Tax Blog/Blawg

The Inspector General for Tax Administration, TIGTA, has been in the news a lot lately. In addition to tracking down misbehaving IRS employees and misbehaving representatives, an important role of this organization seems to be examining every aspect of the operation of the Internal Revenue Service and publishing a critical report about it. Lately, it seems that TIGTA has been publishing an average of two a week, virtually all of which have been critical of the performance of the Internal Revenue Service. Two recent ones, however, deserves some close examination and cause this writer ...

The IRS employs many lawyers and employees of the IRS Office of Chief Counsel are its principal legal staff who number 1560, of whom about 550 work in the IRS National Office in Washington, while the balance work in offices around the country.  They provide legal advice to the Commissioner of Internal Revenue and the local IRS offices, and they act as the lawyer for the Commissioner of Internal Revenue in all Tax Court cases.  In addition, some are specially designated to assist United States Attorneys in bankruptcy, summons enforcement and other civil cases.

In 1998, a Chief Counsel’s ...

As discussed in a story in this morning's Tax Notes, the IRS intends to begin requesting electronic files as part of  taxpayer examinations so that it can analyze the "metadata" contained in those files.  Metadata, sometimes referred to as "data about data," generally shows information about a computer file, such as its editing history.  The IRS claims that such information "may be relevant" to taxpayer examinations because the information "may support or undermine the credibility of the records offered to substantiate the accuracy of the [taxpayer's] return."  See Chief Counsel ...

When the IRS audits a tax return involving a business, its agents invariably get involved in questions of recordkeeping and how transactions are conducted and recorded.  All too often, an IRS Examiner will suggest that a taxpayer's records are not "adequate," or that in some fashion the taxpayer is not operating in "a businesslike manner."  This most often occurs in situations where the taxpayer is attempting to operate a ranch and has incurred losses, or claims that shareholder advances to the company should be recognized as bona fide loans rather than an investment of capital.

This ...

Since codification of the economic substance doctrine in March 2010, taxpayers have expressed fears that IRS will assert the doctrine unpredictably, resulting in an in terrorem effect among taxpayers because of the lack of clear authorities interpreting the doctrine and the new 40% strict-liability penalty for falling on the wrong side of it.  To promote predictability in the exam processes, taxpayers have requested that Treasury or the IRS issue formal guidance instituting prescribed procedures to assert the penalty.  The government had declined these requests, but officials have promised queasy taxpayers that IRS will only assert the penalty after certain approvals.  For example, in September, LMSB Commissioner Heather Maloy issued a directive mandating that any assertion of the penalty during exam must be approved by the appropriate director of field operations.  Then, as reported by Tax Analysts, Associate Chief Counsel (Procedure and Administration) Deborah Butler said in October that Chief Counsel would review any notice of deficiency that applied the economic substance penalty before it was sent to the taxpayer.

For most citizens of the United States, the thought of an IRS audit is probably scarier than a root canal or a colonoscopy without anesthesia.  As a result, people will be pleased to learn that the Internal Revenue Service is in fact "audited" itself, and sometimes doesn't like the results of those audits.

The notion of auditing the IRS is probably surprising.  Most taxpayers know that from time to time their local media doubtless has someone who will find a horror story about a widow who really didn't owe any taxes but is being harassed because of a mistake made by the IRS computer, and from time to time Congress occasionally exercises its oversight over IRS operations above and beyond asking the Commissioner what he's doing about closing the "tax gap."  But these contacts are sporadic, and there's a question about their effectiveness.