IRS nonfiler strategy.

Following up on a meeting held on August 25, 1992, at the IRS National Office, Tax Executives Institute wrote the following letter to IRS Commissioner Shirley D. Peterson concerning the Institute's participation in the IRS's nonfiler initiative. The meeting also included representatives of the ABA Section of Taxation, the American Institute of Certified Public Accountants, the National Association of Enrolled Agents, and the National Society of Public Accountants. The Commissioner's response is printed on page 482.

Thank you very much for your letter dated September 17, with which you enclosed the minutes of the August 25 nonfiler strategy meeting. TEI appreciates the opportunity to participate in the meeting and looks forward to working with the Internal Revenue Service in pursuing its goals of helping delinquent taxpayers get back into the tax system and thereby improving voluntary compliance.

The Unique Status of TEI

As discussed during the meeting, TEI is unique. The other professional tax groups represented at the meeting are composed of individuals who seek clients -- businesses or individuals -- from the taxpaying public at large. TEI's members do not. TEI members are employed by corporations to work in the corporation's tax department -- they have a single client, their corporate employer. They do not solicit business from the public at large and, except with respect to their employer's tax returns, do not engage in tax-preparation activities.(1) Consequently, in the course of their professional activities, TEI members are unlikely to encounter individual nonfilers.

This does not mean, however, that the Institute is unwilling or unable to assist the IRS in implementing its nonfiler strategies. Rather, it is to emphasize that TEI's ability to do so will be circumscribed by the professional environment in which the Institute and its members operate.

The Scope of Corporate Nonfiling

Before discussing the particular initiatives outlined in the minutes of the August 25 meeting, we wish to emphasize the need for the IRS to focus on the right targets. Approximately 2,000 corporations are represented by the Institute's nearly 4,700 individual members. Although there can be no doubt that some corporations do not meet their tax filing obligations, TEI is convinced that none of the companies represented by the Institute falls within the nonfiler category. It is counterintuitive -- indeed, fanciful -- to suggest that a corporation that retains one or more in-house tax professionals would not satisfy its filing obligation. This is especially the case since a majority of TEI members represent CEP taxpayers and an even larger number work for publicly traded companies (which, of course, must file with the SEC). Nonfiling among this universe of corporations would surely be futile and short-lived.

During the meeting, you referred to a particular corporation that made a voluntary disclosure that it had not filed returns for "a number of years" and subsequently made a payment of $350,000 covering taxes, interest, and (possibly) penalties. Although such noncompliance is by no measure de minimis, we suggest that the income level of the nonfiling corporation did not approach that of even the smallest corporation represented by the Institute's membership. Indeed, an aggregate adjusted gross income of $1,000,000 over the entire period of nonfiling would render a tax bill almost equal to the payment you mentioned, without even taking into account interest and penalties.

Clearly, the IRS should not ignore any nonfiler problem that exists in the corporate community. Nor should it, however, paint with so broad a brush that all corporations are sullied by allegations of nonfiling. If the problem is with the small corporate community -- or with the low, low end of so-called large corporations -- that is where the IRS's resources (and rhetoric) should be directed. You will recall that one of TEI's primary objections to previous "tax gap" studies is the lack of any meaningful stratification among corporate taxpayers; CEP taxpayers (corporations with assets of more than $250 million and whose returns are continually audited) were lumped together as "large corporations" with businesses whose assets exceed $10 million. We fear that the same "lumping" may occur in the IRS's nonfiler statistics. Thus, the Institute urges the IRS to be more careful in the language it uses to describe the corporate nonfiler universe.(2)

What TEI Can Do

Turning to the specific initiatives outlined in the minutes of the August 25 letter, TEI will be pleased to assist in the IRS's efforts, especially in the communications area. For example, the Institute could publish nonfiler news articles in its bimonthly publication, The Tax Executive. TEI could also serve as a conduit to its members (either through its headquarters or local chapters) for information about nonfiler training materials or the availability of IRS tax assistance centers at which TEI members could render pro bono services. (The Institute has done this in the past in respect of VITA centers.) Finally, the Institute could encourage its members to advise their employers (through their human resources departments) of the IRS's nonfiler initiatives, which information could then be communicated to the employer's workforce through company newsletters and other communication vehicles. Thus, TEI could assist the IRS in tapping the civic mindedness of its members.

With respect to all these activities, it is important to bear in mind the unique nature of TEI and the professional activities of its members. TEI members for the most part do not engage in tax preparation activities (other than for their corporate employers) and, consequently, are unlikely to encounter nonfilers in the course of their duties. Although many TEI members may work for companies whose workforces include some nonfilers, the TEI member will likely have no contact with such person. Indeed, although the corporate tax department obviously has expertise in individual tax matters, most companies eschew any tax preparation or advice role in respect of their employees. This is the case for a number of reasons.

First, it raises both confidentiality and conflict-of-interest issues. If a company runs a tax assistance center for its employees and a tax department employee who is staffing the center (as either part of his or her assigned duties or as a "volunteer") becomes aware that one of the company's employees is a nonfiler or has engaged in tax fraud, to whom does the tax department employee owe his or her loyalty? The company? The individual employee? What if the tax department employee advises the employee to make a voluntary disclosure and the employee declines? A related issue is the tax department employee's potential exposure in the event he or she makes an error in assisting the employee. Unlike attorneys and accountants in private practice, very few tax executives have professional liability insurance.

Quite candidly, corporate tax departments for the most part steer clear of providing any tax assistance to the employees of the corporation. The requests for such help may be neverending, may expose the tax personnel to information about the employees that neither party particularly wants to be shared, and may put the tax personnel in the uncomfortable position of advising his or her fellow employees (or superiors) that the tax position they seek to take is improper. Thus, where a company provides tax assistance to its employees (most likely, executives) as a fringe benefit, that assistance is invariably provided by independent tax advisers.

Still another reason that companies may resist providing direct tax assistance to their employees is the resources that such a service would consume. Corporate tax departments have not escaped the budget cutbacks and "rightsizing" that has affected practically all businesses in recent years. If all employees of a company were free to call upon the tax department to assist them in preparing their returns, the "real work" of the department would undoubtedly suffer. To the extent the company chose to restrict the availability of services (to limit the diversion of corporate resources), the question arises how to allocate the available resources. This is especially important in respect of the IRS's nonfiler initiatives, where the goal would be to properly target the resources to the "market segments" where the problem exists.

The policy and budgetary constraints on tax department personnel providing tax assistance to their fellow employees (either as part of the IRS's nonfiler initiatives or otherwise) obviously do not preclude TEI members from volunteering at IRS-sponsored assistance centers. With respect to such centers, the Institute could encourage its members to volunteer at such centers and also to participate in outreach presentations along with IRS personnel. In addition, TEI could urge its local chapters to consider sponsoring training sessions that would enable its members to participate in the nonfiler program and to make available to Institute members the nonfiler training materials developed by the IRS.

As to certain suggestions set forth in the minutes of the August 25 meeting, we regret that the unique nature of TEI will limit the Institute's ability to participate. For example, since TEI members must generally not be engaged in public tax practice, the Institute could not meaningfully participate in a practitioner referral network. Similarly, although TEI could encourage its members to volunteer at IRS assistance sites, it would not be practical for TEI members to render pro bono tax assistance as part of their normal tax practices. Finally, TEI is not in a position to grant CPE credits for nonfiler program training. Whether or not credit is granted is up to the accrediting agency, not the sponsor of the training. Thus, even if the Institute sponsored such training, it could not guarantee that the local bar association, CPA society, or even the National Registry of CPE Sponsors (with which TEI is registered) would grant credit for the programs.

Conclusion

Once again, Tax Executives Institute is pleased to have been invited to your August 25 meeting on the IRS's nonfiler strategy and looks forward to assisting the IRS's efforts. We look forward to receiving the proposed memorandum of agreement. In the meantime, if you should have any questions, please do not hesitate to call. (1) The Institute is aware that some of its members may engage in modest return preparation businesses, especially during the tax-filing season. TEI, however, does not sanction such activities, and none of its technical nor educational effort8 is directed to such activities. Indeed, the membership in TEI is expressly limited to "those individuals not engaged in public tax practice." (2) The Institute recognizes that the disclosure rules may preclude the IRS from revealing the details of any nonfiling that it can document exists in the corporate community. To the extent the IRS can share information about nonfiling by those companies represented by TEI's membership, however, we sincerely request that you do so. We pledge our unrelenting assistance in rooting out such noncompliance and can assure you that the Institute will take appropriate disciplinary action against any of its members who contribute to such noncompliance.

Commissioner Peterson's Response

(On November 2, 1992, Commissioner Peterson responded to TEI's letter on the Nonfiler Program. Her response follows.)

I appreciate your prompt response on behalf of the Tax Executives Institute to work with us in helping delinquent individual taxpayers get back into the system. I am especially pleased with your nationwide offer to encourage your local chapters to participate in our assistance centers. Your members' participation in these centers will be of great value to our Nonfiler Program.

I understand from your letter that you will assist us in the communications area by publishing news articles in The Tax Executive and that you will serve as a conduit to your members for information about the Nonfiler Program. Additionally, you will encourage your members to advise their employees of the Service's nonfiler initiatives. These ideas stress both education and practical assistance. I fully concur with your approach which has all the elements necessary for us to get the job done.

As you know, our initiative in the Nonfiler Program is focused primarily on the individual nonfiler with no specific emphasis on corporations. Often, we secure an individual delinquent Form 1040, we identify a delinquent Form 1120 related to that individual. In these cases, it is generally a small corporate return; and the individual is one of the corporation's principal officers. This was the case we discussed regarding the corporation that owed $350,000 in taxes and penalties.

If you would like to follow up on any of these points, please contact Richard Voskuil, Southwest Regional Commissioner.