion guidance, debt equity guidance, rules for spinoffs, international projects such as country-by-country reporting, some Section 367 issues and regulations under Subchapter K of 721(c), and following up on preliminary guidance that’s already been issued under recently enacted statutes.
“Partnership audits are certainly at the head of the line in this area,” said Wilkins. “There’s a revived program for special health care credits for workers affected by trade agreements and the use of private debt collectors.”
Later in the day, a panel discussion focused on Collection Due Process cases and the representation of taxpayers who can’t or won’t pay their outstanding taxes.
“I always want a pro se taxpayer to feel like they’re being treated fairly and that I’m giving them an honest explanation of where they are,” said Michael Matos, a senior attorney at the IRS Office of Chief Counsel. “They go before the court and tell their version of events and their story, so I always want to make sure they understand what’s at issue so they are in the best position to have that opportunity.”
National Taxpayer Advocate Nina Olson pointed out that many pro se taxpayers don’t understand the process and she believes Low-Income Taxpayer Clinics can be helpful in representing them in Collection Due Process cases. “We’ve been pushing the IRS to include notification of the Low Income Taxpayer Clinics on the CDP notice, so they have the opportunity from the start to be able to have representation,” she said. “It will change the dynamics of the case.”
In her most recent annual report to Congress, she noted this was the highest year ever since the Taxpayer Advocate Service began counting CDP cases in 2001 of cases being ruled in favor, either in whole or in part, for the taxpayer. “It’s a 14 percent rate, so it’s the lowest rate of cases being decided for the government,” said Olson. “It’s surprising, and 14 percent of the cases that were decided for the taxpayer were pro se. I think that’s very impressive so they are doing something right. They’re getting some points in front of the judge for them to be able to make their cases.”
She has been making efforts in her own office to encourage employees to stick with cases involving taxpayers who are going through a Collection Due Process.
Mark Allison, an attorney at the law firm Caplin & Drysdale, moderated the discussion and asked U.S. Tax Court Chief Judge L. Paige Marvel if the court can help with such cases, short of going to trial. Marvel believes the court has a strong incentive to ensure that as many cases as possible get resolved at the earliest possible time.
“But let’s talk reality,” she added. “By the time the court gets these cases, they have gone through the administrative process. They have gone through the administrative hearing. Many of us know that by the time that happens, at least in some circuits, the record has been fixed. And by fixed, I don’t mean that there is some illegal activity. I mean that the base on which the court has to act has been determined, and those circuits where the circuit has made clear that the Administrative Record Rule controls the universe that the court has to act on, we have very limited options, even in those cases where the taxpayer did not know enough to tee up certain issues during the administrative hearing. There is very little that we can do. The court has got to be creative in some cases by utilizing the exceptions to the Administrative Record Rule, but it’s hard.”