On June 24, 2016, the GOP published “A Better Way – Our Vision for a Confident America” which sets out its vision of a new improved tax system for the United States. Now that the GOP controls the levers of power, the blueprint it published last summer has more significance in the national debate. If you have take time to read proposed legislation, which I do not often do, the document is a pretty quick read and has some nice pictures. Even though PT does not devote much time to proposed legislation, the blueprint contains a curious but little defined provision concerning tax litigation. I want to talk about that aspect of the blueprint because Congress already created a system designed to handle small cases almost 50 years ago and I wonder what causes Congress to want to fix that system.read more...
When the blueprint gets to tax administration, it proposes the following:
A New IRS for the 21st Century
A New Tax Administrator for a New Tax Code
An integral element of this Blueprint will be to rebuild the IRS into a modern and efficient 21st century administrator of the nation’s tax system. The new IRS will have a streamlined structure aligned with the simpler and fairer tax system for families and individuals and businesses of all sizes.
Streamlined Taxpayer Service Agency
With a dramatically simpler tax code, the Blueprint will create a new streamlined IRS dedicated to delivering world-class customer service. The new IRS will be centered on three major units: families and individuals, businesses, and an independent “small claims court” unit.
- The families and individuals unit will focus on providing state of the art customer service so that taxpayers can get efficient help and answers to their tax questions.
- The business unit will focus on administering the new tax code for businesses of all sizes and types, including specialists with expertise on the issues facing start-up entrepreneurs and small businesses and specialists with expertise on the issues facing large domestic companies and American-based global corporations.
- The “small claims court” unit will be independent of the new IRS. This will allow routine disputes to be resolved more quickly, so that small businesses no longer spend more in legal fees to resolve a dispute with the IRS than the amount of tax that was at stake.
Together, these three units will be the core of the new IRS’s commitment to Service First. Each will have an efficient and accountable workforce specially trained to handle matters relevant to taxpayers in their particular area of responsibility. And each of these units will have access to a modern taxpayer records system and internal communications that are secure and comply with record-retention requirements.
Making small claims court one of three units of the IRS is astonishing to me as a reorganizational concept. While it is described in one place as one of the units of the IRS, it is then described as independent of the IRS. The clarifying description makes it sound something like the Tax Court which has a small tax case procedure created by IRC §7463. So, I am left wondering what is new and why the GOP thinks that a new procedure for resolving small claims is so important that it makes it into a grouping of only three units in the reorganization of the IRS.
The Tax Court was, for almost the first 50 years of its existence, more like an independent part of the IRS than a separate court. It was housed for much of that time in the IRS national office. I had the good fortune during a small part of my tenure with Chief Counsel’s office to occupy the former office of the Chief Judge of the Tax Court. The office is a corner office in the national headquarters building of the IRS at 1111 Constitution Avenue and the office is located directly below the office of the IRS Commissioner. Like the Commissioner’s office, it came with its own private bathroom. It was a nice office for a government attorney. When Congress made the Tax Court an Article I court in 1969, it appropriated funds for the court to have its own space which it does now in the Judiciary Square section of Washington.
So, in 1969 Congress made the Tax Court truly independent of the IRS and it created a procedure for small claims cases. For a greater discussion of the background of the changes in 1969 you can read “The History of the Tax Court – An Historical Analysis” (available for purchase here or can be viewed online here) by Washington and Lee Law School Dean Brant Hellwig. What then makes the GOP so unhappy about the small claims provisions that it lists this as a third prong of the tax reorganization process? The blueprint offers only a few clues. It talks about allowing routine disputes to be resolved more quickly. While wanting more speed in the resolution process is a good thing, it is not something that most of my clients complain to me about. I see two relatively cheap and easy ways in the current model to achieve more speed in the resolution of small tax cases. One is to require Appeals to meet with the taxpayer shortly after the case is at issue. Currently, Appeals may take several months before it gets to a docketed case. During that time, some taxpayers who were gung ho about their case at the time of filing the petition seem to lose interest. For that reason, I would like to see Appeals involved much quicker For the purpose of achieving the goal of the blueprint early meetings would mean, in many cases, early resolution. Currently, the vast majority of Tax Court cases settle and settle with Appeals. Getting the taxpayer to meet with the Appeals Officer quickly after the case is filed would speed up resolution. To achieve this goal, Appeals may need additional resources and it may benefit from a legislative mandate to quickly meet with the taxpayer after the case is at issue. This would be the single biggest way to speed outcomes in the current system.
A second way to speed resolution of small cases is to expand the use of bench opinions. I have written about bench opinions before and guest blogger Andy Grewal has written about them also. Many small cases involve issues that the judge can decide almost immediately if the judge has time. The current system in the Tax Court requires that the judge issue the bench opinion before the calendar session ends during which the case is heard. Tax Court judges usually like to end the sessions as quickly as possible since that allows them to return home and saves the government money on travel expenses. Changing the Tax Court rules to allow bench opinions during a short period of time after the end of the calendar would allow the judge to render a bench opinion without having to prolong the calendar in the city where it is heard and give the judge the benefit of working side by side with their clerk in drafting the opinion. This would make bench opinions more normal, rather than opinions that occur only when a calendar is prolonged and the judge is able to make time without a trial in the city of the calendar. This could reduce the time of the decision in small cases from several months to several days or a few weeks in the cases susceptible to bench opinions. In her remarks at a recent ABA conference, Special Trial Judge Leyden expressed a desire to use bench opinions to the fullest extent possible for the very purpose of giving the taxpayer a quick answer after trial. Because this can occur without a change in the existing statute, IRC §7459, which does not limit the time for issuing bench opinions, it is a relatively easy fix, although undoubtedly involves other considerations within the Court regarding its practices. Bench opinions do have the ability to detract from the uniformity of decisions the Tax Court was created to promote.
In creating the small claims court, the GOP blueprint also expressed concern that it was needed “so that small businesses no longer spend more in legal fees to resolve a dispute with the IRS than the amount of tax that was at stake.” Small businesses can use the existing small tax case procedure of the Tax Court when their tax dispute is less than $50,000 for a tax period. They can do so unrepresented, as do 70% of the litigants at present. Nothing really keeps them from moving forward under the present system without hiring a representative, but the small business will face the same problems under the present system or a new system of winning the case, or achieving the best outcome, without representation. Unless Congress is proposing to expand low income taxpayer clinics (LITCs) to allow them to represent businesses, small businesses with tax disputes making it uneconomical to hire a representative will still go before whatever body resolves the case either unrepresented or pay more for the representation than the amount in dispute. Currently, IRC §7526 limits LITCs to representation of individuals. I am not campaigning for an expansion of LITC scope into coverage of certain business entities, but providing some form of congressionally supported representation is the only way to solve the problem for small businesses whose tax issue does not involve enough liability to justify hiring a professional. These taxpayers get a fair hearing before the Tax Court at present. It is hard to imagine a new tribunal that would improve the fairness of the hearing and I know of no way to resolve the fee issue without providing this group with some sort of free or subsidized representation similar to the representation currently available to low income taxpayers.
It is interesting that the blueprint focuses on small tax cases as such a big part of the administrative fix of the system. The current system could be changed to speed the process in the ways I described and other ways such as sending out the Tax Court judges more often, which would require more judges. I am surprised that this was identified as such a big problem and will follow with interest how it is resolved.