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"'Thou shalts" ... and better ways.

Some years ago when I was a new government lawyer, I heard a story told about a revenue officer who boasted to a delinquent taxpayer engaged in the restaurant business. The revenue officer threatened, "If you don't pay your tax bill by lunch, don't bother putting the soup up for dinner, because I'll levy you and shut you down." Being new to the IRS's Office of Chief Counsel, and not having had much experience in the collection area, I didn't give much thought to the story or inquire about its veracity. Rather, I simply filed it away under the heading "IRS lore."

Recently, I had the occasion to recall that story while reading news reports on the latest instance of IRS overreach--the agency's clandestine freezing of thousands of taxpayer refunds. Was this merely a gaffe, an "oops?" Or is there some connection between it and other not-exactly-taxpayer-friendly actions. Specifically, I had in mind Announcement 2005-80, the recent "take-it-or-leave" pronouncement setting forth settlement terms on an array of "tax shelter" transactions identified by the IRS to be abusive. Another example would be the IRS's corporate e-filing mandate, which stands unchanged despite evidence suggesting that the vendors and IRS (and, yes, taxpayers) won't be ready.

These IRS actions--let's call them "Thou Shalts"--suggest that the IRS is feeling the need to flex its muscles and, just perhaps, to demonstrate that it has the raw power to do these things. Stated bluntly, it needs to (or wants to) show the taxpayer community who's boss. No one seriously questions the IRS's authority to collect tax or undertake the steps necessary to deter fraud, abuse, or even inadvertent non-compliance. Those of us who pay our taxes (as individuals or corporations) appreciate the prudent exercise of that authority. We also recognize that there has been a re-balancing of the IRS's emphasis on customer service and enforcement. Thus, while the IRS Restructuring and Reform Act of 1998 presaged a swinging of the pendulum toward customer service, intervening events have pushed the balance the other way. The question isn't whether a shift was appropriate; it's whether the agency--in its efforts to effect a new balance--might have gone to far or paid insufficient attention to longstanding taxpayer rights.

Consider the e-filing mandate. Although corporate e-filing has been a goal for many years, the IRS's January 11, 2005, mandate came out of the virtual blue, without formal consultation or coordination with (or even much notice to) the constituency that would be most affected (corporate taxpayers). To be sure, the IRS talked with software vendors (an indispensable partner in the effort), but for the most part it relegated taxpayers to the sidelines, issuing a "Thou Shalt" e-filing mandate, along with regulations containing precious few details on how the mandate was to be accomplished.

Furthermore, as it has since learned, the mandate proceeded from erroneous assumptions about the level of uniformity and technological sophistication that exists in the business community. Had the IRS asked good questions of a broad array of stakeholders before issuing its "Thou Shalt" (as it had successfully done in the case of the Schedule M-3 project), it most likely would have prescribed a different, certainly more staged course of action. That didn't happen, however, and barring a major dose of practicality, corporate taxpayers should gird themselves for a potentially bumpy filing season. Again, at bottom, the question isn't whether the IRS has the authority to mandate a course of action (though a legitimate question could be raised whether the IRS has given ample consideration to the costs of complying with the mandate). It's whether the IRS would not have achieved more by proceeding collaboratively rather than simply issuing a "Thou Shalt." To ask the question, I think, is to answer it.

Announcement 2005-80 represents another "Thou Shalt." In that announcement, the IRS set out concession terms for certain transactions it determined to be subject to the accuracy-related penalty. Although the IRS may eventually prevail in court (as it has in respect of COLI transactions), none of the transactions specified in the announcement has been determined by the courts to be in contravention of the tax law. That may some day occur, but until it does, the IRS's positions are entitled to no more deference than those of the affected taxpayers. Whether the transactions are "tax shelters" or some other type of transaction, the conflicting interpretations should be settled, if possible, on the basis of the "hazards of litigation," taking into account both the technical (and often ambiguous) provisions of the Internal Revenue Code and all the facts and circumstances. Regrettably, in Announcement 2005-80 the IRS glossed over that nicety, commenting that "eligible persons who forgo resolving eligible transactions under this settlement initiative ... should not expect to receive a better offer in Appeals than that offered under this settlement initiative." Thus, the pronouncement strongly implies that the facts have been judged, the outcome determined, and the appropriate penalty established. It gives short shrift to taxpayer's appeals rights and arguably contravenes statutory authority (including the mandate in the IRS Reform and Restructuring Act that the agency guarantee the independence of Appeals).

These two corporate examples--combined with the IRS's EITC refund freeze initiative (which has itself been frozen)--raise fundamental questions about whether the pendulum has already swung too far away from customer service and in the direction of enforcement. As TEI put in its letter about Announcement 2005-80, "This is not about tax shelters, but about the fundamental nature of [taxpayer rights]." When the IRS (or any agency) loses sight of the need for balance, when the agency seemingly takes the position that the end justifies the means," it invites a strong response, not only from the practitioner community but from Congress and the public at large. Thus, it was heartening to see the IRS respond positively to the criticism it received about its EITC refund program. And it's heartening (though, in TEI's view, not sufficient) for certain IRS officials to offer assurances that Announcement 2005-80 was not intended to upend appeals or to meet with taxpayers (after the fact) to work out the details of the e-filing mandate.

It may not, however, be enough. Rather than staking out a position that is sure to inflame rather than inform, a better course would be for the agency to renew its commitment to collaboration and consultation. To be sure, some times it falls to the tax administrator to make the hard decision and "let the chips fall where they may." But those decisions will be better informed--and less likely to ignite a firestorm of criticism--if the agency proceeds collaboratively. Otherwise, taxpayer concerns about IRS excesses will mount and Congress may feel the need to respond with changes that, over time, might themselves be viewed as an overreaction. Such a development would not be good news for anyone--IRS or taxpayers--committed to good tax administration.

Eli J. Dicker

TEI Chief Tax Counsel
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Title Annotation:IRS's corporate e-filing mandate
Author:Dicker, Eli J.
Publication:Tax Executive
Date:Jan 1, 2006
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