Temple and Gonzaga Seek Tax Clinicians

Professor Alice Abreu from Temple Beasley School of Law has passed on the news that Temple has an opening for a clinic position. There is no subject matter limitation; the position will be part of the Sheller Center for Social Justice, and the Committee is  interested in considering applications from individuals who propose to establish and run a tax clinic. More information about the Temple position can be found here.

Professor Ann Murphy from Gonzaga also has passed on information about an opening in its existing tax clinic. Gonzaga seeks applicants for a three-quarter-time Lecturer in its Federal Tax Clinic, with flexibility to serve in other areas as needed by the clinical program. More information about the Gonzaga position can be found here.

As the leaves start to fall here in the northeast it is hard to believe that we are now into the third decade of the federally funded low income taxpayer clinic program. For those wanting context Keith wrote a terrific article about the history of tax clinics; a recent blog post from the NTA touts the 20th anniversary of federal matching funding, puts the program in perspective and highlights some recent tax clinic successes.

Villanova Seeks to Hire Faculty Director of Graduate Tax Program

Villanova is seeking to fill a faculty position and is in the process of a national search for a new Faculty Director of the Graduate Tax Program. The Graduate Tax Program is jointly run by the Law School and School of Business, and offers a Masters of Laws for lawyers and Masters in Tax for accountants.

The program is innovative and includes an extensive suite of online classes and classes on the ground. Villanova is looking for an experienced practitioner with teaching experience and management skills.

More information about the position as well as information on how to apply can be found here.

Some Tax Court Geography

We welcome back as a guest poster frequent commenter Bob Kamman.  Those of you who are regular readers of the blog know that Bob has a sharp eye and an inquisitive mind. He saw in a designated order post the statement by the National Taxpayer Advocate that her office is looking to add a tax clinic to Hawaii. Drawn to the beautiful islands, Bob began to do his research about the tax issues he might face should he seek to establish a low income taxpayer clinic (LITC) in that state. I think he is sharing the information in case there are other readers who might also be interested. As you can see from our prior post, Hawaii is not the only state looking for an LITC. Keith

The seas are infested with sharks. The land is scorched by flowing lava. It is no place for a young person. But volunteers are needed. So in the twilight of my tax years, I could accept the risks. The National Taxpayer Advocate has asked for help with establishing a low-income taxpayer clinic in Hawaii, and I am ready. I understand grant money is available.

First, of course, I checked out whether there is really a need for tax help in the middle of the South Pacific. Does federal enforcement of tax laws really extend that far?

One measure of need (and there are probably better ones) is the number of Tax Court petitions filed from a place. The Tax Court website provides an easy, although somewhat inaccurate count. A “Docket Inquiry” yields the number of petitioners from each state. Of course, in many cases there are two names for each petition because of joint returns, or multiple petitions for the same issue, if partnerships and their members are counted.

Yet you can imagine yourself at the Tax Court door, watching about 100 people file their petitions each business day (mostly, by mail or delivery service), and asking, “Where do they all come from?”
And it is of some interest, at least to me, if there are geographical differences in the origins of these tax disputes.

So here are the results of my research. I started with the 2017 rank by population of each state, along with the District of Columbia and Puerto Rico. And then I found how many petitioners came from each location, so far this year.

This method works for most states, but not the ten largest by petitioner count, because the Tax Court docket inquiry function lists only the first 500. So those were ranked according to earliest date of the first 500 petitions.

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What stands out from this table is that nothing much stands out. With few exceptions, the results are about what you would expect.

Some states rank five or six places lower in petitioner count than in population rank. It is not unreasonable to assume that compliance levels are higher in them: Kentucky, Alabama, North Carolina, West Virginia, Indiana, Nebraska, Wisconsin and Maine. Or, you could assume that a higher percentage of rural residents discourages trips to Tax Court trial sites.

Delaware ranks five places higher, and Maryland eight places higher, in petitioners compared to population. Delaware is home to many corporations, but most file from some other state. The IRS Baltimore District used to administer Washington, D.C., also. Maybe the IRS staffing in Maryland is still weighted more heavily than needed.

And then there are the four contiguous Western states where petitioner rank significantly exceeds population rank: Utah, Nevada, Colorado and Arizona. What do they have in common? A low percentage of rural residents. Someone with more access to data than I have, should research what percentage of Tax Court cases are filed by taxpayers who live within a two-hour drive of the courthouse.

Of course, for most of Hawaii trial attendance requires a flight to Oahu. But there are still more petitioners in Hawaii, than in twelve other states; Washington, D.C.; and our Atlantic islands of Puerto Rico. Help is definitely needed. I am just waiting for a call.

Celebrating the 5th Anniversary of Procedurally Taxing

Today marks the 5th Anniversary of the first Procedurally Taxing post. As we have mentioned before, the blog is the brainchild of Les. He recruited Steve and me to join him in this endeavor as he recruited us to join him in working on the “IRS Practice and Procedure” treatise. When we met to discuss the blog prior to the first post, we anticipated that we might post once or twice a week. Before the end of the first year, we were posting almost daily, and we have tried to keep up the daily posting practice though there are days when we do not get our act together. Regular readers know our blog does not run like clockwork but rather operates based on the varying schedules of those of us trying to pull it together.

In the first post Welcome to Procedurally Taxing! Les wrote the following:

Welcome to Procedurally Taxing. Our blog will be a place where you can learn about important developments in federal tax procedure and tax administration, as well as occasional musings on general items that interest us. We started this blog because we want to be a site that readers can trust to learn about important developments. In addition, Keith, Steve and I are all involved in editing and rewriting books that deal with tax procedure; we are constantly reading and thinking about cases and administrative developments that may not jump out at the reader. We will highlight some of these less obvious developments and provide analysis and context reflective of our many years of practice in the area.

The most amazing stats of our first five years involve you. We have 1841 email subscribers to the blog. It has been 1825 days since we started. We have maintained a pace of approximately one additional email subscriber per day since the beginning of the blog. We know that readers access the blog through media other than email but the one additional subscriber per day stat has been a constant. You have accessed the web site slightly over 750,000 times since we started.

Some other stats about the blog:

– 373 guest posts written on a wide variety of topics which greatly enriched the blog

– 332 posts by Les, 372 by Keith, 164 by Stephen and 3 by Christine (plus 10 guest posts)

– 96 posts by frequent guest blogger Carl Smith

– 392 comments by frequent commenter Bob Kamman

In addition to bringing on Christine as a regular contributor, we have added regular bloggers Samantha Galvin, William Schmidt, Caleb Smith and Patrick Thomas, who comment on the Tax Court’s designated orders.

We hope that we have met our stated goal to keep you current on important developments in federal tax procedure and administration. We also have reported on less obvious developments and we have definitely provided our views on the developments.

As we mark this anniversary we invite you to comment on the blog – the good, the bad and the ugly. Tell us about anything that has made the blog useful or not useful to you and tell us how we can improve it going forward. Thanks for being our loyal readers. Our hats are off to you.

Eleventh Circuit Affirms Disgorgement in Tax Return Preparer Case

We welcome first time guest blogger Matthew Mueller. Matt practices in Florida representing individuals with tax issues and white collar crime issues. Prior to moving to private practice, he had the perfect background for the work he currently does. He represented the IRS in criminal prosecutions at the Department of Justice Tax Division, Criminal Section and then he moved to the United States Attorney’s Office in Tampa. He brings to this discussion of disgorgement over a decade of experience with these types of cases both inside and outside the government. Keith

As this blog has covered previously, the Department of Justice Tax Division has increasingly sought disgorgement from tax return preparers in civil injunction cases. This growing trend has been on display nationwide, but especially in the Middle and Southern Districts of Florida. While the government experienced some initial growing pains in court—see this prior post discussing an MDFL case in which the district court denied disgorgement—the effort to disgorge return preparers from their profits has continued. Last month, the Eleventh Circuit Court of Appeals issued an unpublished opinion in United States v. Stinson affirming the district court’s judgment entering a permanent injunction against the return preparer and affirming a $949,952.47 disgorgement order.   Armed with favorable appellate precedent, return preparers and owners of tax preparation businesses should expect to see the government continue this trend.

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What is disgorgement?

Disgorgement is an equitable remedy employed by courts to prevent unjust enrichment. Case law defining the contours of disgorgement has largely evolved out of civil enforcement actions brought on behalf of the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Federal Trade Commission (FTC). Relying on precedent from the securities fraud context, the Eleventh Circuit in Stinson described disgorgement as follows:

“Disgorgement is an equitable remedy intended to prevent unjust enrichment.” S.E.C. v. Levin, 849 F.3d 995, 1006 (11th Cir. 2017) (quoting S.E.C. v. Monterosso, 756 F.3d 1326, 1337 (11th Cir. 2014)). To be entitled to disgorgement, the Government need only produce a reasonable approximation of the defendant’s ill-gotten gains. See S.E.C. v. Calvo, 378 F.3d 1211, 1217 (11th Cir. 2004). “Exactitude is not a requirement; so long as the measure of disgorgement is reasonable, any risk of uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty.” Id. (quotation marks omitted and alterations adopted).

United States v. Stinson, 2018 WL 2026928, at *6 (11th Cir. May 1, 2018). The Stinson Court affirmed that disgorgement was an available remedy under Title 26, United States Code, Section 7402(a).

Having established the authority to disgorge profits from a return preparer, the Court in Stinson went on to discuss the boundaries of this remedy in, at times, conflicting terms. The Court first points out that disgorgement is limited to the amount the defendant “profited from his wrongdoing.” Id. At the same time, the Court also asserts that courts have accepted gross receipts as a reasonable approximation of disgorgement “in cases involving the operation of a fraudulent business.” Id. The theory being that “wrongdoers are not entitled to deduct costs associated with committing their illegal acts.” Id. While gross revenue in a wholly fraudulent business might be a reasonable approximation of ill-gotten gains or profit, the issue is more complicated when applied to businesses that engage in legitimate business activity in conjunction with the alleged instances of fraud. In those instances, the government must show a link between the disgorgement amount they seek and the alleged fraudulent transactions.

Another outer boundary applicable to disgorgement is the five year statute of limitations found at Title 28, United States Code, Section 2462 for “an action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture.” In 2017, the Supreme Court rejected the SEC’s argument that there was no statute of limitations for disgorgement in securities fraud cases. Kokesh v. S.E.C., 137 S.Ct. 1635, 1645 (2017). In applying the five-year statute of limitations in Kokesh, the Court stressed that disgorgement “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.” Id. at 1644. While the Court was addressing disgorgement in SEC cases in Kokesh, the rationale extends to disgorgement sought in tax preparer injunction cases in all significant respects.

How does the government prove disgorgement?

As the government has increasingly sought disgorgement in tax return preparer cases, district courts have predictably undertaken a highly fact-intensive inquiry into the amount of disgorgement sought. As a result, in United States v. Mesadieu the district court refused to order disgorgement because the government failed differentiate between compliant and noncompliant returns and asked the court to extrapolate from one tax year and one geographical area. 180 F.Supp.3d 1113 (M.D. Fla. 2016). Yet in Stinson, the very same district court judge in Orlando awarded $949,952.47 out of the greater than $1.5 Million sought by the government at trial. The trial in Stinson spanned six days and included testimony by more than 15 taxpayers and deposition testimony by 41 witnesses including taxpayers. That disgorgement figure included so-called “Category 1” calculations based on 1,861 returns containing unreimbursed business expenses on Schedule A. The total disgorgement amount also included “Category 2” calculations based on returns prepared by Stinson himself, as opposed to his employees. The Eleventh Circuit found these calculations reasonable and supported by the record.

The Eleventh Circuit also disposed of Stinson’s argument that disgorgement could only include fees from tax returns specifically proven to be false returns. The Court invoked as an analogy the United States Sentencing Guidelines–for the proposition that only a reasonable estimate was required:

Although this was a civil matter, in the analogous criminal context, the U.S. Sentencing Guidelines “do not require that the sentencing court calculate the amount of loss with certainty or precision … [but only] a reasonable estimate based on the available facts.” United States v. Bryant, 128 F.3d 74, 75-76 (2d Cir. 1997). As we have held, a trial court may extrapolate from available evidence, and such extrapolation may occur without interviewing every customer and preparer for every allegedly false or fraudulent return. See United States v. Barber, 591 Fed.Appx. 809, 823-24 (11th Cir. 2014).

Clearly, the government’s ability to prove disgorgement in a given case will depend on its ability to demonstrate patterns and to persuade the court to make reasonable extrapolations from known samples.

Conclusion

In addition to defending against possible injunctions, and criminal charges in select cases, tax return preparers will have to continue to contend with disgorgement for the foreseeable future. The Department of Justice undoubtedly hopes the pain of separating preparers from their profits will serve as an additional deterrent against business practices that do not otherwise appear to be on the wane. Restitution is available as a remedy in criminal preparer prosecutions, but even that has posed some problems for the DOJ and IRS, see here, for example. In the meantime, practitioners who represent return preparation businesses and their owners can learn from cases like Stinson and the more developed body of law in the securities fraud context for guidance on how disgorgement should and should not be computed.

 

 

 

 

 

 

 

Supreme Court Holds that SEC ALJs are “Officers” Who Need Constitutional Appointment

Frequent guest blogger Carlton Smith brings us an important development in Appointments Clause litigation that could have implications for employees of the IRS Office of Appeals. Christine

In Lucia v. Securities and Exchange Commission (June 21, 2018), in a 6-3 ruling, the Supreme Court held that Securities and Exchange Commission (SEC) Administrative Law Judges (ALJs) are “Officers of the United States” under the Constitution’s Appointments Clause (Art. II, Sec. 2, cl. 2), so need to be properly appointed by the SEC, not merely hired by SEC staff. In an opinion authored by Justice Kagan that was joined by all five Conservative Justices on the Court, the Court said that its holding was simply one required as a result of the holding in Freytag v. Commissioner, 561 U.S. 868 (1991), that Tax Court Special Trial Judges (STJs) are constitutional officers who need to be appointed pursuant to the Appointments Clause.

Since September 2015, I have been doing posts on the litigation leading up to the Lucia ruling (in chronological order, here, here, here, here, here, here, and here). In those posts, I have pointed out that the litigation leading to Lucia might have a significant impact on the ALJs that the Treasury uses to conduct Circular 230 violation hearings. Although I am not sure, I suspect that only Treasury staff, and not the Secretary of the Treasury (or any other Secretary) has hired those ALJs and that none has been appointed. I also noted that a ruling holding that SEC ALJs need to be appointed may cause the revisiting of the Tax Court’s holding in Tucker v. Commissioner, 135 T.C. 114 (2010), affd. on different reasoning, 676 F.3d 1129 (D.C. Cir. 2012), that Appeals Settlement Officers and their Team Managers conducting Collection Due Process (CDP) hearings need not be appointed.

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In Freytag, the Court held that STJs are “Officers of the United States” who need to be appointed and that the Tax Court Chief Judge was one of “the Courts of Law” to which Congress could delegate this power, since the STJs were “inferior Officers” under the Clause. In making its ruling in Freytag, the Court noted numerous powers of STJs that were similar to those of district court judges (who everyone conceded were officers under the Clause).

However, the Court created confusion in Freytag by also noting that Tax Court judges could enter final decisions in certain Tax Court cases, without review by a regular Tax Court judge. See section 7443A(c). This led to a split by lower courts as to whether SEC ALJs had to be appointed, since the SEC ALJs lacked power to make final decisions. An SEC ALJ’s ruling becomes final only if the SEC declines to hear an appeal from the ruling. In the Lucia case, the D.C. Circuit had followed its ruling in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), concluding that Freytag held that STJs needed to be appointed only because they entered final decisions in some cases. In Lucia, the Supreme Court (in footnote 4) called the finality mention in Freytag an “alternative holding”, with the primary holding being that STJs needed to be appointed based on their other powers. The Lucia footnote states that Freytag’s “primary analysis explicitly rejects JUSTICE SOTOMAYOR’s theory that final decision making authority is a sine qua non of officer status.” Thus, the Lucia Court rejected Landry’s interpretation of Freytag.

This point is important, since in its opinion in Tucker, the Tax Court held that Appeals Settlement Officers and their Team Managers conducting CDP hearings need not be appointed because they do not (in the Tax Court’s view) have the power to enter final decisions, as required by Landry’s interpretation of the holding of Freytag. The D.C. Circuit in Tucker, however, disagreed with the Tax Court and stated that the IRS personnel had effective final ruling authority in CDP. Instead, the D.C. Circuit in Tucker held that the Appeals personnel need not be appointed because the collection matters they ruled on were not important enough to need a constitutional officer and the tax liability determinations that they made were so restricted by Counsel’s supervisory authority that little discretion was exercised by Appeals personnel in CDP.

In Buckley v. Valeo, 424 U.S. 1 (1976) (per curiam) (involving the Federal Election Commission), the Supreme Court had held that an “Officer” under the Appointments Clause is one who exercises “significant authority” on behalf of the United States. The Lucia Court acknowledged that the “significant authority” standard provides little concrete guidance for how to decide other cases, and the Court did not want to provide more general guidance in Lucia as to what “significant authority” encompassed.

Instead, the Court in Lucia held that the SEC ALJs were so like Tax Court STJs that the holding of Freytag inevitably extended to make SEC ALJs Officers under the Clause. The Court in Lucia noted four powers of the SEC ALJs that were similar to those of Tax Court STJs: (1) taking testimony, (2) conducting trials, (3) ruling on the admissibility of evidence, and (4) having the power to enforce compliance with discovery orders. The Court held that these four powers alone were enough to make the ALJs constitutional officers, without deciding whether each of those four powers was necessary to a determination of officer status. The Court acknowledged that there were some differences between the two types of adjudicators (e.g., the STJs can enforce their discovery orders by contempt, whereas the ALJs can enforce those orders only by lesser means – such as barring the person from the hearing), but did not find these differences of constitutional significance.

This led to the question of remedy: The SEC has since appointed the various ALJs (including the one who decided Lucia’s case) and has purported to ratify all prior rulings entered by ALJs before they were appointed. But, the Court held that a person who brings a successful Appointments Clause challenge is entitled to a remedy, which, it in the past, the Court had held was a trial before an appointed officer. The Lucia Court wanted to make the remedy here one that encourages the brining of successful Appointments Clause challenges. Accordingly, the Court expanded on its prior case law and ordered a new hearing by either a now-appointed ALJ or the SEC itself, but not by the ALJ who originally decided Lucia’s case. The Court thought that the ALJ who decided Lucia’s case, whose underlying rulings had never yet been even criticized in a judicial opinion, would be too likely to simply reissue his opinion unchanged.

Justices Thomas and Gorsuch had joined the majority opinion, but Justice Thomas wrote a concurrence, joined in by Justice Gorsuch, in which he rejected Buckley’s significant authority test. He would have a less restrictive test: Anyone who held a continuing position in the government should be an officer, since that would have been the understanding of the drafters of the Constitution in 1787 as to what they meant by “Officer”.

Justice Breyer wrote a partially dissenting opinion in which he refused to decide the constitutional Appointment Clause issue. He thought that the language of the Administrative Procedure Act that authorized the SEC to appoint ALJs was simply enough to decide the case and that the SEC had not complied with its statutory mandate to appoint, rather than have the staff hire, the ALJs. Justice Breyer felt he could not decide the Appointments Clause issue without also deciding whether, in the event appointment was required, there would be another constitutional issue created concerning the limited for cause removal powers of those ALJs that the SEC possessed. The SG, when he changed the government’s Lucia position to argue that the SEC ALJs need to be appointed, had asked the Court to also decide whether a removal power issue was created if the ALJs needed appointment. The Court explicitly declined to write on removal power issues that might have been created by its ruling. The Court desired that lower courts consider any removal power issue before the Supreme Court is asked to consider it.

It is not clear to me that the Appointments Clause powers need to mesh constitutionally with removal power issues. However, in Kuretski v. Commissioner, 755 F.3d 529 (D.C. Cir. 2014), as counsel for the taxpayers, I had argued that another holding of Freytag – that the Tax Court exercised a portion of the Judicial Power of the United States – means that a for cause removal power applicable to regular Tax Court judges at section 7443(f) violates the separation of powers doctrine and so should be eliminated. There is clearly a reason for harmonizing the appointment and removal power questions, but it is not a foregone conclusion that anyone who exercises a portion of the Judicial Power of the United States, and so who needs to be appointed, cannot be removed by the President under a for cause removal power.

Justice Breyer also disagreed with the majority’s holding that the remedy should be a rehearing by an appointed ALJ or the SEC, but not by the ALJ who ruled after the original hearing. He thought that the remedy chosen by the Court was excessive. A rehearing before any appointed officer, he thought, would be enough of a remedy.

Justice Sotomayor wrote a dissent in which she was joined by Justice Ginsburg. Those two Justices also joined that part of Justice Breyer’s dissent that descried the remedy as excessive. But, Justice Sotomayor, in her dissent, also argued that the ability to render a final decision was a sine qua non of constitutional officer status under her reading of Freytag (which matched that of the D.C. Circuit both in Landry and Lucia). She wrote:

In Freytag, the Court suggested that the Tax Court’s special trial judges (STJs) acted as constitutional officers even in cases where they could not enter final, binding decisions. In such cases, the Court noted, the STJs pre­sided over adversarial proceedings in which they exercised “significant discretion” with respect to “important func­tion,” such as ruling on the admissibility of evidence and hearing and examining witnesses. 501 U. S., at 881–882. That part of the opinion, however, was unnecessary to the result. The Court went on to conclude that even if the STJs’ duties in such cases were “not as significant as [the Court] found them to be,” its conclusion “would be un­changed.” Id., at 882. The Court noted that STJs could enter final decisions in certain types of cases, and that the Government had conceded that the STJs acted as officers with respect to those proceedings. Ibid. Because STJs could not be “officers for purposes of some of their duties . . . , but mere employees with respect to other[s],the Court held they were officers in all respects. Ibid. Freytag is, therefore, consistent with a rule that a prerequisite to officer status is the authority, in at least some instances, to issue final decisions that bind the Government or third parties.

As noted above, though, the Lucia majority rejected this interpretation of Freytag.

As to the direct impact of Lucia on pending Tax Court cases, in my last post on Lucia on January 19, 2018, I noted that Florida attorney Joe DiRuzzo is again raising the Tucker issue (i.e., whether CDP Appeals personnel need to be appointed) in multiple Tax Court cases that would be appealable to other Circuits. Rulings on this issue have in essence been postponed (though not officially) pending the ruling of the Supreme Court in Lucia. Those rulings are now ready for the Tax Court to make.

I don’t know if there are any Circular 230 adjudications going on, so I can’t tell whether or how the Lucia opinion will affect current Circular 230 matters. I am not sure that future Circular 230 sanctions litigants will want to raise issues concerning the ALJs and Appointments Clause. And, of course, it is too soon for the Treasury to have decided whether to change its procedures and appoint its ALJs.

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.