David Cay Johnston reported today in the New York Times on IRS agents' concerns that they are being pressed to expedite corporate audits in a way that compromises their ability to detect abuses. They say they are "grab[bing] all the low-hanging fruit in a few highly productive hours, while leaving most of the harvest untouched." See I.R.S. Agents Feel Pressed to End Cases, NYTimes, Mar. 20, 2007. The article reports on interviews with 21 agents, all of whom indicate that the IRS claims about taking strong enforcement action are just "lip service" while providing various documentation of managers pushing to close files quickly--managers are more concerned about possible bonuses from meeting their case closure goals. Id. No report is required to be filed when agents are forced to close cases early against their professional judgment. Id.
Remembering the size of the federal corporate tax return of one of my clients when I was in practice, I cannot help but think that fast service, in this case, means a disservice to the ordinary American taxpayers who will foot bigger tax bills when corporate abuses go undiscovered. Not surprisingly, one agent informed Johnston that "his team was forced to sign off on a closing agreement allowing the company to permanently underpay its taxes by hundreds of millions of dollars a year." Id.
The IRS, on the other hand. claims the number of audits and tax dollars found is up from last year, even though it has essentially no more auditors, and that audits have been shortened to 18 months from about two years. The problem, according to the IRS, is older agents who are "unwilling to adopt new approaches." Id.
BNA Daily Tax Report (Mar 20, 2007 RealTime 1pm) notes IRS Commissioner Everson's comment at the House Ways and Means hearing today that the $11.1 billion budget request for FY 2008 is "the best request of his tenure." That doesn't say much in a regime that has kept the tax administrative agency funded at low levels and pushed for privatization of this most quintessentially government function, at a ridiculous cost to taxpayers (see earlier posting noting that 65 IRS personnel were needed to oversee the work of the 75 contractors collecting taxes for the IRS). So another argument that surfaces about enhancing enforcement is the fear that stepped up enforcement activities will turn the agency into a "beast" that won't please anyone. See Ryan Donmoyer, Democrats Revenue Plans Might Mean Turning Taxman into 'Beast', Bloomberg, Mar. 5, 2007.
The IRS argument, and concerns about a taxman "beast", simply don't fly. First, actual face-to-face corporate audits have been dysmally low under this administration, so some increase in the number of audits still leaves the agency below the audit rates of prior decades. Furthermore,if the IRS conducts an audit of a company, the audit must be sufficiently in depth to provide some assurance that the audit can find actual tax evasion as well as any super-aggressive techniques the audited company may be using. If not, the sloppy audit will merely breed more audit contempt. The reportable transaction rules requiring disclosure will be meaningless if they are not enforced through the audit process, and the threat of penalties will again become a mere "cost" to be taken into account by aggressive corporate tax departments in their calculations about the risks and rewards from the audit lottery (which for big corporations is won by limiting the items reviewed in depth, rather than by not having an audit at all). As for enhanced tax reporting (such as requiring brokers and banks to report on securities sales), it surely will be no more burdensome than requiring employers to report on wages. What is good for the goose (ordinary salaried workers) should be good for the gander (the wealthy who own the vast majority of financial assets).
Thankfully, the Ways and Means Committee under new management is decidedly more willing to question the administration about these issues. Today, Doggett joined the committee in the hearing with the IRS commissioner. Although Ways and Means has not yet posted a transcript, I expect that Doggett was more dogged than the usual questioner in trying to get satisfactory answers. BNA reports merely that he "questioned the agency's auditing practices, saying IRS's objective of reducing audit cycle time... perhaps ends[s] audits before IRS agents have the chance to collect all taxes owed." For those who don't remember, Doggett is the Texas Democrat who for more than a decade has sought legislation on tax shelters, including codification of the economic substance doctrine. When he first began pushing for economic substance codification back in the early '90s, I remember New York tax lawyers would groan when they heard his name. Maybe it is appropriate that the current tax administration face some of that Doggett doggedness. Too many of the pronouncements these days seem geared towards easing compliance burdens and not enough towards ensuring actual compliance.
Recent Comments