Liaison meetings, congressional hearing dominate scene: TEI testifies on IRS budget and priorities; meets with Treasury, IRS, and LMSB; renews push for simplification. (Recent Activities).
Congressional Testimony on IRS Priorities
TEI's appearance before Congress on April 8 came at a hearing of the House Ways and Means Subcommittee on Oversight on the IRS filing season, the agency's budget for fiscal year 2004 (which begins in October), and other issues of tax administration.
Appearing on a panel with representatives of other tax organizations, TEI Executive Director Timothy McCormally began by stating that for enforcement efforts to succeed, the tax law must be clear. Thus, the Institute encouraged Congress and the Treasury Department to continue their efforts to simplify and clarify the law--statutorily and administratively. Mr. McCormally also stressed that an effective enforcement strategy depends upon a committed, well-trained, and stable workforce.
TEI next commended the IRS's development of several innovative procedures--such as Fast Track Settlement, Accelerated Issue Resolution, and Limited Issue Focused Examination--to improve the examination process and promote currency. Its testimony said the increased attention on "front-end" activities can reduce contentious audits and expensive litigation.
Turning to the IRS's budget for the coming year, TEI said that if the IRS is to continue its efforts to improve the agency's credibility and effectiveness, it must be assured its programs will be fully and consistently funded. Money and stability are also required, TEI said, for the agency to recruit, train, and retain qualified personnel.
Use of Private Collection Agencies and Other Proposals
One area that prompted questions from the Subcommittee was recent proposals by the Bush Administration and others to use private firms to collect federal taxes. TEI and the other witnesses expressed reservations about the proposals, focusing on taxpayer rights and the privacy of tax information. The Institute acknowledged that the IRS must move to effectively resolve collection issues, and it applauded the presence of safeguards in the legislative proposals. Nevertheless, TEI said the better approach was to provide the IRS with sufficient resources to perform its core governmental duties in an efficient manner: "Private collection agencies should generally not be used to perform these governmental functions."
TEI also opposed proposals to require public companies to disclosure their tax returns and CEOs to sign their tax returns. "TEI believes that public disclosure of tax returns is simply not appropriate," Mr. McCormally testified. "Confidentiality of tax return information is a key privacy right that should be vindicated because it is the cornerstone of voluntary compliance."
As for the CEO signature requirement, TEI cautioned that the proposal would adversely affect tax administration. "The proposal would force companies to devote substantial time and resources to educating CEOs about the intricacies of the company's tax affairs, distracting them (and the company's tax personnel) from activities that put their respective professional expertise to their best uses--including, in the case of the CEO, overarching issues of corporate governance and accountability."
Finally, TEI renewed its call for tax simplification. In its testimony, the Institute emphasized the desirability of repealing the individual and corporate alternative minimum tax. "The AMT creates enormous administrative burdens and undermines the policies underlying substantive provisions of the Code. It takes in more revenues during recessions and reduced revenues during periods of expansion.... The AMT represented poor public policy when it was enacted and it represents bad policy now."
TEI also supported the reform and simplification of the Code's international provisions.
TEI's testimony before the House Oversight Subcommittee is reprinted in this issue, beginning on page 150. In addition, a related letter to Treasury Secretary Snow on the tax simplification aspects of the President's budget--filed jointly by TEI, the ABA Tax Section, and the AICPA on March 25, is reprinted on page 162.
Government Liaison Meetings
TEI's liaison meetings with the Treasury Department and LMSB Division were held the week of February 24. The Treasury Department's delegation was led by Assistant Treasury Secretary Pamela Olson, and the LMSB group was chaired by Division Commissioner Larry Langdon and Division Counsel Linda Burke. In addition, a meeting with acting IRS Commissioner Bob Wenzel and other National Office representatives took place on March 21.
Among the issues discussed at the Treasury meeting was the Bush Administration's excludable dividends proposal. TEI commended the Administration for seeking to ease the double taxation of dividend income, though it noted that certain aspects of the proposal could prove burdensome when implemented. The Institute pledged its efforts to help mitigate the administrative complexity of the proposals.
The group also discussed the proposals to establish Employer Retirement Savings Accounts; to restrict related party interest deductions; to make the research tax credit permanent; and to use private collection agencies to support IRS collection efforts by having the agencies locate and contact taxpayers with outstanding tax liabilities. Finally, TEI supported the budget proposals to amend section 1203 of the IRS Restructuring and Reform Act, to bring a better balance between taxpayer and IRS employee rights.
A prime topic of discussion at the Treasury meeting was the Administration's legislative and regulatory efforts in respect of tax shelters. TEI reiterated its support for a disclosure-based approach to tax shelters, and confirmed that legislation imposing new penalties would have the effect of layering another penalty on top of an already complex penalty regime. TEI took particular umbrage at the proposed strict liability penalty for failing to disclose reportable transactions, especially given the ambiguity and potential scope of "substantially similar" transactions that might fall under the rubric of reportable transactions. TEI also expressed concern about other legislative proposals to "clarify" the economic substance test and to require chief executive officers to sign corporate tax returns.
As for the Treasury's regulatory efforts in the shelter area, the agenda for the liaison meeting summarized the Institute's concerns about the proposed regulations. The Institute applauded the move toward more objective disclosure rules, but voiced continuing concern about the potential the regulatory rules might pose for substantially increasing compliance costs, increasing uncertainty for taxpayers, and exposing taxpayers to significant penalties for inadvertent failures. (Note: Final regulations were promulgated within days of the liaison meeting.)
Finally, the Institute requested status reports on a variety of issues, including IRS modernization, proposed regulations on the capitalization of expenditures, the section 482 service regulations, as well as regulations relating to cost-sharing, the research tax credit, stock options, and Circular 230.
The agenda for TEI's liaison meeting with the IRS's Large and Mid-Size Business Meeting focused on initiatives to improve audit processes. The agenda specifically addressed pre-filing agreements and industry issue resolution, as well as LMSB's limited issue focused examination, or "LIFE," initiative, which seeks to focus government and taxpayer resources on the most significant issues on a taxpayer's return by using a risk-based methodology.
TEI also raised the issue of record retention agreements, stating that although taxpayers have a responsibility to maintain records to support the positions taken on their tax returns, there is a need to minimize the burden that currently exists (especially for those taxpayers that have many years open for IRS examinations).
Tax Shelters Redux, Other Issues
TEI also commended the IRS's innovative approach to resolving certain tax shelter cases. The settlement initiatives relate to corporate-owned life insurance (COLI), section 302/318 basis-shifting transactions, and section 351 contingent liability transactions that "have the potential for clogging the tax system, consuming significant resources, and preventing LMSB from making progress on other important issues." The Institute reiterated its concerns about the tax shelter disclosure regulations, urging the IRS to reinforce the message that disclosure of "reportable transactions" is not indicative whether the tax benefits are allowable and emphasize in training materials that the determination of the benefits of a transaction is independent of disclosure.
Other topics raised during the LMSB liaison meeting were the IRS's procedures for seeking production of a taxpayer's tax accrual workpapers, the assertion of late tax deposit penalties in respect of employment and withholding taxes owed on the exercise of nonqualified stock options; section 482 documentation penalties; certain service center issues; and the access to corporate tax returns granted to non-government employees. (Appos the stock option withholding issue, on March 14, the IRS issued a field directive stating that agents should not impose penalties if the deposit is made the day following the settlement date, so long as the settlement date is within three days of the trade date.)
The agendas for TEI's liaison meetings with the Treasury Department and LMSB are reprinted in this issue, beginning on page 164; the minutes of the meetings will be published in the May-June issue.
IRS Liaison Meeting
Finally, on March 21--immediately before the Institute's Midyear Conference--TEI's senior officers met with acting IRS Commissioner Bob Wenzel, Chief Counsel B. John Williams, LMSB Commissioner Langdon, Division Counsel Linda Burke, and other senior officials of the IRS for its annual liaison meeting. The two-hour meeting touched on many of the topics covered during the Treasury and LMSB liaison meetings, as well as transitional issues relating to IRS and LMSB. Specific attention was given to Appeals initiatives (including Fast-Track Settlement), business process modernization, private collection agencies, and the disclosure of corporate tax return information.
Additional information about the IRS liaison meeting will be included in the next issue of The Tax Executive.
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|Date:||Mar 1, 2003|
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