IRS Publishes 5-Year Strategic Plan

Earlier this week IRS published a 5-year strategic plan.The plan identifies the following six strategic goals.

  • Empower and Enable All Taxpayers to Meet Their Tax Obligations
  • Protect the Integrity of the Tax System by Encouraging Compliance through Administering and Enforcing the Tax Code
  • Collaborate with External Partners Proactively to Improve Tax Administration
  • Cultivate a Well-Equipped, Diverse, Flexible and Engaged Workforce
  • Advance Data Access, Usability and Analytics to Inform Decision-Making and Improve Operational Outcomes
  • Drive Increased Agility, Efficiency, Effectiveness and Security in IRS Operations

Here are some observations:

  1. The plan starts with a recitation of the IRS mission, and lists the taxpayer bill of rights. Including the taxpayer bill of rights so prominently in the plan is a very good sign, as IRS courts and taxpayers are all wrestling with precisely how and in what way those rights should manifest themselves in particular situations.
  2. The message from the acting commissioner is wrapped up with the challenges of administering the late 2017 tax legislation. That is less strategic in and of itself but certainly part of the IRS broader goals of empowering taxpayers to meet their obligations.There is tons on the IRS plate when it comes to getting guidance out; new procedures with OMB when it comes to issuing regulations, and many issues from pre-2017, such as more BBA guidance that my colleague Marilyn Ames and I are awaiting as we finalize the new partnership content in the Saltzman and Book treatise.  (One example will no doubt be watched and litigated: just this past week IRS issued Notice 2018-54concerning state workarounds to avoid the $10,000 limit on SALT deductions. The Notice reminds taxpayers that federal law controls the characterization of payments for federal tax purposes, and that regulations will reflect that substance over form will control the outcome).
  3. On the goal of empowering taxpayers to meet obligations, the plan emphasizes a multi-channel approach that incorporates taking advantage of digital technology but also recognizes that face to face and telephone interaction are key. The plan also discusses the importance of educating taxpayers when communicating.
  4. On protecting the integrity of the tax system, the plan reflects that interactions with taxpayers, even when there is a suspicion that a return may be incorrect (especially among individuals), can be a chance to inform and educate taxpayers and nudge compliance. Audits, while crucial, especially for those intent on gaming the system by leveraging information asymmetry and the inability and undesirability of IRS auditing all suspicious returns, are costly, and IRS needs to think more robustly about ways to encourage better taxpayer behavior, an issue I have been thinking about lately and which I explore further in an article with Intuit’s Dave Williams and Krista Holub that was just published in the Virginia Tax Review.
  5. The report has an important sidebar about challenges associated with administering a tax system in a changing environment. The report flags for emphasis the growth in the gig economy and in multi-generational households as two key challenges that present  difficulties for the IRS. Lots of income earned in the gig economy is not subject to information reporting. Credits like EITC which depend on income level and family living arrangements present a next level type of challenge for tax administration.
  6. The report emphasizes a need to reboot how “data is collected stored analyzed and accessed.” This is a key area that I suspect will be a challenge for the new Commissioner. Technology is changing so rapidly and there are many value choices that are manifested in the way data is used to inform agency practices. I am deeply interested in this area, and there is growing important research looking at how government agencies, under the guise of more efficient use of data in informing and driving compliance choices and procedures, have compromised the rights of those especially less able to navigate bureaucracy due to poverty and transience and other challenges facing the working poor.
  7. The conclusion emphasizes a world where more taxpayers will be able to resolve matters quickly and efficiently, while also recognizing that IRS faces substantial barriers to achieving its goals. Some of those challenges include “changes in tax law, aging technology infrastructure, staffing challenges, cybersecurity risks and fiscal uncertainty.” As part of its main goals, the report discusses the key role that a well-trained and motivated IRS workforce must play in a successful tax administration. While resources and technology and use of data are all key, I think that a trained and motivated agency is the best safeguard of the future for tax administration. The report notes that 27% of the IRS workforce is nearing retirement; and only half of 1% of the workforce is under 25. This is a major challenge for the new Commissioner.
  8. I think the report’s emphasizing collaborating with others (like the private sector and volunteer organizations and other government entities) is so important. Getting the right input from those who bring differing perspectives is a challenge but can in my view pay substantial dividends. There are signs of success in this area (like the Security Summit where IRS has partnered with private sector and states and others to drive down ID theft), and I think this is an area that has even great potential. With potential, there is also risk (e.g., agency capture), but with transparency and true broad stakeholder engagement the risks I think can be mitigated.

 

The Taxpayer First Act

On March 26, 2018, the House of Representatives Committee on Ways and Means Subcommittee on Oversight published a discussion draft entitled “The Taxpayer First Act.” Unlike the recent tax reform legislation, the Act was jointly released by Chairman Lynn Jenkins and Ranking Member John Lewis of this subcommittee in a bipartisan effort to reform tax procedure. It’s nice to see that tax procedure can bring the parties together. The publication of the draft came with an invitation to submit comments and a statement that “Comments would be most helpful if received by April 6, 2018.” That’s a pretty short turnaround time; however the legislation came out just as my clinic class turned to policy. Each semester I try to end with a focus on the policy issues raised by the individual cases on which the students have worked. Writing proposed legislative solutions to policy issues we had encountered seemed like a good way to focus on policy given the invitation from the subcommittee. So, we tried our hand at commenting on the legislation and offering legislative proposals in the tax procedure area that might create a better tax system for the low-income taxpayers we represent. Thanks to Toby Merrill, Sean Akins and Carl Smith who assisted on this project.  On April 6, 2018, the clinic submitted comments to the subcommittee.

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The proposed Act has six parts roughly described as: 1) Independent Appeals; 2) Improved Service; 3) Sensible Enforcement; 4) Cyber Security; 5) Modernization and 6) Tax Court. The Clinic did not comment on all of the proposals. You can read the 49-page document submitted by the Clinic if you want the details, but I will give you a thumbnail sketch here.

Appeals

The subcommittee was concerned about the independence of Appeals. It almost seemed as if much of the concern stemmed from the issues raised in the ongoing Facebook litigation, about which we have blogged before here and here. Low-income taxpayers do not face the same issues of Appeals independence that large corporate taxpayers face. No one in IRS compliance or in Chief Counsel attempts to influence Appeals on an individual case involving a low-income taxpayer because no one at the IRS has worked their case. Their cases are worked in a group setting at correspondence exam. So, the concerns about the independence of Appeals expressed by the subcommittee’s proposal are not concerns that relate to the issues facing low-income taxpayers.

Low-income taxpayers would, however, like the same opportunity as their higher end counterparts to meet with an Appeals officer to discuss their case when a face-to-face meeting would be appropriate. The Appeals employees who work in local offices typically have worked with the IRS for some time and have achieved high grade levels. Appeals does not want these highly-graded employees to spend time working on cases involving low-income taxpayers. Appeals employees with the lower grades generally reside in the work ghettos generally known as service centers. Because of their location, these employees are not accessible to taxpayers. As a result, low-income taxpayers who do not have an individual assigned to their case as they go through the examination process get assigned to someone they never meet face to face and who may work in a community that is across the country creating time zone and community understanding issues. The Clinic suggested that the concerns of low-income taxpayers with Appeals will not be resolved by creating a more independent Appeals but a more accessible one.

Customer Service

Similar to the problem with Appeals, one of the big issues for low-income taxpayers is access to service. We know that Service is the last name of the IRS but it does not have to be the last aspect of focus. The Clinic identified issues that could improve the ability of taxpayers to deal with tax problems. It praised the subcommittee suggestion allowing IRS employees to make referrals to clinics rather than simply passing out a publication. It suggested making eligibility for clinics indexed to local cost of living so that clinics servicing high cost of living areas did not need to turn away individuals living a marginal lifestyle but one slightly above the national average for qualification. Specifically, the Clinic suggested changing the criteria for requiring entities forgiving debt to allow the non-issuance of Form 1099-C in instances of disputed debt. Sending out tens of thousands of Form 1099-C to individuals, usually low-income individuals, relieved of debt in the settlement of a lawsuit disputing that debt causes havoc for the individuals and for the system. This issue is currently playing out in the for-profit school industry where numerous state attorney generals and private parties have challenged the business model and practices of this industry to assist individuals with high debt and little meaningful education to show for it.

The Clinic also suggested changing the litigation path of assessable penalties so that taxpayers do not face insurmountable obstacles in seeking to litigate their dispute with the IRS because of the Flora rule. It suggested changing and clarifying the operation of the I.R.C. section 32(k) penalty for wrongfully claiming the earned income tax credit, arguing that the current penalty operates more like a penalty imposed in the welfare context rather than one imposed by the tax code which causes the IRS trouble is properly administering the penalty. The Clinic also suggested clarification of the provisions regarding taxation of attorney’s fees so that the fees do not create a barrier for low-income individuals seeking remedies for consumer law violations and other similar provisions where the statutory remedy provides a small recovery amount for the individual coupled with statutory attorney’s fees that could trigger tax to the individual in excess of the award amount, that can trigger loss of other public benefits because of the phantom income, and that creates a system of double taxation of the individual and the attorney.

Tax Court

The subcommittee proposals would rename court orders and rename the special trial judges to bring the names more into line with other federal courts. The Clinic made proposals seeking to open up the Tax Court both from a jurisdictional and information perspective. Consistent with the litigation the Clinic has pursued regarding the jurisdiction of the Tax Court, the Clinic suggests that Congress make clear it did not intend the time periods for filing a petition in Tax Court to be jurisdictional. Regarding information availability, the Clinic proposes that all notices giving a taxpayer the right to petition the Tax Court contain the last date for filing the petition, as the notices of deficiency do after the 1998 amendment regarding those notices. Additionally, the Clinic has some suggestions on accessing the Tax Court’s records and other matters.

Conclusion

Although it is now past the requested deadline set by the subcommittee for comments on its legislation, if you agree with any of the proposals of the Clinic, you might consider submitting comments yourself. The portal for sending comments is irsreform@mail.house.gov. Happy commenting.

Pecker Buys Procedurally Taxing For Undisclosed Sum

David Pecker, whose company owns the National Enquirer, purchased all rights to the name and likeness and prior posts of Procedurally Taxing for an undisclosed sum. Pecker, whose National Enquirer has been in the news of late due to its cozy relationship with President Trump, has long felt the need to enter the nascent world of legal blogging, especially tax, with its cross over to and connection with the world of entertainment.

In commenting on the purchase, Pecker noted that just in the last few weeks we have seen Cardi B talk about tax policy, rapper DMX get sentenced to jail for tax evasion, an innocent taxpayer sue Howard Stern and the IRS for an employee talking about her tax account on the shock jock’s radio show, and John Oliver sing the praises of tax exemptions as he discusses prosperity gospel.

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Noting the extensive reach that PT has in the bar, the bench and in government, Pecker hopes to leverage his company’s marketing and publicity to expand the blog’s footprint.

“Tax is everywhere,” said Pecker. “Outlets like Procedurally Taxing do not have a clue about the real world.”

While we are working out the final details, it appears that Keith, Stephen, and I, the founding bloggers, will remain affiliated with the blog in some capacity, though it is expected that we will significantly reduce time spent on the blog to allow well known celebrity authors to post.

The first post, due to be published Monday is entitled “Frequent Contributor Carl Smith Abducted by Aliens Claiming to Know Precise Constitutional Status of Tax Court.” Written by Fogg’s Harvard Law School colleague Steve Shay, who specializes in international and intergalactic transactions, the post hopes to explore issues that have long troubled not only the tax bar but also the public at large.

Pecker has released Monday’s post in preview form to a number of tax celebrities. Frank Agostino commented:  “The aliens have made a Graev mistake.  There is no evidence that the initial determination to abduct was personally approved in writing by the immediate supervisor of the alien making the abduction.  I plan to appeal this matter to the Court of Appeals for the Milky Way Circuit.  Or, at least go out and buy a Milky Way bar.”

Nina Olson thought:  “Carl Smith’s abduction no doubt violates a number of provisions of the Taxpayer Bill of Rights that I recently got Congress to incorporate into section 7803.  I won’t help Carl, but I will closely monitor any litigation in this area.”

Tax Court Chief Judge L. Paige Marvel expressed surprise that PT was aware of the abduction. “Information about the abduction,” she said, “is contained within the Tax Court files of a case Smith brought, but the information is not available on line.  To get this information, someone had to go to the Tax Court Public Files Office in D.C. or pay 50 cents a page for it to get it mailed out.  Who would do that?”

Pat Smith of Ivins Philips argued that Carl Smith’s abduction was invalid as a violation of the Administrative Procedure Act and looked forward to any court case that might overcome the limits of the Galactic Anti-Abduction Injunction Act.”

President Trump tweeted that “Regardless, the Trump campaign and Trump Administration did not speak to any of the aliens who abducted Smith.  There was NO COLLUSION.  Covfefe.”

Hillary Clinton noted that Carl Smith was a resident of Manhattan, a locale that voted overwhelmingly for her in 2016.  “Obviously, the aliens wanted someone smarter to probe.”

And Now a Quick Break from Procedure to Recognize Dorothy Steel

Guest blogger Bob Kamman picked up this story last week and the judicial conference slowed down our production line. This is a great story about a former revenue officer who has gone on to bigger (and better?) things with her career. It’s nice to see someone working in tax procedure collecting taxes having a good post-IRS career. Keith

Is there life after IRS? That’s a question that many writers and readers of this blog have likely asked ourselves. No one has a better answer than a 91-year-old former IRS revenue officer from College Park, Georgia.

“Hopefully, somebody who at 55 or 60 has decided, ‘This is all I can do,’ they will realize they have 35 more years to get things together,” Steel said. “Start now. It’s never too late. … Keep your mind open and keep faith in yourself that you can do this thing. All you have to do is step out there.”

That is a quote from her in this article in the Washington Post

“Dorothy Steel was born and raised in Detroit and eventually worked for the federal government as a senior revenue officer for the Internal Revenue Service for decades before retiring on Dec. 7, 1984 — a date she rattles off with impeccable memory,” the Post reports. The article adds, “she bounced around the world as part of her job.” So what has she done lately?

Proved, beyond a doubt, that if you can collect federal taxes you can do anything, even if you are an African-American woman north of 90 years old.

She is a scene-stealing actress in the current box-office blockbuster, “Black Panther.” It’s the 14th-highest grossing movie of all time, and moving up the list. She plays the role of a merchant elder. Acting experience? She started in community theatre for seniors when she was 88. At 89, she got an agent and began getting parts in television shows and commercials.

Steel turned down the chance to audition for “Black Panther” the first time she was asked, because she was not interested in some “comic-strip movie” and she didn’t think she could do an African accent. Her grandson, 26, explained to her that this was not just any comic strip. And she listened to hours of Nelson Mandela speeches on YouTube, to develop the accent. She agreed to the audition, and was asked to join the cast.

Yes, there is life after IRS. Some of us may even be fortunate enough, to have an income at age 91 that is as much as what Dorothy Steel will pay in taxes this year.

Using an Affidavit to Avoid Summary Judgment

We have been requested to notify you that the USD School of Law-RJS Law Tax Controversy Institute will take place this summer on July 20, 2018 at the University of San Diego School of Law Campus. Some PT guest bloggers will be speaking as will Chief Judge Paige Marvel of the Tax Court. For more information about the conference go here.  It is nice to have a conference that focuses on the issues discussed in this blog.

In United States v. Stein, the 11th Circuit reverses longstanding precedent in that circuit and allows a taxpayer to get past a summary judgment motion filed by the IRS and reach the jury. The decision may not result in a victory for Mrs. Stein in the long run but it allows her, and other similarly situated taxpayers (as well as litigants in non-tax cases), to put on their case.

As I will discuss further below, the concurring opinion of Judge Pryor in this en banc opinion provides a history lesson supporting the reasoning of the Court’s opinion and gives interesting insight into the relationship between the dreaded Stamp Act and Mrs. Stein’s ability to move past summary judgment.

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The IRS brings relatively few affirmative suits to collect. It does so when the amounts justify the expenditure of effort, the potential to actually collect exists, and, usually, the taxpayer’s cooperation with administrative collection efforts has been less than robust. In this case, the IRS sues Mrs. Stein seeking to reduce its assessment of approximately $220,000 to judgment. It alleged that she had unpaid taxes for 1996 and 1999-2002.

As is normal in these cases, the IRS submitted account transcripts showing her outstanding liabilities and an affidavit from an IRS officer supporting and explaining the transcripts. It moved early in the case for summary judgment based on this information. Mrs. Stein, in response, filed an affidavit in which she stated that to the best of her recollection she paid the taxes at issue. Her affidavit addressed each year in turn with such a statement; however, it did not contain any corroborating evidence of payment.

The district court granted the IRS summary judgment concluding that the evidence presented by the IRS created a presumption that the assessments were correct and that Mrs. Stein “did not produce any evidence documenting said payments.” Her lack of documentation did not allow her to overcome the presumption of correctness. So, the district court determined there was no genuine dispute as to any material fact making the IRS entitled to summary judgment as a matter of law.

She appealed the district court’s decision to the 11th Circuit but lost her appeal. She requested en banc review of the decision. The en banc review resulted in a reversal of the prior decisions in her case and a reversal of Mays v. United States, 763 F.2d 1295 (11th Cir. 1985). In reversing, the panel examined FRCP 56 which governs summary judgment and determined that “nothing in Rule 56 prohibits an otherwise admissible affidavit from being self-serving. And, if there is a corroboration requirement for an affidavit, it must come from a source other than Rule 56.”

The panel states that it makes no difference that this is a tax case. The same summary judgment standard applies in tax cases as in other areas of the law. Doubling back to its earlier statement on corroborating, the panel says Rule 56 simply has no such requirement and that “a non-conclusory affidavit that complies with Rule 56 can create a genuine dispute concerning an issue of material fact, even if it is self-serving and/or uncorroborated.” Of course, this does not mean Mrs. Stein will win her case – far from it. Unless she obtains some proof of her payment of the liabilities or finds a basis for attacking the assessments beyond the statements in her affidavit, I expect she will lose in the end.

Getting past summary judgment is still a big deal. It allows her to gather evidence in support of her payments she may not have done before and it allows her to tell her story to a jury which is where Judge Pryor’s concurrence comes into play.

Judge Pryor states that he writes “to highlight the irony of our earlier precedent when viewed in the light of the history of the Seventh Amendment.” He explains that in the decades before the American Revolution, parliament grew tired of American juries which held for American interests in tax case. So, it expanded the jurisdiction of the Admiralty Courts, which sat without juries, to include trade cases even though those cases would have resulted in jury trials in England. It later expanded the jurisdiction of Admiralty Courts in America to cover matters involving the Sugar Act and the Stamp Act, seeking to avoid “friendly” juries in America.

The colonies strenuously objected to these measures and the right to a jury trial became one of the chief complaints leading up to the revolution. It became an issue in the Constitutional Convention as well and Alexander Hamilton wrote about it in the Federalist Papers. He equated the granting of summary judgment in these circumstances to the type of behavior that our forefathers sought to avoid in overthrowing the yoke of British rule. Judge Pryor’s concurring opinion is a good read for history buffs and perhaps for any lawyer wanting to know more about the origins of American law and how to craft an argument.

By seeking en banc review, Mrs. Stein not only overturned three decades of 11th Circuit precedent but got us a history lesson as well. I wish her the best in finding proof that she did pay the taxes so that her story has a happy ending.  Perhaps, if victorious, she will celebrate by drinking some tea and reflecting fondly on our forefathers.  I would like to expand Judge Pryor’s logic to beat back the government’s current view of the Flora rule where taxpayers such as Mr. Larson are denied an opportunity to even step into court to dispute their tax liability without shelling over millions and millions of dollars.

 

2018 Tax Law Changes: IRS Releases Withholding Calculator

The changes to the individual income tax effective for 2018 will be fully felt next filing season. As paychecks start rolling in for employees, IRS has released an online withholding calculator that will allow people to adjust withholdings to reflect the changes.   The old withholding system was based largely on personal exemptions. The new law, ostensibly at least for the next eight years, eliminates the deduction for personal exemptions and dependents.

In its place, among other changes, the new law doubles the standard deduction, boosts the child tax credit and lowers the tax rates.

These changes will for most taxpayers lower federal income taxes; to adjust withholding to minimize serving up an even larger interest free loan to Uncle Sam taxpayers should submit a new Form W 4 with their employers.

The online calculator will allow people to enter information, including projected income and eligibility for credits like the CTC and EITC, to see if they should prepare a new W4. Of course, if taxpayers do nothing, and the law reduces taxes, the effect will be just a greater refund next year. Yet, as some have noted, not everyone wins under the new law. An article in the WSJ from earlier this year points out for families who have older kids that have aged out of CTC eligibility but who would have qualified as dependents, the new law may in fact increase taxes and a failure to adjust withholdings may leave those taxpayers short and potentially subject to penalties. Our blogging friends at Surly Subgroup in a post by Sam Brunson made a similar point.

The loss of the dependency exemption will also impact individuals who do not have social security numbers since they can no longer claim the child tax credit and it will impact and taxpayers who previously claimed dependents who were qualified relatives since these dependents do not create a child tax credit to offset the loss of the exemption.  Taxpayers with dependents that will not generate the child tax credit need to carefully consider the withholding tables and the tax impact of the changes on their 2018 return.  Because this aspect of the new law does not receive as much attention as the tax cuts, an unpleasant surprise could be waiting for many taxpayers next filing season and for the IRS.  If even a small percentage of taxpayers under withhold that previously over withheld, the IRS could find many more accounts in the collection stream with all of the additional work that entails.  Getting the withholding amount correct seems like a small thing but it can have significant downstream consequences for taxpayers and the IRS.

I do not have much else to add other than to note that the online calculator does not require individuals to add identifying information that would potentially allow IRS to associate a taxpayer’s entered (or deleted) information with the taxpayer. That is key for privacy. I get a little antsy when I get a reminder email from an airline or retailer when I have not followed through with a purchase after submitting some information (e.g., an email from Southwest reminding me that flights were still available to West Palm Beach as I had explored fares to escape the endless winter here in Philadelphia). I suspect the government could have a keen interest in taxpayers who fiddle around with a withholding calculator, just as IRS would have interest in taxpayers and preparers changing information when preparing returns on tax software, especially for items that are not subject to information reporting or withholding.

 

 

The Perils of a Discredited Appraisal: Critical Insights on Kollsman v. Commissioner

We welcome guest blogger Cindy Charleston-Rosenberg, ISA CAPP. Cindy is a past President and Certified Member of the International Society of Appraisers (ISA), the largest professional organization of qualified appraisers in the United States and Canada.   She is an experienced expert witness and writes and presents widely on advanced appraisal methodology issues. Cindy is active in industry activities to raise awareness of the critical importance of meaningful appraiser qualification standards. She provides insight on things we should consider in hiring an expert witness in order to avoid problems of qualification or bias. Keith 

A US Tax Court ruling has brought the perils of a discredited art appraisal into sharp focus. In the Estate of Kollsman v. Commissioner, the court rejected a premiere auction house appraisal for bias and absence of objective support. Relying almost exclusively on the IRS expert, the court concluded a $2,400,000 value for the disputed artwork. (The estate had valued the artwork at $600,000, the IRS at $2,600,000). Kollsman illustrates that preeminence in the auction business, or in another art-related profession, is not adequate assurance of appraisal expertise or competency. As Keith Fogg thoughtfully covered in a previous Procedurally Taxing blog post, an expert who has or is seeking any involvement in the sale or purchase of the subject of an appraisal can signal an obvious and avoidable conflict of interest.

Beyond bias, this post explores exposure in failing to select a relevantly credentialed expert, who will submit fully supported, impartial testimony and reports, allowing their opinions to be confidently embraced by the IRS and the courts. Those who practice tax law where the value of art is at issue may be held liable for failing to secure a qualified expert who can competently support contested value. Therefore, lawyers offering estate planning services should be familiar with established, meaningful, credible and defined appraiser qualification criteria when vetting personal property appraisal experts.

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In contrast to the disregarded expert witness offered by the estate in Kollsman, the IRS expert whose opinion prevailed and was found qualified, was a properly credentialed appraiser. Credentialed appraisers are trained and tested in appraisal standards, ethics and methodology, have had sample reports vetted through peer review, and are more likely to submit a full and impartial expert analysis.

In rejecting the appraisal offered by the estate in Kollsman as “unreliable and unpersuasive”, the court found profound deficiencies in competency as well as independence:

  • Absence of comparable market data: The court found it “remarkable” that the opinion was not supported by the comparable sales price data consistently found to be significant in prior cases, or that “any objective support” was offered to support the valuation figures. “He effectively urges the Court to accept them on the basis of his experience and expertise. We have no basis for doing so”.
  • Exaggerated discount for condition. In rejecting the wholly unsupported opinion of diminution of value based on condition, the court believed any reasonable investigation of condition impacts on value would, at a minimum, include an opinion from a qualified conservator.
  • Direct conflict of interest: The expert provided his fair market value estimates simultaneously with a solicitation for exclusive rights to auction the paintings if they were to be sold. The court found this to be a “significant conflict of interest that could cause a reasonable person to question his objectivity”.
  • Direct financial incentive: The court believed the expert was acting with incentive to undervalue estate tax liability in exchange for an agreement to benefit from selling the property. Judge Gale’s language was strong on this point, finding: “a direct financial incentive to curry favor” by providing “lowball estimates that would lessen the Federal estate tax burden borne by the estate”.

The Appraisal Foundation’s 2018 Personal Property Appraiser Qualification Criteria

The appraisal of art is a recognized professional discipline, distinct from other types of art market expertise, with clearly defined credentialing standards. When engaging an art appraisal expert it’s critical to assert the same diligence employed in engaging any other expert witness, which includes understanding the professional criteria specific to the discipline of appraising.

In the United the States, The Appraisal Foundation (TAF) is the foremost authority on the valuation profession. Under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), Congress authorized The Appraisal Foundation as the source of appraisal standards and qualifications.  TAF’s Appraiser Qualifications Board (AQB) is responsible for developing appraiser qualification standards for the real estate and personal property professions. TAF’s Appraisal Standards Board (ASB) issues and updates The Professional Standards of Professional Appraisal Practice (USPAP). Together these standards help ensure a trustworthy level of professional competency. After five years of research and analysis, including input from the credentialing sponsoring organizations, TAF issued an updated and more stringent Personal Property Appraiser Qualification Criteria, which is in effect as of January 1, 2018.

TAF sponsoring professional personal property organizations are required to adhere to these criteria when credentialing members. The International Society of Appraisers, The Appraisers Association of America, and The American Society of Appraisers maintain public online registries where the expert’s specialization, level of credentialing and current USPAP compliance may be accessed and confirmed.

Suggested Standards of Professional Responsibility in Vetting Appraisers and Expert Reports

  1. Require a current credential issued by one of the three TAF sponsoring personal property appraisal organizations. Members of the qualifying organizations earn their credentials through a rigorous admissions, training and testing process. They are required to comply with IRS and AQB guidelines, adhere to a code of ethics, are subject to oversight, and continuing education requirements. Before attaining Accredited or Certified status, members must submit appraisal reports to a stringent peer review process. These qualifications support competency, accountability and a commitment to professionalism. Consult the public registries of the qualifying organizations to ensure current credentialing. The International Society of Appraisers, the Appraisers Association of America, and The American Society of Appraisers.

 

  1. Appraisal reports should be well-supported. Every appraisal submitted to assist in determining tax liability has the potential to become the subject of litigation. The IRS Art Appraisal Services (AAS) is staffed by experienced appraisers, tasked with protecting the public from abuse in valuation resulting from inadequately supported appraisal reports. The IRS Art Appraisal Services is part of the IRS Office of Appeals. All AAS reviewers have been trained in appraisal methodology by one of the three TAF Sponsoring organizations and comply with USPAP continuing education requirements. The AAS is distinct from the IRS Art Advisory Panel. The members of the Art Advisory Panel are renown art experts, scholars and gallerists who serve without compensation.

Reports for objects of significant value should be supported by comparable sales data, relevant expert opinions, and a well-reasoned objective justification for each value conclusion. In response to IRS guidance, this is a required reporting component of all three TAF qualifying organizations for any object valued above $50,000. At a minimum, all appraisal reports should also disclose the approach to valuation and methodology employed, intended use, definition of value, markets explored, any conditions limiting assignment results, extraordinary assumptions, and scope of work.

  1. Appraisal reports should be comprehensive. IRS Publication 561, Determining the Value of Donated Property, outlines a Preferred Object Identification Format for Art Valued over $50,000. The suggested appraisal format includes a complete physical description of the object, including size, materials or medium, subject matter, name, nationality and life dates of the artist, signatures or other identifying inscriptions or markings, date of creation, provenance (history of ownership), condition, literature references and exhibition history. The IRS also recommends the appraiser exercise due diligence in confirming authenticity. The appraisal must include professional quality photographs of the subject properties. The IRS Preferred Object Identification Format for Art Valued over $50,00 defines “Art” as including paintings, sculptures, watercolors, prints, drawings, ceramics, antiques, decorative arts, textiles, carpets, silver, rare manuscripts, historical memorabilia, and other similar objects. This format essentially applies to all personal property.
  1. Appraisals submitted to the IRS should address how the appraiser meets the IRS Appraiser Qualification Criteria, and acknowledge civil liabilities associated with a grossly inaccurate valuation. The Pension Protection Act of 2006 ((PPA), P.L. 109-280, at §170(f)(11)(E)), codified the definition of a qualified appraiser and qualified appraisal report. The PPA strengthened the professional requirements a qualified appraiser must meet, specifically identifying organizational credentials, experience, and professional-level coursework. All IRS appraisals are required to include a statement of how the appraiser meets the IRS qualification criteria.
  1. Appraisals should include a signed and dated certificate of compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). This certification must confirm that the assignment was not predicated on a pre-determined result. The certification should include a statement that the appraiser is compliant with the current version of USPAP (2018-19)
  1. The Uniform Standards of Professional Appraisal Practice (USPAP) is not a credential. USPAP sets critical ethics and reporting standards, but it is not a credential. An individual who promotes as “USPAP Certified” displays a superficial understanding of the standards of their own profession, because USPAP does not certify. The qualifying personal property organizations issue credentials. USPAP training and compliance is a 15-hour foundational course with a 7-hour bi-annual continuing education requirement. It is a required, but rudimentary component in achieving and maintaining an AQB compliant credential.
  1. Experts should be objective and disinterested. The PPA specifically disqualifies individuals who would have a conflict of interest in the outcome of the appraisal. An expert should do nothing that would cast doubt on the impartiality of their opinion.
  2. Contingent fees are prohibited by USPAP. The Ethics Rule of USPAP prohibits contingent fees without exception. An appraiser must not accept an assignment, or have a compensation arrangement for an assignment, that is contingent on a predetermined value result, based on a percentage of value, or attainment of any advantage (e.g., the appraiser will broker or sell the subject property).

In summary, preeminence in art sales or other art-related professions is not assurance of appraisal expertise or competency. In fact, an expert’s involvement in the sale and purchase of the subject artwork can undermine the perception of objectivity. Further, to manage the risk of a disqualified expert, appraisers should meet recognized professional standards for qualification and competency, including active credentialed membership in one of the three TAF qualifying organizations. In Kollsman, the appraisal credential of the IRS expert was referenced in the opinion.

Professional Qualification Criteria for Personal Property Appraisers are developed by The Appraiser Qualifications Board of The Appraisal Foundation. The standard is rigorous, meaningful, easily accessible to opposing parties, and is clearly defined. Qualification to AQB standards is the accepted minimum professional standard.

The three major appraisal organizations (TAF Sponsors) have united in a collaborative effort to inform the public of meaningful qualification standards. The Appraisal Foundation is in the process of developing a public campaign to promote these standards. Increasingly, it will be difficult for allied professionals to credibly overlook the qualifying standard of experts they customarily engage.

In the wake of Kollsman, it is critical for tax attorneys and tax and estate advisors who rely on expert appraisals to be familiar with appraiser qualification and reporting standards. Assertively vetting experts illustrates an advanced level of diligence, providing a critical, and often overlooked layer of protection for the clients we mutually serve.

 

 

 

 

 

Harry Potter and the Nominee for Commissioner

We occasionally write reminders that the comments to our posts provide a rich source of additional information. This is especially true when frequent commenter Bob Kamman takes hold of a topic and does the background research that we do not do. Bob has two comments on the post about Chuck Rettig, the President’s nominee for IRS Commissioner, that we are elevating to a post in order to make sure that a broader audience benefits from his work. It seems that, if confirmed, Mr. Rettig could indeed perform magic at the IRS as you will learn in reading Bob’s research.

In addition to the comments Bob made, we are receiving a lot of comments this month from individuals hurt by the way we carry out offsets under the current system. I wrote a post in December of 2015 on the topic of refund offset bypass that is our all-time most viewed post. Each year at this time, we get hundreds of hits every day from individuals searching the internet to try to understand why they are not receiving their refund or who seek to understand and use the bypass procedure in order to avoid the offset. Most often, the failure to receive the refund results from the offset of the refund to another federal or state obligation. This year we have received a number of comments from these individuals showing the harshness of the procedure because it frequently captures the earned income credit designed to provide a benefit to lift individuals, usually with qualifying children, out of the depths of poverty. Refunds of the earned income credit get offset just like “regular” tax refunds even though the purpose of these refunds differs significantly from the return of money paid into the system. The comments point to the need to rethink this system. Keith

As noted, some IRS observers believe the best choice for Commissioner of Internal Revenue is an experienced executive with public and private experience, while others believe the best choice is a lawyer with tax expertise and experience dealing with IRS from outside the system.

Both groups are wrong, of course. But until a tax law professor is nominated and confirmed, it might be best to alternate between the two types, as will happen when Charles Rettig earns Senate approval.

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Most tax professionals will consider it in his favor, that he has sat at his Beverly Hills desk or conference table to advise clients on litigation when they disagree with IRS. They may not have the same issues as those of us who deal with middle-class or low-income taxpayers, but the procedures and judges are the same.

I came across four Tax Court cases in which Mr. Rettig appeared. There is a win, a loss, and a draw. He even inspired some wordplay in an opinion by Judge Mark Holmes.

Here are the cases:

In Corbalis, 142 TC 2 (2014) blogged by Leslie Book at Mr. Rettig was one of four lawyers with whom the Tax Court agreed, ruling on a motion for summary judgment, that Tax Court review provisions of section 6404(h) apply to denials of interest suspension under section 6404(g). IRS had taken the position that the court review provisions of 6404(h) applied only to final determinations relating to 6404(e), dealing with abatement claims running from IRS ministerial or managerial mistakes. The Tax Court held that it does have jurisdiction to review an IRS determination that the suspension period does not apply.

This case illustrates that the wheels of justice often grind slowly. The case is still on the Tax Court docket. After the Court decided it has jurisdiction, the last filing is an October 26, 2016 status report filed by the petitioners. There are two related cases involving the same petitioners. In Docket No. 008220-13, the last filing is apparently the same status report. In Docket No. 027306-14, the petitioners filed a status report on September 1, 2017.

In Canterbury Holdings, TC Memo 2009-175 Mr. Rettig’s clients lost on the issue of whether $987,040 in LLC “management fees” were deductible, but won their argument that Section 6662 accuracy-related penalties should not be assessed. (Mr. Rettig was not involved in the preparation of the return. It was done by a KPMG partner who was a CPA and lawyer with more than 40 years of experience.)

Judge Holmes in a footnote gave some history of “limited liability companies,” even in 2009 a somewhat novel creature in tax litigation. But that was not until he used some equine references that frankly went over my head. It might be because “Canterbury” is the name of a horse racing track in Minnesota — not one with which I was familiar during my college days when I worked on a Chicago newspaper’s horse-racing results desk. Judge Holmes wrote:

“Christopher Woodward, David Teece, and Kenneth Klopp were partners in Canterbury Holdings, LLC. Canterbury mounted a takeover of an old New Zealand clothing company in 1999. Its ride turned rough, and the shell company that Canterbury was using had to pony up more money in 2000 and 2001 to make the deal go through. That money actually came from Canterbury itself, but Canterbury argues that these payments are deductible nonetheless. The Commissioner disagrees, and would also saddle Canterbury’s partners with an accuracy-related penalty.”

Then there are two estate-tax cases in which Mr. Rettig represented executors. The first, Estate of Trompeter, TC Memo 1998-35 contains many useful facts about the valuation of large coin collections, if you want to wade through its 68 pages. However, the petitioners lose on most, if not all points, and are assessed a penalty:

“After our detailed review of the facts and circumstances of this case, in conjunction with our analysis of the factors mentioned above, we conclude that respondent has clearly and convincingly proven that the coexecutors filed the decedent’s estate tax return intending to conceal, mislead, or otherwise prevent the collection of tax. We also conclude that section 6664(c) does not insulate the estate from this penalty; we find no reasonable cause for the underpayment, nor that the estate acted in good faith with respect to the underpayment. We sustain respondent’s determination of fraud.”

Keep in mind that even serial killers are entitled to competent representation.

The other estate-tax case is Estate of Gimbel, TC Memo 2006-270. In a 28-page opinion, Judge Swift listened carefully to the arguments of both sides concerning the valuation of a large block of publicly-traded Reliance Steel and Aluminum Company. The estate suggested a 20.72% discount, and IRS recommended only 8%. The Court’s solution was 14.2%. No doubt it was just coincidence that this was almost exactly halfway between the two positions.

Commissioner-designate Rettig should also be applauded for his history of media availability. Many tax practitioners are reluctant to speak to journalists about tax issues. Between 2000 and 2004, he was the go-to guy for columnists Kathy Kristof and Liz Pulliam Weston of the Los Angeles Times, whose financial-advice columns were widely syndicated to other newspapers.

In May 2004, for example, Ms. Kristof quoted him in a column about IRS efforts to settle “Son of Boss” cases by waiving penalties for those who voluntarily settled. Mr. Rettig told her, “If you look at the effort of trying to chase those people versus opening the door and letting them come in, this makes a lot of sense.” Commenting on other amnesty programs, he added “there are a lot of wannabe taxpayers who just don’t know how to get back into the system. When you provide some incentive for people to come forward, you find a tremendous number of folks step up to the plate.”

In August 2000, he had offered Ms. Weston some rather colorful advice: “If the taxpayer buries his head in the sand and ignores the liabilities, as the saying goes, the only place left in the air to kick is going to [get] hurt. No one should wait for the IRS to knock on their door before attempting to rectify the situation.”

In May 2008, Mr. Rettig was quoted by Tom Herman of the Wall Street Journal in an article headlined “Offshore-account holders bite their nails.”

“People are having trouble sleeping at night. They don’t want to go to prison.” . . . If you have an offshore account with unreported income, you “should definitely be worried,” says Mr. Rettig, who represents a number of clients with such accounts. And if you have an account in Liechtenstein, you should “lawyer up immediately.”

A final note: in December 1997, Charles and Susan Rettig of California, pro se, filed a Tax Court petition at Docket No. 023484-97. The case was closed with a stipulated decision in December 1998. Visitors to the Tax Court archives in Washington may be able to determine whether these Rettigs are related to the current nominee.

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More about Charles Rettig, including his membership in the Academy of Magical Arts, here and his history of political contributions, here.