Data from ABA Tax Section Meeting

February 8-10 the Tax Section held its mid-year meeting in San Diego. Here are a few items of interest from the meeting concerning the Tax Court, the Department of Justice Tax Division, the revocation of passports and the National Taxpayer Advocate’s annual report.

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Tax Court

The Court had about 22,000 cases pending at the end of October. It continues to close cases faster than it receives them. There are three openings at the moment to fill the empty seats on the 19 judge roster of the court and there are three nominations pending. I got the impression from a separate conversation that perhaps the nominations would move forward in late March based on the current schedule in the Senate. Tax Court nominations go through the Senate Finance Committee rather than through the Judiciary Committee. In addition to the three current openings, Chief Judge Marvel reported that she anticipates the possibility of three additional openings on the Court this year because one judge will turn 70 – the mandatory age for Tax Court judges and the point at which a Tax Court judge turns into a senior judge or retires altogether – and two judges come to the end of their 15-year terms. Chief Judge Marvel observed that it is possible that the makeup of the Court will change by almost 1/3, depending on how the administration deals with the judges whose terms are expiring, and that would be an extraordinary amount of turnover for the Court. (Some administrations have almost automatically reappointed Tax Court judges as their terms expired and some have almost automatically replaced judges as their terms expired. We will soon find out how the current administration approaches the matter.)

Department of Justice

The Tax Division of the Department of Justice was ably led by Dave Hubbert for many months while it was without a political appointee. Dave continues to serve as the deputy in charge of Civil Matters as he did, since 2012, before he was acting as the head of the Tax Division. On December 17, 2017, Richard Zuckerman joined the Tax Division as the Deputy Assistant Attorney General for Criminal Matters and became the Division’s Principal Deputy in charge of the Division. Read more about him here. The Tax Division has three priorities for the coming year: 1) offshore compliance; 2) employment taxes; and 3) return preparers. These priorities are not especially new but continue as areas of emphasis in enforcing the tax laws.

Passports

I attended a panel discussion devoted to the enforcement of the provision which will revoke or deny a passport for individuals with seriously delinquent tax debt. The principal panelist was Drita Tonuzi, the Deputy Chief Counsel for Operations. Drita has held this position for almost one year. So, the panel could hardly have been more authoritative. We have discussed this issue before here and here. The IRS will certify taxpayers to the State Department if the taxpayer owes more than $50,000 and their CDP rights are exhausted, except for taxpayers who fall into certain statutory and administrative exceptions.

The statutory exceptions listed in IRC 7435(b)(2) include debts being paid in an installment agreement (IA) or offer in compromise (OIC) on which the taxpayer is up to date, debts being contested in a Collection Due Process (CDP) hearing and in an innocent spouse request. The manual also notes that the IRS will not refer taxpayers currently serving in a combat zone because of the suspension of action against these individuals in IRC 7508(a). The IRS has created a list of eight administrative exceptions in IRM 5.1.12.27.4 which it published on December 12, 2017. These exceptions are cases in currently not collectible status; cases involving identity theft; cases in which a bankruptcy case is pending; debt of a deceased taxpayer (the IRM specifically limits this exception to the deceased taxpayer himself or herself and makes me wonder how many of these taxpayers have concerns about their passports but I will refrain from making further remarks on this exception); pending OICs and IAs; pending adjustments that will fully pay the liability and taxpayers residing in a disaster zone.

The panel indicated that the letters would be going to the State Department “soon,” which may mean before the end of February.

When the IRS sends a certification to the State Department that a taxpayer is seriously delinquent, it simultaneously will send a letter to the taxpayer. This letter, which will be sent by regular (not certified) mail to the taxpayer’s last known address will give the taxpayer the opportunity to file a petition in Tax Court to contest the decision. The taxpayer has the right to file a petition in Tax Court or in the District Court. The panel stated that the time to go to court is open-ended. It also speculated that most taxpayers will go to District Court because of the desire for speed that would not be afforded under normal Tax Court procedures. The panel stressed that the IRS is just one part of this process and the State Department is the place where the denial or the revocation of the passport occurs. For IRS procedures, look at IRM 5.1.12.27.

National Taxpayer Advocate’s Report

I was extremely glad that the government shutdown that occurred during the Tax Section meeting lasted only a few hours. Had the shutdown continued, I was slated to attempt to fill in for the National Taxpayer Advocate on a couple of panels and that would not have been good for those attending. Since the shutdown ended, the National Taxpayer Advocate was able to deliver the presentation about her report. This will be a glancing blow on the topics covered and I hope to have some individual posts regarding some of the topics needing a longer discussion.

One of her findings this year concerned the reports we have become accustomed to hearing that the IRS audits less than 1% of the returns filed. In her annual report and her discussion, she debunked this myth by pointing out the actual number of returns on which the IRS makes adjustments approaches 7%. She also pointed out that 76% of audits are done by correspondence and that we should be focusing on not just the number of contacts made by the IRS but the nature of the contacts. The contacts are an opportunity for the IRS to educate and to bring taxpayers into long-term compliance but contacts by correspondence have much less of a chance of accomplishing this purpose.

The IRS has decided that it has authority to do retroactive math error adjustments. In 2017, there were a number of filers who used ITINs without updating them as instructed. Chief Counsel has issued an opinion that nothing prohibits retroactive math error adjustments. The IRS intends to send such notices to the individuals who used invalid ITINs in 2017 and then just summarily assess liabilities against the individuals who received refunds.

The 2017 filing season was the first one in which the IRS held up refunds in which the taxpayer sought refundable credits until February 15th. The purpose of the delay in issuing the refunds until that date was to give the IRS time to match third-party data against the returns to cull out bad refund claims. By February 15th, the IRS still did not have the data it needed in order to perform the match with respect to many taxpayers. If the employer or other third party submitted the information returns by paper, the IRS did not have time to transfer that information into its digital file in order to perform the match. The NTA recommends reducing the number of employees, from 50 to 5, an employer can have and still use paper.

The NTA also talked about the new “Purple Book” that was issued as a part of her report. The color was chosen as a blend of red and blue to signify the bi-partisan nature of the legislative suggestions. The book puts together the suggestions from a compilation of suggestions made during the period of the NTA’s service in that position and it provides the suggestions to Congress in a ready to use format. The NTA credits Ken Drexler, who heads up the legislative liaison work in her office, for the idea but noted that its inclusion caused a lot of additional work for the staff. Two of the provisions in the book were passed by Congress during the Tax Section meeting and I will talk about those provisions in a separate post.

 

Follow up to Some Interesting Sources on Tax Legislation (and a Little Procedure Too)

We have previously offered some suggestions for readers wanting additional insights on the major tax legislation Congress pushed through and President Trump signed into law last week. Here are some more interesting reads:

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An update on the must read The Games They Will Play article that describes how the “final law introduces fundamental—and in our view insurmountable—structural problems to the income tax.” This is I think the most important tax article of the year and an essential read.

Tax and twitter maestro Professor Andy Grewal suggests that 2017 prepayment of 2018 property taxes may not generate a 2017 deduction;

Professor Ellen Aprill explains in a guest post on Medium why the new law imposing a 21% excise tax on highly paid University employees has a hefty technical glitch that seems to unintentionally exclude employees of public universities;

Forbes tax blogger Tony Nitti on the 20% deduction on pass through income, a major source of future game playing (and complexity). This is terrific;

Professor Sam Brunson over at Surly discussing the implications of the repeal of deductions for dependents as well as the trade offs from the law’s boosting the standard deduction and increasing the CTC. An important read for low and moderate income families—the comment exchange is also good;

A Law360 piece on another of the law’s big winners: tax professionals;

Professor Dan Shaviro offering some preliminary thoughts on the international provisions;

And finally on a completely unrelated topic, if you have had enough substance and want some procedure, Frank Agostino and his team have a new monthly tax controversy journal out, and it includes a practical and important discussion of the about to be implemented passport revocation rules.