Presentation on theme: "Five Key Things Non-Tax- Administrators Should Know about Tax Administration and Its Policy Implications (and What Non-Tax- Administrators Could Do Differently."— Presentation transcript:
Five Key Things Non-Tax- Administrators Should Know about Tax Administration and Its Policy Implications (and What Non-Tax- Administrators Could Do Differently as a Result) Donald L. Korb Chief Counsel Internal Revenue Service Washington, D.C.
Overview – 5 Things 1.Tax Practitioners Are the IRS’s First Line of Defense 2.Sunshine Is the Best Disinfectant 3.The Number of “Touches” of Taxpayers Rather Than “Traditional Audits” Are the Key to Compliance 4.Your Case May Be More Important to the IRS Than You Think It Should Be/Your Case May Be Less Important to the IRS Than You Think It Should Be 5.It Takes More Time Than You Might Think to Implement Changes Made by the Congress to the Internal Revenue Code
1.Tax Practitioners Are the IRS’s First Line of Defense Our federal tax system combines a self- assessment tax system with an especially complicated tax code. Consequently, accounting firms (from the Big Four to the smallest local operations), other tax return preparers, tax lawyers, corporate in-house tax personnel, and other tax advisors, all play a key role in helping taxpayers pay the correct amount of tax.
The relationship between tax practitioners and their clients/customers is often in conflict; the same is true for the relationship between tax practitioners and the IRS. Former: reactive (answering questions on the law; rendering opinions) vs. proactive (creating transactions designed specifically to reduce tax liability). Latter: responsibilities to clients/customers (a) when advising them on what reporting positions to take on their tax returns and (b) when advocating on behalf of clients/customers in tax controversies before the IRS vs. responsibilities to the IRS, the public, and their profession when they perform such services for their clients/customers.
In order to deter aggressive behavior by tax practitioners (and by extension, their clients/ customers, i.e., the taxpayers themselves), the IRS must ensure that attorneys, accountants, and other tax practitioners adhere to appropriate professional standards and follow the law. This is a key IRS strategic objective in its Strategic Plan Goal of Enhancing Enforcement of the Tax Law. The failure of the professions to self-police their members’ activities was one of the major causes of the most recent tax shelter epidemic which began in earnest in the mid-1990s and which was brought under control only in the past two or three years.
2. Sunshine Is the Best Disinfectant A cornerstone principle in combating the proliferation of abusive tax shelters is that the Tax Administrator has, in effect, lost the battle once a tax shelter has been sold to the taxpayer. Consequently, Tax Administrators must have tools at their disposal to prevent the sale of the abusive tax shelter in the first instance.
Since Tax Administrators cannot be everywhere at once (i.e., review every single transaction that could be potentially abusive as it happens), a “built-in tension” or some sort of “checks and balances” must be introduced into the system in order to raise the stakes to taxpayers of (a) detection/disallowance and (b) the concomitant cost, of investing in an abusive tax shelter. The best way to do this is to make such transactions “transparent” to the Tax Administrator with the expectation that such transparency will, in most cases, deter the taxpayer from engaging in the abusive tax sheltering activity in the first place.
The Tax Administrator needs transparency because oftentimes it does not know what it does not know. Taxpayers “hiding the ball” in reporting transactions on their tax returns and “playing cat and mouse” in dealing with the IRS during the course of an examination is a constant frustration for the IRS. Hence, the need for a mandated disclosure regime.
Treasury/IRS Disclosure Regime. Publicizing, as soon as possible, transactions that the IRS has determined to be abusive (so-called “listed transactions”). Requiring taxpayers on their tax returns to affirmatively disclose and highlight certain transactions which have the potential for tax avoidance (so-called “reportable transactions”). Requiring promoters of tax shelters to register the transactions with the IRS before they are offered for sale and also to maintain lists of clients/customers who have purchased such abusive tax shelters from them. Using a penalty regime designed to increase the out-of- pocket costs to taxpayers who are caught using an abusive tax shelter transaction. Requiring disclosure of tax accrual workpapers when a publicly held corporate taxpayer is found to have engaged in one or more listed transactions.
3.The Number of “Touches” of Taxpayers Rather Than “Traditional Audits” Are the Key to Compliance Statistically, the number of face-to-face “office” and “on site” IRS audits has been decreasing for years. That, however, is not the whole story.
Taxpayers’ behavior can be positively impacted by any number of other “contacts” or “interactions” by the IRS which have a broader impact than face-to- face audits: IRS correspondence audits. IRS publications/instructions to forms. Publicity surrounding resolutions of particularly large dollar amount or otherwise significant cases. Publicity of criminal indictments/guilty plea agreements/convictions.
Publicity surrounding so-called “global” tax shelter settlement offers. Disclosure requirements (see Key Item No. 2). Interactions by taxpayers with tax professionals (see Key Item No. 1). The ripple effect of numerous well- targeted enforcement tools can definitely enhance compliance.
4.Your Case May Be More Important to the IRS Than You Think It Should Be/Your Case May Be Less Important to the IRS Than You Think It Should Be Sometimes the Tax Administrator needs to set a legal precedent that will hopefully resolve the same issue for a large number of other similarly situated taxpayers. Your particular case may contain the best facts for the IRS to successfully establish its position in a court decision, so Chief Counsel may decide to go forward with litigation even though you offer to settle the case, on what you believe to be very government-favorable terms.
It works the other way, too. You may believe that the IRS will want to settle your case at all costs for fear that a bad precedent will harm the IRS’s chances in successfully bringing closure to a whole group of cases. However, Chief Counsel may still go forward with the litigation in order to resolve the issue, even if the resolution will most likely benefit taxpayers, in order to (a) bring closure to that whole group of cases, this time not in favor of the government, or to (b) leave it up to Congress to decide if the tax law should be changed to overturn an unfavorable result.
5.It Takes More Time Than You Might Think to Implement Changes Made by the Congress to the Internal Revenue Code This point relates to the time during the calendar year when Congress enacts a Tax Bill. When Congress makes changes to the Internal Revenue Code in November or December— effective as of January 1 or some other time during the calendar year in which they are enacted—it cannot always expect the IRS to have a smooth filing season.
Because more and more individual tax returns are being filed electronically, one would think that tax legislation enacted late in the calendar year could be quickly implemented by both the tax return preparers and the IRS. Certainly, it would seem much easier to do that today when more than 60 percent of individual income tax returns are filed electronically as opposed to 20 years ago when everything was done on paper. It is counter-intuitive, but the answer is no.
All software vendors need to have the changes to the tax law incorporated into their products generally around the beginning of the fourth quarter of the calendar year. Any changes after that date cause serious problems for both the tax return preparers and for the IRS.
Another problem with late-in-the-year changes to the tax code is that taxpayers’ expectations do not change that quickly. This means that the IRS must deal with changed expectations “on-the-fly” in the middle of the filing season, causing much confusion and delays in distributing refund checks.