ataxingmatter

The IRS tale--Times letter writers seem to get it (or at least, most of them anyway)

As I've noted in several posts on A Taxing Matter (see links, below), the media and right-wing "hearing" frenzy continues over the purported IRS "scandal" from "targeting" conservative groups for extra scrutiny in determining whether to approve application for 501(c)(4) "social welfare" organization status (referred to herein as "C-4 status").  It's a silly affair.  Obama and his minions appear to have apologized not because anything wrong was done but because the (GOP-appointed) Treasury Inspector General for Tax Administration (TIGTA) was issuing a report that suggested the use of a key word that might be in many conservative groups' name was "inappropriate" and that the failure of IRS leaders to correct that represented "mismanagement."

I find it hard to see the reasonable use of a term that most of us associate with political campaigns "tea party" and "patriots" as inappropriate as a keyword for filtering out applications for C-4 status for further review of whether the group is planning to engage in politicking rather than social welfare activities.  The mismanagement seems really to go back much further to a pro-taxpayer interpretation that put the IRS in an untenable position.  The law passed by Congress states that C-4 organizations are supposed to be dedicated "exclusively" to "social welfare" activities.  Regretably, years ago tax administrators recognized that many of these groups were actually doing lots of politicking.  Rather than take the (politically) risky step of denying C-4 status to those groups, the regs officially interpreted the statute to require merely "primary" social welfare activity, thus opening themselves up for the impossible task of policing the border between doing some politicking and doing too much and opening the C-4 status up for the games-playing that some wealthy sponsors of organizations have engaged in--that is, hiding politicking behind C-4 status in order not to reveal that a purported 'grass roots' organization is in actuality a corporate-funded lobbying and campaigning organization.

Readers at the New York Times who responded to Frank Norris's finance column, A Fine Line Between Social and Political, New York Times (May 17, 2013) show, on the whole, that they get it.  See The Tale of the I.R.S. in Cincinnati, Letters to the Editor, the New York Times (May 21, 2013).

• Russ Weiss (New Jersey) notes that "the fundamental problem here was actually the result of a too passive government.  Clearly, political entities ludicrously masquerading as 'social welfare' groups have been allowed by supposed government watchdogs to subvert our political process for far too long."
• Melvin Jacobowitz (a tax lawyer from Miami) explains that "[t]he I.R.S. properly targets a tax-exempt application for further review if there is a likelihood that its operations will be political rather than educational or for social welfare.  This can be indicated by the group's name.  The application is not denied solely because of the name. ... The I.R.S. would violate its obligations if it failed to target such applications for further inquiry. ...There was no need for an apology."
• Neil Dworkin (Connecticut) adds that non-profit hospitals that apply for charitable status under 501(c)(3)--a provision allowing tax-exemption to the organization and tax-deductible contributrions by donors-- have to "demonstrate a level of community benefit that is at least commensurate to the value of [their] tax exemption. In light of their sometimes murky activities, the I.R.S. should require 501(c)(4) organizations to give some transparent measure of social welfare in order for them to continue to carry that designation."

The one letter to the editor that misses the point is, not surprisingly, from Texas.  I say "not surprisingly" because I graduated from high school in Texas when much of Texas was known for its racism and bigotry towards anyone that wasn't "white" or "Christian", with private schools often established to avoid anything but token integration and ensure that "God" and "education" were synonymous for many Texan children.  It has since moderated its racism somewhat but at least the part I know best has become radically anarcho-libertarian, pro-gun, pro-business (the word "regulation" is almost a cuss-word in most of Texas), anti-taxes/anti-government and not very charitable towards its poor, its hungry, its homeless, its environment or any kind of intellectual (except in the oases around Austin and, to some extent, around other universities). So what did the Texan commentator have to add to the IRS sham-scandal discussion?

•  James Russell (Bellaire, Texas) suggests that it doesn't even matter whether there was intentional or unintentional mistreatment of Tea Party groups.  What matters is that "the federal government is an elephant and we are all mice who can be squashed flat at any time."

This is a perfect example of the failure of the right to look at all relevant facts.  It ignores the fact that while groups with "tea party" in their names were selected for scrutiny, there is no evidence that any group was denied C-4 status inappropriately.  It ignores the fact that failure to scutinize these groups for politicking would essentially be carte blanche for donors to avoid the sunlight required by our laws under the rules for 527s.  And it disregards the fact that government is in fact a major provider of the wealth that has created most of Texas--from tax expenditures for the Oil and Gas Industry, to railroads to highways, Texas has depended on government for its economy throughout its membership in the Union.

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Useful information on 501(c)(4)s and 527s and the IRS's scrutiny dilemma

A fellow tax professor at Loyola University, Ellen Aprill, has put together a useful powerpoint on the way political activity comes into play in deciding whether an organization is eligible for 501(c)(4) status or should instead be treated as a 527 organization that is required to disclose donors.

Download Aprill. Primer on political activity of 501(c)s and 527s. May 2013.

 Perhaps if most people understood the importance of this distinction (and the difficulties created by the lenient tax administration position that an organization can be "exclusively" focused on social welfare activities as long as it "primarily" is), some of the brouhaha over the IRS use of "tea party" and other terms to select applications for extra scrutiny would fade away.

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The GOP and media frenzy over IRS scrutiny of tax exempts continues

Since I last wrote about this issue, the acting commissioner of the IRS Steve Miller has been forced to resign, and another IRS official has also been fired.  Heads are rolling because the tax-exempt office used what seemed a likely efficient filter (the use of tea party or patriot in group names) to select applicants for C-4 status for review to see if they should be applying instead as 527s, groups that are allowed to be politically active. C-4 groups are supposed to operate "exclusively" for social welfare purposes, although the IRS has, through administrative interpretation in regulations, permitted such groups to qualify even when they do not satisfy the letter of the law, so long as they operate "primarily" for social welfare purposes.

But Majority Leader Boehner isn't happy with a few heads rolling and a media feeding frenzy over the purported "scandal"--he wants people to go to jail.  See Rayfield, Boehner on IRS:  Who's going to jail over this scandal, Salon.com (May 15, 2013).  And Rep. Camp at the Friday hearing, in which Republicans indulged in egregious insults to government employees, called the issue just the "latest example of a culture of coverups", "a problem of the IRS being too large, too powerful."  Rubin & Tiron, Existing IRS Cheif Miller Denies Targeting as Republicans Pounce, Bloomberg.com (May 17, 2013).

 And the Treasury Inspector General on Tax Administration (TIGTA) report has been released, described by his testimony Friday at what promises to be the first of many hearings conducted by Congress on this matter.  See   Inspector General's Report on the IRS, New York Times (May 14, 2013) (full report available). Note that the reason the Inspector General considered the use of "tea party" or "patriot" problematic wasn't that it was not a potentially good indicator of whether a group was engaged in too much political activity, it was that the tag would capture every group that had "tea party" in its name, unlike the use of less targeted searches, which would capture some but not all groups.  So he thought it was an inappropriate way to select groups for scrutiny, but he did not think the groups were politically or ideologically targeted by the IRS.  He just thought there was a poor management problem. 

All those on the right who have been repeating the "big, bad government" meme are nonetheless having a ball.  They have long targeted taxes, and the IRS as the administrative agency responsible for collecting them and going after tax cheaters, as the preeminent symbol of all they hate about the American experiment in self-government and their desire for a free hand for, and rule by, the  corporatist and wealthy elite.  Taxes permit government to act on behalf of all the people, rather than just catering to the needs of those who can buy access.  And so taxes are a prime target for moneyed groups on the right. 

So they are playing this as a rogue government agency out to get ordinary people.  See, for instance, the right-wing Institute for Policy Innovation's latest release (from TaxBytes.org@ipi.org, May 15, 2013), in which it  uses the tax-exempt office's use of tags like 'tea party' to identify C-4 applications for scrutiny to support its claim that "our freedom is in peril" from government agencies, because "we can't trust the IRS".  So the IPI complains about providing personal financial information to the IRS and the concern that "they" can't be trusted with the info is used as a basis for arguing for moving from an income tax (which is progressive) to a consumption tax (which is regressive--not taxing capital income of the wealthy).  Then it goes on to claim that the inability to trust the IRS is just another reason to repeal the health care reform (which is mildly progressive) enacted under Obama.  And a reason to object to the development of a "real-time tax system" that would allow the IRS to compute tax liabilities for taxpayers (which is progressive, since the wealthy hire whatever tax advisers they need, but many an earned income tax credit goes unclaimed because the working poor don't know they are eligible for it), since a system that allows the taxpayer to submit information and let the agency (using computers) calculate the tax due is "an affront to our system of voluntary tax compliance."  The fact that an office used what seemed like an efficient label for separating out likely candidates for disqualification for C-4 status is used to argue that there are "powerful enemies within the Government Class" that are using "IRS harassment, purposely delaying flights, or releasing felons" to "fight back" against the purportedly righteous effort by the right to "limit the spending and power of the federal government." 

The facts suggest otherwise.  As Stuart Levine commented on an earlier posting here,

An organization seeking to qualify under 501(c)(4) does not need a determination letter. Why then were they seeking these letters? Well, the (likely well-founded) suspicion of the people in Cincinnati was that these organizations wanted a determination letter under 501(c)(4) to assure donors that they weren't 527 organizations and that their political donations would be anonymous.

[He notes further that] the applications for all organizations seeking a determination letter are reviewed. That's 100% subject to review, not 1% or 2%. Second, one of the issues that has to be focused on in a 501(c)(4) review is whether the organization was engaged in an undue amount of political activity.

 The IRS has stated in its Q&A on the topic that "it started using 'tea party' as a shorthand in examining non-profit groups because employees had specific concerns about some groups with that name.  IRS employees had seen cases of organizations with the name Tea Party in which political activity was an issue that needed to be reviewed for compliance with legal requirements."  The IRS Q&A goes on to say that was an "inappropriate criterion"--it could have used "politically neutral" terms to get at the same groups that would be reasonably subject to greater scrutiny.   Personally, I doubt that selection of groups with "tea party" would have been considered inappropriate in a world that didn't have a dysfunctional Congress with a partisan divide so wide you could drive a Mack truck through it.

Further, the IRS targeted Democratic-leaning organizations for greater scrutiny in the same period that it targeted tea party groups.  Emerge America, a liberal group that trains women for public office, had its status as a C-4 denied and was forced to file as a 527--disclosing its donors and paying some taxes.  Julie Bykowicz & Jonathan D. Salant, IRS Sent Same Letter to Democrats that Fed Tea Party Row, Sources Say, 94 DTR GG-2 (May 15, 2013).  Progress Texas, a liberal group, faced the same line of questioning, according to the Bloomberg report. The two law firms that represent 33 Republican-leaning organizations claiming they were targeted by the IRS acknowledged that none of their clients was rejected for tax-exempt status.  Id.  

The problem isn't targeting of potentially political groups--it's that the IRS has administratively applied the law (requiring "exclusive" operation as a social welfare organization) to permit organizations to conduct a great deal of political campaign intervention activity--so long as it isn't the "primary" activity of the organization.  This allows both Democratic and Republican groups to "game a system [that is] intended to encourage citizens to engage in charitable endeavors and support projects or programs that braodly benefit communities."  Julie Bykowicz, IRS Probe Sheds Light on Nonprofit Election-Year Activity Boost, Bloomberg.com (May 17, 2013). 

As notes Melanie Sloan, executive director of Citizens for Responsibility and Ethics: "The real problem is that phony 501(c)(4) groups are exploiting the tax laws to protect donors who don't want to be held accountable for vicious, deceitful political ads."  Julie Bykowicz & Jonathan D. Salant, IRS Sent Same Letter to Democrats that Fed Tea Party Row, Sources Say, 94 DTR GG-2 (May 15, 2013).

Baucus (registered as a Democrat but comporting himself on tax issues like a Republican) and Camp (a dyed in the wool GOPer) both claim that this controversy should provide "momentum" for their ideas about "tax reform"--ideas which involve "broadening the base" and "lowering the rates" (an idea whose time came more than a quarter-century ago and shouldn't be revisited now when we need to raise revenues to support education and infrastructure development).  See Rubin & Cook, IRS Scandal Bolsters Case for Tax rEvision, Camp and Baucus Say, Bloomberg.com (May 16, 2013). 

That's silly--what this episode shows more than anything seems to be that we have underfunded the IRS, so that there is insufficient training of employees and insufficiently skilled management leading all of the various offices.  We need to raise more tax revenues to fund necessary government functions adequately, as well as deal with the many problems we have deferred for decades as we have moved to the right, such as climate change, infrastructure decay, and educational funding.

Ron Wyden has a better idea for combatting the "problem" demonstrated by the potential for bias in groups picked for scrutiny in the tax-exempt application process:  make all groups that spend any money driectly on politics disclose their donors.  That eliminates the kind of difficult line-drawing that requires discretionary decisionmaking by low-level functionaries and instead provides a workable bright-line rule that politicking requires disclosure.  Outside groups spent $1 billion in the 2012 elections, id., a result of the Supreme Court's worrisome Citizens United decision granting corporations a First Amendment right to intervene in political campaigns as "persons" under the law, even though corporations can't actually vote.  (One wonders whether they don't get even better selection of political handymen through their liberal use of money.)    Let them all reveal just who put up that money, to support which positions.  That way, voters can decide, with full information.

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While the information about the applications of tea party and other groups for tax-exempt 501(c)(4) "social welfare" status has been causing a feeding frenzy in the press, the Obama Administration continues to pander to the right by agreeing Monday that the use of terms designating primarily tea party and other groups with politically important terms in their names for scrutiny was intolerable.  This is the kind of statement that makes it difficult for the IRS to retain employees, in an underfunded agency with a highly visible mission to collect taxes, including from people who don't want to pay them.

I'm not convinced that it was anything other than a political deaf ear to how the right would respond when it was disclosed.  After all, there were thousands of new conservative groups seeking approval at the height of tea-party mania, and many of those groups were likely to be conducting considerable political activity that might make them inelgible for (c)(4) status.  It is much more likely that targeting such groups was simply a political no-no because of the hue and cry that right-wingers in Congress and out would raise (as they have), rather than that it was an improper exercise of the IRS's limited resources to select groups for review. 

Now Eric Holder has announced that he has ordered the Justice Department and FBI to investigate whether IRS officials broke any criminal laws in singling out groups for special scrutiny.  Shear & Shane, Justice Department Opens Criminal Inquiry Into I.R.S. Audits, New York Times (May 14, 2013).

We don't investigate federal government officials for targeting US citizens for assassination by drone or for imprisoning US citizens in military brigs, but we start an investigation of mid-level IRS officials trying to find reasonable ways to filter the many political groups who apply for (c)(4) status to find those that are inelgible?  Sounds like skewed priorities to me.  Especially when the IRS's inspector general is already investigating the gency and is expected to release its report in a few days, describing in detail the way the agency screened political groups for extra scrutiny.

And of course, a Republican in Congress has already introduced a bill to make it illegal for the IRS to 'target' political groups. 

Are there other options to prevent the recurrence of these issues?  One idea is to publish all donors: If a (c)(4) is funded almost exclusively by a party machine, the public should know about it.  Another idea is to eliminate tax-exempt status for any group that does any political campaigning or lobbying. Another is to require all tax-exempt groups to provide a full monthy report of activities on their website, listing every event and every contact of any member or agent of the group with any sitting official or any political candidate.   The price of tax-exemption would be transparency regarding the organization's activities.

 

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Moving in the right direction: US, UK, Aussies to share tax info

One of the (many) ways by which rich, sophisticated taxpayers who are also ultra-greedy have managed to avoid paying their fair share of taxes is to move money offshore through trusts and "companies" set up in various no-tax/lo-tax, hi-sun jurisdictions like the Cayman Islands, British Virgin Islands, Cook Islands, Singapore, etc.  I suppose for many years this scheme served multiple objectives--it stashed the cash beyond the reach of the US government, it provided a nice place to visit the cash, and it had the cachet of belonging to the exclusive jet set behind it.

That's becoming less so as the US continues to pursue tax cheats with unreported offshore accounts.  The dam started bursting with the revelation of the way Swiss bankers groveled at their American clients' feet, from smuggling diamonds into the country in toothpaste tubes to secreting gold in deep, hidden vaults to setting up sham companies in the Phillipines or other countries.  Over the last half decade, more people have participated in voluntary disclosure and more have been identified for more serious penalty programs (including criminal prosecution).  Each voluntary disclosure included full information about those who facilitated the offshoring--bankers' names, other involved lawyers, accountants, and bankers, other entities.  That groundswell of information facilitated identification of even more tax cheats, and those identifications yielded a new trove of relational data--those who had assisted them.  That finally seemed to begin to put some teeth into enforcement efforts and some gnashing of teeth into the lives of the otherwise obliviously happy tax evaders.

But various commentators (including my colleague at Wayne Law, Professor Michael McIntyre) have been concerned that the offshore gambit can't be cleaned up until countries begin more automatic sharing of the tax information they have without requiring the requesting country to have already identified the accountholder well enough to ask for information specifically about that person.  If they can ask specifically, of course, it means they have already been found, which makes for a catch-22 that has made pursuing secret bank account holders an overly arduous task. 

That makes the IRS's announcement today of a new coordinated effort among the U.S., U.K, and Australia heartening news.  They have agreed to share information about trusts and companies holding assets in tax havens like the British Virgin Islands, the Cayman Islands, and Singapore.  See IRS news release IR-2013-48 (May 9, 2013).   With the cache of information each country has gleaned from the recent efforts, coordination will allow them all to benefit from each one's effort.  That should accelerate the effort to catch the tax cheats.

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The latest "golden fleece" award for a corporate subsidy: just another way to "rig the game for 'the haves'"

[edited to add reference to Bair op-ed  3:22 pm 022713]

Back when William Proxmire was a senator and the Senate sometimes actually tried to deal with facts rather than convenient or mythological fictions, Proximre created something he called The Golden Fleece Award to highlight instances of wasteful government spending.

Now, let it be said early on that waste is rather like beauty--its recognition rests in the eye of the beholder.  The Tea Party neocons see waste in most funding for science, whereas most intellectuals, academics and others see that as investment in the future--especially exploratory, speculative science testing the fringes of theory--which serves the public good.  Similarly, most of the "deficit hawk" crowd see waste in government safety net programs, or programs that might (if the conditions now were to last for 75 years) create a large obligation in the future, but don't see waste in military expenditures or 100 years of subsidies for multinational giants like Big Oil and Big Pharma.  Furthermore, the "starve the beast" crowd want to maintain most of the programs that give the plutocracy a powerful edge in the socio-economic world that tax so directly influences, while wanting to eliminate or substantially reduce most of the programs that barely offer some opportunity to the peasants whose productivity is usually the source of the economic gains of the plutocrats.

ASIDE:  remember that the deficit hawk crowd overlaps a good deal with the "starve the beast" crowd, which overlaps as well with the "starve the poor"  crowd.  The deficit hawk crowd thinks deficits are awful when Democratic programs create them (but generally didn't squawk at the upwardly redistributionist tax cut programs of the Bush years, or the constantly creeping upwards military-industrial subsidies, etc.).  The "starve the beast" crowd thinks most government programs that serve the public good rather than paving the way for the rich to get richer are bad.  And the "starve the poor" crowd condemn all except the most meager social justice and safety net programs on the grounds that they are paternalistic and keep "the 47%" from exercising personal responsibility.  Generally speaking, all of the above tend to disfavor downwardly redistributionist programs as "socialism" but favor upwardly redistributionist programs as "investments in the future" or  "just plain fair" or "job creating" or traditional (and on and on).

That said, pointing out programs on which considerable money is spent without a showing of likelihood of success at a reasonably beneficial goal is often worthwhile. 

The Golden Fleece awards have been carried forward by Taxpayers for Common Sense, a 501(c)(3) organization that protrays itself as a "non-partisan budget watchdog serving as an independent voice for American taxpayers [with a] mission ... to achieve a government that spends taxpayer dollars responsibly and operates within its means."  It's goal is to "increase transparency, expose and eliminate wasteful and corrupts subsidies, earmarks, and corporate welfare, and hold decision makers accountable."  (from emailed release about the Golden Fleece award). 

More transparency, less corrupt subsidies, less corporate welfare, and more accountability are all important.  As Sheila C. Bair (former head of the FDIC from 2006 to 2011) put it in an op-ed in today's New York Times:

The yawning gap between rich and poor has been growing since the 1970s and reached a 90-year peak in 2007, just before the financial crisis.  The Great Recession narrowed the gap a bit, but now, once again, the richest Americans are vacuuming up what wealth is out there, a trend that Mr. [Emmanuel Saez, UC Berkeley economist] expects to continue.

...I fear that government actions, not merit, have fueled these extremes in income distribution through taxpayer bailouts, central-bank-engineered financial asset bubbles and unjustified tax breaks that favor the rich. ...

Skewing income toward the upper, upper class hurts our economy because the rich tend to sit on their money--unlike lower-and middle-income people. ... .[M]ore fundamentally, it cuts against everything our country  and my party stand for.  government's role shouldn't be to rig the game in favor of 'the haves' but to make sure 'the have-nots' are given a fair shot.

So the Golden Fleece target is worth considering. They picked "Department of Energy for Federal Spending on Small MOdular Reactors."  This is the nuclear-reactor-in-every-basement idea, for which another half billion dollars (in addition to $100 million already provided) in corporate welfare is planned.  The corporations, not the federal government, will own the R&D and licensing rights.  The government is, in other words, getting fleeced.

The federal government is in the process of wasting more than half a billion dollars to pay large, profitable companies for what should be their own expenses for research & development (R&D) and licensing related to “small modular reactors” (SMRs), which would be about a third of the size or less of today’s large nuclear reactors.

...

[Autumn Hanna, at Taxpayers for Common sense, said,] "Unfortunately, these technologies have an equally long tradition of expensive failure. If the industry believes in small modular reactors and a reactor in every backyard – great – but don’t expect the taxpayer to pick up the tab.”

The federal government already paid for a version of SMR R&D when small reactors were designed for the U.S. Navy’s nuclear submarine fleet. Now some highly profitable companies – including Babcock & Wilcox, Westinghouse, Holtec International, and Fluor Corporation -- are at the federal trough for another round of federal support for small modular reactors that could go into suburban American neighborhoods.  Id. (TCS release)

 This kind of tax expenditure subsidy for major corporations is just another example of corporatism in action in today's economy, often as part of a tax code that is rigged to favor the rich, from the preferential treatment of capital gains to the preferential treatment of fund managers' "carried interest" compensation income; from the subsidies provided for hugely profitable industries like oil and gas, pharmaceuticals, IT and real estate, to the subsidies provided to the rich through charitable contribution deductions for amounts they never invested.  It is a part of the growth of plutocracy and inequality, as big corporations, their managers and owners garner most of the productivity gains and use their lobbying prowess to ensure that they also garner incredible amounts of unnecessary financial support from the federal government through direct subsidies (Agribusiness payments to corporate farmers) or tax expenditure subsidies (percentage depletion allowance and "domestic manufacturing deduction" and R&D credit and active financing exception and the allowance of offshore captive reinsurance companies, etc.).  All this amounts to redistribution upwards to the wealthy and the multinational corporations that they mostly own--amounts funded by ordinary taxpayers.

 

 

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Circular 230 Revisions Discussed at ABA Tax Section Today

Not quite a decade after the much-hated "covered opinion" rules, the Treasury and Service today announced proposed amendments to Circular 230 that wipe the slate clean.  See REG-138367-06.  The amendments include a few other changes that will assuage some worries about the role of OPR in discipline of attorneys.

The government panel at the ABA Tax Section Standards Committee introduced the changes.  Karen Hawkins, OPR Director, was "excited about the changes".  Section 10.1 clarifies the authority of OPR as the office with exclusive responsibility for discipline and sanctions of attorneys.  This issue had been a concern after the most recent amendments, which took out all references of OPR to accommodate the introduction of the new Return Preparer Office. 

Changes to section 10.31 make it clear that attorneys may not use "self-help" to acquire repayments from client's tax refunds.  Whether a refund is through a paper check or some electronic means, attorneys must turn it over to the client and may not deposit to their accounts, including trust accounts.  Hawkins noted that this was a "broader rewrite than some anticipated".  The result is consistent with the section 6695 regulations, and applies to all tax practitioners.

The big change was section 10.35.  The strict rules for written opinions and disclaimers are removed, with core principles of tough due diligence requirements incorporated in section 10.37, now the single provision covering written opinions.  The extensive disclaimer requirements are gone.   Why the change?  Several reasons.  While opinion practice seems to have improved (for the nonce), the government concluded that the strict rules in 10.37 were not an effective tool in squelching over-aggressive tax advice.  It had been expected the disclaimers would get the attention of clients, but instead they were generally not seen as a problem by sophisticated clients and created a confusing trap for unsophisticated ones.  Tax practitioners complained mightily about the difficulty of complying with the rules from the outset, saying the rules were too costly and too burdensome.  It's likely that oral opinions substituted for written advice as a way of avoiding having to comply. 

New 10.35 is a quite short provision that requires attorneys to have the requisite skill, knowledge and competence for the role they are undertaking.  Astonishingly, though the Model Rules have long included such a requirement, Circular 230 governing practice before the IRS had not.  This is what might be called a "no-brainer" addition.

Section 10.36 places more responsibility on the person in a firm with principal authority for overseeing Circular 230 practice.  That person must take reasonable steps to be sure that everyone understands their Circular 230 obligations.  If s/he fails, s/he will be held personally liable.  If s/he takes steps but those s/he oversees still violate the rules and s/he does not take additional steps to stop the violations, personal liability is again possible.  As Hawkins said at the meeting, this is essentially a "respondeat superior" type of obligation.   An audience member asked about the application of this rule when there are independent contractors.  Hawkins noted that there is an interrelationship here between section 10.22, which requires due diligence and allows a practitioner to rely on another, and 10.36 which requires appropriate oversight of employees or the work cannot be relied on.  Either way, she noted, poor due diligence will result in being unable to rely on the work, under either 10.22 or 10.36.  (And Section 10.37 would be relevant if the independent contractor is preparing an opinion on which the practitioner expects to rely.)

 Section 10.37 is, as noted above, now the provision that governs all written tax advice.  It is, Hawkins said, a "sensible form of regulation that everyone can understand and follow, including both practitioners and clients."  There are some significant changes beyond the elimination of the covered opinion rules.  For example, the original section 10.35 did not permit practitioners to consider settlement possibilities in giving written advice: under the proposed regulation, it is permissible to consider the hazards of litigation, but not the potential outcome of audits.  Rich Goldstein pointed out that "the regulations retain a 'heightened scrutiny' for marketed opinions, so they are not a shift back to the pre-2004 status but rather a decision to provide a rule that was easier to work with, easier to enforce and one that had the potential to be effective."  Questioners asked what heightened scrutiny is intended to mean in this context.  Hawkins reminded everyone that "the basic standard is reasonableness."  Goldstein explained that "if the opinion is marketed, it will be reviewed closely to ensure that it complies with the requirements, because the effect on tax administration is greater."   In other words, there is not a different standard or level of confidence required by the practitioner, but a difference in how it will be reviewed.

Section 10.82 provides for expedited suspension in situations where there has already been a fitness adjudication by another body, such as a tax crime conviction or the loss of a state bar license.  These amendments add the possibility for expedited suspensions when practitioners have demonstrated willful disreputable conduct by failing to comply with tax filing obligations--e.g., failing to file for 4 of the last 5 years.  Hawkins noted that with many new practitioners, it is reasonable to expect that there will be some compliance problems, and it would be a drain to have to take all of those cases before an administrative law judge when the result is clear.  Although there was a similar effort to create additional expedited process a decade ago, Hawkins suggested that this revision was "better, more thoughtful, and more confined."  But having opposed the original attempt to permit expedited process in these types of situations, she noted that she "would particularly invite the Committee to provide feedback on this issue.  She reminded that in an expedited suspension, OPR initates the process with what is now called an "order to show cause" to the practitioner, who can talk to OPR and perhaps end the process.  If not, the suspension takes place and then full due process protections apply.

The notice also withdraws the proposed regulations for state and local bonds, proposed in 2004.

There is a comment period for 60 days, which will end November 15, and a hearing will be held December 7.  Hawkins noted that it is important to let the government know if they have missed something since otherwise "in two-three years we will be back in the same place again with a variant of 10.35, if these rules are not effective."

Whistleblower gets millions: good for compliance improvement (and makes us ask again--did Romney get amnesty?)

[Edited 9/13 to add link to Kenneth Thomas]

Bradley Birkenfeld, the UBS whistleblower who helped jumpstart the IRS's enforcement of foreign bank account reporting and helped catch criminal tax evaders, ended up serving a relatively short prison term (for failure to be entirely forthcoming, in the case of one of UBS's private banking customers) but also go a significant $104 million whistleblower award.  See David Kocieniewski, Whistle-Blower awarded $104 Million by I.R.S., New York Times (Sept. 11, 2012);  Whistleblower Brad Birkenfeld Rewarded Record $104M for Exposing How UBS Helped Rich Evade Taxes, DemocracyNow.org (video available); Exhaustive Study Finds Global Elite Hiding Up to $32 Trillion in Offshore Accounts, DemocracyNow.org (July 12, 2012) (video or transcript available); Birkenfeld's bonanza, The Economist (Sept. 11, 2012).

As Birkenfeld's attorney put it:

“Today is a great day for all the honest Americans out there who work their job and pay their taxes. Today is a great day for tax fairness. Today is a terrible day for big-time tax cheats.”  Birkenfeld's bonanza, The Economist (Sept. 11, 2012).

The very public and very large whistleblower award should do two things:

1) encourage other insiders who are aware of egregious company or individual tax-evading behavior to blow the whistle and

2) discourage other insiders and companies from egregious company or individual tax evading behavior.

There have always been anonymous brown-envelope tips to the IRS from those who know what is going on but don't want to participate in it and don't want their competitors to gain a competitive advantage because they do.  But whistleblowers generally have access to inside information that can break the dam on enforcement.  That certainly was the case with Birkenfeld, whose information-- about smuggling diamonds for UBS's private banking clients and other means taken to help such clients avoid reporting their assets to the US government--was instrumental in increasing awareness about tax crimes and increasing the fear of God (or rather, the fear of the "revenuer") in sophisticated, wealthy taxpayers who had been able to hide some of their assets and wealth relatively easily before.

By the way--we still do not know whether GOP presidential candidate Mitt Romney participated in the amnesty program that was introduced in the wake of the UBS exposure of banking secrecy's connection to tax evasion by wealthy Americans.  As most Americans know by now, Romney refuses to release his tax returns for the relevant years when he might have participated in the amnesty program to avoid criminal prosecution.  See, e.g., Kenneth Thomas, UBS Whistleblower's Award Reminds Us Romney Banked at UBS.  Until Romney does release his returns back to 2003 o4 so, there will continue to be questions regarding his taxes, as the wealthiest nominee ever with offshore holdings galore and his sole business experience being a hedge fund with numerous offshore entities and blocker corporations.  Specifically, Americans will wonder how his self-proclaimed patriotism and love of nation plays out in his ordinary decisions.  His hedge fund, Bain Capital, has also made the news as a participant in a claimed conspiracy of hedge funds to deflate the prices they pay for companies they acquire.  See Lichtblau & Lattman, Equity Firms Like Bain Are Depicted as Colluding, New York Times (Sept. 11, 2012).   Both tax evasion and price-rigging are criminal activities, so it behooves Romney to release his returns and ancillary information so Americans can assess how he practices what he preaches in terms of love of country and rule of law.  Did he report his foreign assets as required all along?  Did he invest abroad (so that any purported "job creation" activity didn't benefit us)?  Was he still influential in Bain during the period that it began, or carried on, price-fixing agreements with other powerful hedge funds?  Americans deserve to know.

Will this lead to better compliance in the future?  One suspects that there will always be those who enjoy the game of avoiding taxes so much that they will be willing to pay to play the tax evasion games even on the harder-to-manipulate playing field created by the crackdown on banking secrecy and offshoring of funds.  But hopefully they will be fewer, and less successful! 

IRS goofing on foreign trust letters, says AICPA

The American Institute of CPAs (AICPA) is asking the IRS Commissioner to resolve what it suggests is a "widespread problem" for taxpayers.  Download AICPA Letter to IRS on Erroneous Form 3520 Letters to Taxapyers.082812.   For 2010 and earlier years, the IRS apparently has made a wide range of systemic mistakes in processing the form required to be filed annually by owners of a foreign trust--Forms 3520, the Annual Return to Report Transactions with Foreign Trusts and REceipt of Certain Foreign Gifts.

  The AICPA reports errors including:

• instructions to fill out Part II about ownership of a foreign trust, when the taxpayer is not the owner of a foreign grantor trust;
• instructions to provide additional information required when a taxpayer answers a question "yes" when the question on the form was answered "no";
• instructions to provide identifying information required to be submitted when the information was already submitted; and
• insturctions to provide an explanatory statementwhen such statement was already submitted.

This looks like one of those kinds of things that happen when staffing at a government agency is reduced beyond what is reasonable for the kinds of tasks that have to be carried out.  Query--isn't it likely that the right's  (and now officially the GOP's) drive to reduce staffing at all levels of government agencies (except, of course, for the right's pet project, expansion of the military) likely to increase the headaches for ordinary citizens because those government agencies simply won't be able to get their jobs done well with the reduced staffing and morale problems that will cause?

Funding the IRS Cuts the Deficit

According to David Cay Johnston (Reuters, Jan. 17, 2012) (Hat tip Robert McKenzie)

IRS data show that auditors assigned to the 14,000 or so largest corporations found $9,354 of additional tax owed for every hour spent testing tax returns in the 2009 fiscal year. The highest-paid IRS auditors make $71 an hour. Based on a 2,080-hour work year, that works out to around $19 million of lost revenue annually for every senior corporate auditor position cut from the payroll.