Liaison meetings with IRS commissioner, LMSB, and Treasury Department top advocacy agenda: TEI urges staged implementation of e-filing mandate; institute reiterates opposition to codifying of economic substance doctrine; independence of appeals undermined by IRS shelter, TEI asserts.
In early February, TEI will hold separate meetings with the Commissioner of Internal Revenue, officials of the Large and Mid-Size Business Division, and the U.S. Treasury Department's Office of Tax Policy. Among the issues to be discussed are the most recent version of a statutory economic substance requirement, the IRS's electronic filing program for corporations, and the need for the agency to safeguard the independence of Appeals--all of which were addressed in separate technical submissions--as well as the cost sharing regulations and LMSB's Compliance Assurance Process.
TEI's delegation to the liaison meetings will be led by TEI President Michael Boyle of the Seattle Chapter who remarked that "the meetings provide the Institute with the opportunity for critical dialogue with the government on the issues of the day for tax executives." The agendas for and minutes of the liaison meetings will be reprinted in the next issue of the magazine.
In a pre-holiday letter to the congressional tax committees, TEI urged Congress to exercise its oversight authority in respect of the IRS's mandate that large corporate taxpayers electronically file their tax returns. To forestall a hasty and chaotic filing season, TEI said, the mandate should be phased in over several fling seasons, with e-filing for 2005 tax returns being voluntary and the scope and speed of implementation of the mandate being based on incremental results and actual experience and not artificial deadlines.
TEI's letter December 20 noted that the mandate was issued in January of 2005 "without proper consultation with affected taxpayers and will impose significant burdens on the business community without any assurance that the IRS will have adequate systems, procedures, and personnel in place to receive and process the data and capabilities to effectively analyze that data to fulfill its audit and compliance responsibilities."
Taking a step backward, TEI said its members collectively support the goal of increasing the IRS's use of technology including its ability to effectively process e-filed returns. Thus, the Institute's letter acknowledged that a properly designed and implemented e-filing process would advance key IRS objectives such as providing the IRS with accurate and timely return information, reducing audit cycle time, and achieving currency in those audits. But, the organization continued, mandating the goal does not ensure its fair or timely implementation. In addition to imposing unnecessary costs on taxpayers, the letter cautioned that the mandate may threaten the orderly processing of returns for the 2006 filing season. The letter also noted that the Internal Revenue Service Advisory Council's recent recommendation to delay the e-filing mandate by one year was rejected by the Commissioner.
Since the mandate's announcement, TEI, its members, and software vendors have worked with the IRS to make corporate e-filing a reality. In spite of tremendous efforts during the past year, the letter continued, "significant challenges remain--issues that may not be soluble by the time the first mandated returns are due to be filed."
One major challenge, TEI said, is that many taxpayers use different types of software for different purposes and no program is available to permit data from multiple programs to be aggregated into a single XML file, as required by the regulations. A second significant challenge is that, although the IRS has issued guidance on securing hardship waivers, the notice provides little guidance in determining what might qualify for relief. A third challenge relates to the availability of software from third-party vendors. As of the time the letter was sent (December 20), no software vendor had released prototypes of the new software.
Finally, TEI concluded, "it is unclear ... whether the IRS has devoted the time and resources necessary to develop and have in place the capabilities to effectively analyze the electronically transmitted tax return information." The letter concludes with the Institute's recommendation that implementation of the e-filing mandate be phased in over several filing seasons, with e-filing for 2005 tax returns made voluntary.
TEI's letter is reprinted in this issue, beginning at page 61.
Codification of Economic Substance Doctrine
On January 10, 2006, TEI President Mike Boyle urged the chairs of the House and Senate tax-writing committees to reject a proposal to codify the economic substance doctrine. Mr. Boyle's comments were set out in a letter to Representative William Thomas, chair of the House Ways and Means Committee, and Senator Charles Grassley, chair of the Senate Finance Committee, on the revenue-offset provisions contained in S. 2020, the Tax Relief Act of 2005. (The provisions in S. 2020 have no counterparts in the bill (H.R. 4297) passed by the House. A conference to reconcile the differences had not been scheduled as of late January.)
TEI's letter observed that proposals to codify the economic substance doctrine--and related provisions creating a penalty for transactions lacking economic substance and denying a deduction for interest attributable to understatements of tax attributable to such transactions--have been rejected multiple times by previous conference committees. Mr. Boyle explained that "the key to stopping tax shelter abuses is the effective administration of the tax law's substantive provisions," which depends, in turn, "on the ability of IRS agents to identify and analyze transactions." As a result, he continued, "TEI has consistently urged the adoption of disclosure-based approaches" to stopping tax shelters rather than codification of the economic substance test.
TEI said that a number of actions taken by the IRS and Congress have significantly enhanced taxpayer and promoter disclosures, including the reportable transaction regulations, the development of Schedule M-3, and changes to the Circular 230, as well as the creation of new disclosure penalties. In addition, the letter noted that changes in the rules governing the documentation of tax positions for financial statement reporting under the Sarbanes-Oxley Act have contributed to raising the tax planning bar to questionable transactions. Because these actions have substantially curbed tax shelter activities, no further action is warranted.
Deductibility of Fines and Penalties
In the same letter, TEI also urged that a proposal to modify the rules under section 162(f) denying deductions for fines and penalties as well as a proposal to deny deductions for punitive damage awards or settlements be rejected.
In respect of the modification of section 162(f), TEI said that the provision would go much further than clarify the rules, potentially denying many legitimate business expenses that are remedial or compensatory in nature. Moreover, "there are a host of court decisions providing guidance distinguishing between nondeductible fines and penalties and deductible amounts, such as restitution or other compensatory payments. When government agencies settle claims and inquiries into potential violations of the law," TEI said, "there is ample guidance available to permit the governmental agencies to structure the payments as deductible--or not--as appropriate to the circumstances."
In respect of the provision denying deductions for punitive damage settlements and awards, the letter notes that punitive damage awards are all too common under the tort compensation system in United States. "One measure of their commonness," TEI said, "is their longstanding treatment as an ordinary and necessary business expense deduction under section 162. Because of the mismatching of ordinary and necessary expenses with the business income that engenders the expense, as well as the potential for interfering with the judicious and efficient disposition of tort claims," the letter concluded, this provision should also be rejected.
TEI's letter is reprinted in this issue, beginning at page 63.
Independence of Appeals--Announcement 2005-80
On January 17, TEI submitted a letter to IRS Commissioner Mark W. Everson urging the IRS to reaffirm the independence of appeals in the wake of IRS Announcement 2005-80. In the announcement, the IRS set out concession terms for 21 transactions to which it has determined the accuracy-related penalty is applicable. By asserting 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," TEI said, the announcement "usurps the authority of Appeals (and the right of taxpayers to have Appeals) assess the merits of cases."
TEI acknowledged that the IRS's positions on the 21 issues may ultimately be sustained, but said that "until the issues are adjudicated by a court, the IRS's interpretation of the law is entitled to no more deference than that of the taxpayer." Hence, TEI said, the announcement threatens to fundamentally change the balance between Examination, Appeals, and taxpayers and to deprive taxpayers of a right conferred by Congress in the IRS Restructuring and Reform Act of 1998.
"Let there be no mistake," the Institute wrote in a letter from TEI President Mike Boyle. "This is not about tax shelters; it's about the fundamental nature of Appeals." He explained that the flaw in the IRS's announcement is illustrated by those transactions involving valuation disputes. "How can the IRS ensure the independence of Appeals (as mandated by RRA) while intimating that valuation disputes--which are inherently factual--can be resolved in a formulary, cookie-cutter manner?"
Because Congress has unambiguously spoken on the issue of Appeals independence, TEI concluded, the IRS must look for other ways to alter the balance between taxpayers and the IRS. The IRS "cannot simply declare, by fiat, that a fundamental right of taxpayers must be discarded in the agency's fight against tax shelters."
TEI's letter is reprinted in this issue, beginning on page 65.
* TEI Urges Phased Implementation of E-Filing, page 61
* Revenue Offset Provisions in Senate Tax Reconciliation Bill, page 63
* TEI Encourages IRS to Reaffirm Independence of Appeals, page 65
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|Title Annotation:||Recent Activities|
|Date:||Jan 1, 2006|
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