Leslie Book

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Chamber of Commerce Files Amicus in Facebook Case: In Praise of Appeals

The Chamber of Commerce, no stranger to cases challenging fundamental issues in tax procedure, has filed an amicus brief in the case I discussed earlier this week where Facebook is suing IRS due to the agency denying Facebook access to Appeals.

The amicus largely repeats the substantive arguments Facebook has made though emphasizes 1) the importance that taxpayers place on ensuring access to a fair and impartial Appeals function and 2) the cost to the system if IRS is allowed to bypass Appeals when it in its unreviewable discretion believes that decision is consistent with “sound tax administration.”

The brief highlights how taxpayers value privacy (uhh a privacy argument  in a case involving Facebook?) and unlike cases in federal court, Appeals proceedings are outside the public eye. The brief also discusses how Exam is kept in check by Appeals’ mission to settle cases fairly and on the hazards of litigation, a balancing act that Exam does not apply in evaluating possible resolutions:

Taxpayers no longer can feel confident that they will have access to an independent forum to serve as a safety valve on an overzealous examination team. Taxpayers and examination teams alike may focus more energy on convincing IRS Counsel whether it is in the interests of “sound tax administration” to permit access to IRS Appeals at the expense of devoting effort to developing the merits of the issues in the case. The effects of Revenue Procedure 2016-22 will be felt far beyond those cases in which access to IRS Appeals is actually denied.

The brief also emphasizes the Chamber’s view that IRS is trying to carve out a different path and extend dreaded tax exceptionalism:

The IRS continues to resist application of the APA, arguing in this case that “Congress has provided specific rules for judicial review of tax determinations; those specific rules control over the more general rules for judicial review embodied in the APA.”


Whatever the underlying merits of the IRS Appeals process, and Facebook’s claims in this case, it is nonetheless astonishing for the IRS to argue in its Motion to Dismiss that it has the authority to deny taxpayers access to an independent administrative forum in an arbitrary and capricious manner, and that taxpayers that are adversely impacted by those actions have absolutely no judicial recourse. Whatever one can say about the goals of “sound tax administration,” a system in which the IRS is above the law—the very same law that applies to all administrative agencies of the federal government—is not one that the Supreme Court has approved and is not one that this Court should approve.

The Chamber brief hangs its hat in part on the argument that the courts have been pushing back on tax exceptionalism. That to me is atmpospherically relevant, but it proves too much: administering the tax system is different from say regulating noxious emissions or ensuring airplane safety.  The devil is in the details of the particular procedures or path IRS believes warrant a separate approach.

IRS has not helped itself in this case though by promulgating essentially a standardless standard that allows Counsel to bypass Appeals that as the brief indicates allows Counsel to “mask illegitmate reasons for denying access to Appeals.” Even if in this case the reason for cutting off access to Appeals is legitimate, the lack of guidance on what should inform or explain that bypass decision generates a perception of illegitimacy, and that is not sound tax administration.


Facebook Asserts that TBOR Mandates Right to Appeals

Facebook and IRS are squaring off in Tax Court over billions in taxes relating to its transfer of intangible assets to Irish subsidiaries. That fight has spawned major procedural side skirmishes in a California federal district court, including battles over privilege and IRS’s refusal to allow the social media giant access to Appeals.

Perhaps in a later post I will return to the interesting privilege battles. This post is about the important legal issues in Facebook’s challenge to the IRS’s rules that allow Counsel discretion to eliminate a taxpayer’s right to Appeals.


In its complaint that it filed last November, Facebook seeks a declaratory judgment that IRS unlawfully issued a 2016 revenue procedure that unlawfully denied its access to an administrative forum. IRS began its audit of Facebook in 2011, and Facebook repeatedly sought Appeals consideration. After Facebook declined to extend the SOL on assessment for a sixth time because IRS did not agree to provide a timetable for Appeals consideration, IRS issued its stat notice. Facebook petitioned to Tax Court and renewed its request for Appeals consideration. IRS refused, referring to the 2016 revenue procedure that allowed Counsel to bypass its right to Appeals review in its transfer pricing deficiency case in the interest of “sound tax administration.”

The case tees up Appeals role and whether taxpayers have the right to Appeals’ consideration in light of developments over the last two decades. Prior to 1998, it was generally accepted that the right to Appeals was discretionary, and the product of IRS procedural rules that IRS was not required to follow. The pre-1998 Code barely acknowledged Appeals’ role in tax administration.   When we rewrote the Saltzman and Book IRS Practice and Procedure chapter on Appeals (currently slated for another refresh this summer) we discuss how the 1998 IRS Restructuring and Reform Act of 1998 (RRA 98) changed that through a host of Code provisions that directly mention Appeals and an off Code but still statutory directive to IRS to ensure an independent Appeals function. In addition, the 2015 codification of TBOR in Section 7803(a)(3)(E) requires that the Commissioner ensure that IRS employees be familiar with and act in accord with taxpayer rights, including the “right to appeal a decision of the Internal Revenue Service in an independent forum.”

In its response to government’s motion to dismiss Facebook argues that RRA 98 and Section 7803(a)(3)(E), taken together, mean that IRS is not free to cut off Appeals’ rights as it has done via the revenue procedure (and as an aside in the IRM when it allows for bypassing Appeals in cases designated for litigation). In making its argument, Facebook claims that TBOR itself creates a substantive right. In response to the IRS view that Section 7803(a)(3)(E) does not directly provide a remedy for violations, Facebook argues that when Congress explicitly directs agency action (as it argues was done with Appeals consideration), an agency cannot dismiss that as meaningless. In addition, Facebook claims that Section 7803(a)(3)(E) justifies the court ordering a remedy for agency violations, through Supreme Court precedent that courts should not read language in statutes as “mere surplusage.”  This argument syncs with our recent guest post on the subject.

The government makes a number of arguments in response, including that TBOR merely expresses general principles and does not create binding rights, the TBOR reference to an independent forum refers to judicial and not administrative review, and that in any event Facebook does not have Article III or statutory standing to bring the litigation.

The matter is scheduled for a hearing in April. We will keep a close eye on this litigation.

Even apart from this case, the broader issue of the role of taxpayer rights in tax procedure is an issue that is picking up steam and is likely to become one of the major issues in tax procedure in the next few years. On PT Christina Thompson recently discussed Alice Abreu and Richard Greenstein’s article on taxpayer rights (which flags some of the issues in this litigation). In addition, Keith and I will be on a panel at the Tax Court judicial conference in Chicago later this month that will consider taxpayer rights, and in May Alice and I will be moderating two panels at the ABA Tax Section Individual and Family Tax Committee and Pro Bono and Tax Clinics Committee that will consider rights in controversies and include more on the Facebook litigation. One of the main promoters of taxpayer rights in tax administration, Nina Olson, is convening the third International Taxpayer Rights Conference in May.

Boo Boo Busted: Alabama Man Sentenced to Thirty Years for Role in ID Theft Tax Refund Fraud Schemes

Earlier this month, the Department of Justice announced in a press release that William Gosha III, who went by the nickname Boo Boo, was sentenced to 30 years for his role as mastermind in a brazen identity theft ring that resulted in the filing over 8,800 fake tax returns and the receipt of over $9 million in bogus refunds.

The case stands out both for its scope and impact. Co-conspirators included an employee of a hospital in Fort Benning, Georgia, who stole US soldiers’ identities and Social Security numbers. The soldiers’ information enabled Boo Boo and co-conspirators to file fake returns claiming phony refunds, including for soldiers who were stationed in Afghanistan.

The scheme also reached other government agencies, as co-conspirators included an employee of the Georgia Department of Public Health and Georgia Department of Human Services. Gosha also arranged to steal identities from inmates at a local prison and conspired with a US Postal Service employee to get physical addresses for refunds when financial institutions limited his ability to get refunds directly deposited in bank accounts.

Thirty years seems on the high end for sentencing for a crime such as this though I doubt that many schemes have had this deep a reach with other government agencies. In addition, the victim impact statements, including a statement from a parent of a soldier whose identity was stolen and who heard from the IRS while her son was in Afghanistan, must have had a major influence on the sentence:

This news was devastating to think that my [] 19-year-old son[,] who was defending the very freedom this country stands [for] [,] was wronged by one of those people [he] was willing to die for. My whole family could not believe what was happening. We now had to worry about this terrible act by one of our own. As I tried my best to keep composed and handle all of the gruesome mounds of paperwork to get this straightened out with the IRS, [my son] was then denied his tax refund [as result of this scheme]. This created a financial hardship on [him]. We were too afraid to tell [him] while he was deployed because we did not want to worry him and we wanted him to focus only on getting home alive and not have to worry about such an atrocious act by someone who did not even know

Last month IRS announced that in 2017 it has been very successful in cutting back on identity theft based refund fraud. Key indicators show that IRS has turned the tide in the battle:

  • In 2017, the IRS received 242,000 reports from taxpayers compared to 401,000 in 2016 – a 40 percent decline. This was the second year in a row this number fell, dropping from the 677,000 victim reports in 2015. Overall, the number of identity theft victims has fallen nearly 65 percent between 2015 and 2017.
  • The number of tax returns with confirmed identity theft declined to 597,000 in 2017, compared to 883,000 in 2016 – a 32 percent decline. The amount of refunds protected from those fraudulent returns was $6 billion in 2017, compared to $6.4 billion in 2016. In 2015, there were 1.4 million confirmed identity theft returns totaling $8.7 billion in refunds protected. Overall during the 2015-2017 period, the number of confirmed identity theft tax returns fell by 57 percent with more than $20 billion in taxpayer refunds being protected.

As this DOJ Press release shows, identity theft is not a victimless crime. While IRS and its private sector partners are making major headway the problem is still plaguing hundreds of thousands of people, causing direct costs on them and on all of us in the form of significant IRS resources dedicated to this fight.

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.



Government Seeks Reversal of District Court Decision That Invalidated PTIN User Fees

One of the more interesting cases from last year was Steele v US, where a DC district court upheld regulations imposing a PTIN requirement for preparers but held that the IRS did not have authority to require preparers to pay a user fee for obtaining or renewing a PTIN. In Steele, the District Court in invalidating the fees largely relied on the reasoning in Loving, and applied the Independent Offices Appropriations Act (IOAA) which authorizes agencies to charge fees for “a service or thing of value provided by the agency.” The lower court essentially held that the IRS’s fees were a backdoor attempt at regulating return preparers, stating that IRS “may not charge fees for PTINs because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority” after Loving.

The government appealed, and it just filed its opening brief.


The main argument that the government makes on appeal is that the district court failed to appreciate the service and value associated with obtaining a PTIN:

The PTIN provides a special benefit to tax return preparers because, as even the District Court held, it is required by statute and regulation to lawfully prepare returns for compensation. If a return preparer does not obtain a PTIN and provide it on returns he or she prepares, the preparer is subject to penalties of up to $25,000 per year, I.R.C. § 6695(c), as well as to being enjoined from preparing returns, I.R.C. § 7407. Return preparers comprise only a tiny fraction of the U.S. population, and the members of the general public who are not preparers have no occasion to request PTINs and receive no direct benefit from their issuance to those individuals who are return preparers. The issuance of PTINs thus provides a special benefit to the recipients of the PTINs, and therefore the IOAA authorizes the IRS to charge a user fee for PTINs.

In addition the government emphasized that the PTIN program helps “to protect preparers’ SSNs, which was Congress’s purpose in authorizing the IRS to create and mandate the use of the PTIN.”

The government on appeal attempts to separate the PTIN requirement from the regulation regime that Loving struck down. In so doing, the government emphasizes that while PTINs played a key role in that ill-fated regulatory regime (essentially only registered or licensed return preparers were eligible for a PTIN in the pre-Loving world) PTINs have a value and role that is distinct from regulating preparers.

As readers may recall, the district court’s conclusion mooted the alternative argument that the user fees IRS charged were excessive. If the government prevails on appeal, that issue will resurface.

Stay tuned.

For a prior post on Steele see here

Scamming Taxpayers: 2018 Version

IRS has released information this week about the latest twist on identify theft related tax scams. This scam involves thieves who access personal client information from preparers, and then submit fraudulent tax returns claiming a refund. The funds arrive via direct deposit in a legitimate bank account. The thieves then pounce on the unsuspecting refund recipient, leaving messages detailing how the IRS has issued an erroneous refund and in order to correct the situation the individual must send the cash to a collection agency. Some versions of the scam threaten criminal prosecution; others threaten a so-called blacklisting of the individual’s social security number.

IRS notes that new versions of the scam are appearing; it all stems, however, from thieves compromising personal information from a preparer’s client files. Earlier this month, IRS reminded preparers on ways to secure data.

All of this reminds me about the generational shift in  tax preparation and filing and how technology has changed the dynamics, mostly for the better but in its wake creating 21st century problems and legal issues. We have discussed the effects of this shift, including recently in Delinquency Penalties: Boyle in the Age of E-Filing, where we looked at an amicus brief the ACTC filed in Haynes v US. That case tees up if a taxpayer who uses an authorized e-filer expecting that the return be timely filed can avoid a delinquency penalty if in fact there was an error in the processing of the e-filed return but the IRS or the preparer did not notify the taxpayer of the error in time to fix the glitch.

For more on the changes in tax administration relating to the shift, I recommend a review of the Electronic Tax Administration Advisory Committee (ETAAC) annual reports; recently that group has shifted its focus to more directly include security issues generally and identity theft tax refund fraud in particular. The 2017 report discusses what IRS, working with private sector and other government partners, has done and its progress in recent years. As this week’s IRS news release indicates, IRS efforts to secure the tax system from creative and motivated thieves is a little bit like whack a mole; one scam disappears and a new one pops up in its place.



Spotlight on IRS Guidance: A Look at Recent Blog Posts on How Agencies Communicate

Subtitle: And a Nudge to Look at the National Taxpayer Advocate Purple Book’s Proposal to Formalize the NTA in the Rulemaking Process

Last week I attended an outstanding presentation on the recently enacted tax legislation that Tal Tigay, Brian Volz, Cuyler Lovett, Brian Thaler, and Howard Gavin (all from PWC) gave for the Villanova Graduate Tax Program. The Power Point presentation  summarizes the new legislation’s main individual, corporate, and international provisions. The presentation included review of the legislative process that led to a number of substantive decisions in the legislation and covered how any technical changes legislation will not be able to rely on a simple majority in the Senate to pass, but instead will need 60 votes for cloture to avoid a likely filibuster.

There are  numerous areas where the legislation is in need of further clarification. My colleague Professor Ed Liva, Director of the Villanova Graduate Tax program, noted in his introductory remarks that in today’s charged environment in DC, it may be difficult to get the 60 votes in the Senate to get a technical corrections bill passed, putting even greater pressure on IRS and Treasury to get guidance out in the form of regulations or less formal guidance.

The pressing need for tax guidance in light of the legislation leads me to a fascinating series of posts from our blogging colleagues at Notice & Comment, which last week hosted an online symposium on how agencies communicate.


As part of that series, there are three posts sweeping in IRS: one by Professor Andy Grewal called Involuntary Rulemaking that discusses IRS use of less formal guidance like Chief Counsel Advice, a post by Professors Susan Morse and Leigh Osofsky called How Agencies Communicate: Introduction and an Example, discussing how IRS sometimes fills the gap in regulations and less formal advice by using examples, and Interim-Final or Temporary Regulations: Playing Fast and Loose with the Rules (Sometimes), a post by Professor Kristin Hickman discussing Treasury’s use of temporary regulations. All of the posts are worth a careful read, as does Professor Bryan Camp’s outstanding post a couple of weeks ago in Tax Prof called Treasury Regulations and the APA that looks at the Tax Court’s opinion in SIH Partners v Commissioner involving an APA challenge to longstanding regulations under Section 965. (Bryan’s post is part of a series of posts he regularly places on Tax Prof called Lessons from the Tax Court; for tax procedure types the series is a must read).

Today I will focus on Professor Hickman’s Notice & Comment post. In her post she notes how Treasury has skirted pre-promulgation APA notice and comment requirements with what she believes is an excessive use of temporary regulations (an issue we have discussed on PT in the context of the Chamber of Commerce challenge to the temporary anti-inversion regs). Calling the practice short-sighted, Professor Hickman laments that “post-promulgation notice and comment are an inadequate substitute for pre-promulgation procedures that themselves are already a second-best proxy for the legislative process.” Adding to the concern, Professor Hickman notes that social science research suggests that once a decision has been made and Treasury is administering a regulation it is less likely to change gears and respond to comments.

Professor Hickman’s comments have broad appeal, especially among  administrative law scholars who might find Treasury’s use of temporary regulations (or interim final regulations in admin law speak) to be an outlier agency practice. The argument also finds a soft landing spot among those who may not like the IRS, for both legitimate and perhaps less legitimate reasons.

Perhaps because I come at the issue more from the perspective of thinking about agency rulemaking as it applies to individual taxpayers, and especially lower income taxpayers, when reading Professor Hickman’s post I thought of the recent National Taxpayer Advocate (NTA) Report and its Purple Book. The Purple Book is a concise summary of suggestions that the NTA believes will strengthen taxpayer rights and improve tax administration. One of the NTA’s recommendations is that Congress should amend Section 7805 to require that IRS/Treasury should be required to solicit comments from the NTA when it promulgates regulations. And for good measure, the NTA proposes that Treasury should have to address those comments in the preamble to the final rules.

This mirrors a proposal I made when I last wrote a longish article about Treasury’s rulemaking process, in the 2012 Florida Tax Review’s A New Paradigm for IRS Guidance: Ensuring Input and Enhancing Participation.  I made a similar suggestion to amend Section 7805, drawing on Section 7805(f), which requires Treasury to solicit input from the Small Business Administration when proposed rules were likely to have an impact on small business taxpayers. I noted that the absence of participation is particularly troubling for rules that have a likely impact on those the agency is less likely or able to consider in the first instance (such as low income taxpayers or other taxpayers without much voice), and that the tax system would be better if there were a more formalized role for proxies like the NTA that could ensure all voices and views are before the agency.

The NTA proposal is a bit more nuanced than mine, as in my article I pegged the requirement to Treasury promulgation of final regs, while the Purple Book proposal adds that the requirement should also apply when Treasury is contemplating issuing temporary regulations.

The increasing attention around IRS’s rulemakng practice is likely to be intensified given the pressing need for guidance following the passage of the sweeping tax legislation. While it seems unlikely that Congress can in a bipartisan way approach the issue from an agency best practices perspective, perhaps the tax legislation’s passage will nudge the IRS to reflect further not just on the public’s need for guidance but also think about the process it uses get that guidance to the public.



Flora and Preparer Penalties: Preparer Two Weeks Late to File Suit in District Court

As we move into tax season, it is worth remembering that IRS has a significant arsenal of civil and criminal penalties to address misbehaving preparers. I recently came across a federal district court case, Bailey v. United States that discussed an exception to the Flora full payment rule for preparers subject to penalties for preparing tax returns or refund claims that have understatements stemming from unreasonable positions or willful/reckless conduct. For preparers, that penalty can be fairly sizeable, as under Section 6694 the amount of the penalty is the greater of $1,000 for each return or refund claim ($5,000 if the understatement is due to willful or reckless conduct) or 50% (75% for willful/reckless conduct) of the income derived by the tax return preparer with respect to the return or claim for refund.


These penalties are not subject to the deficiency procedures, meaning that if IRS examines a preparer and determines that the preparer’s conduct in preparing the return or refund claim warrants a penalty, the preparer will generally have to pursue a refund suit to guarantee judicial review of the penalty. (I’ll skip the CDP discussion on this, a topic we also have discussed, which turns on whether a preparer has previously had an opportunity to dispute the penalty through its rights to have Appeals consider the matter).

We have often discussed the Flora rule, which requires full payment to ensure jurisdiction for a refund suit. Flora presents a considerable barrier, especially for moderate income persons subject to the penalty but also stemming from the fact that some civil penalties, including the variety of penalties preparers are subject to, can be very significant; Keith has written about that before here, suggesting perhaps it is time to rethink Flora in light of the impact and potential unfairness of requiring full payment to get a court to review the Service’s penalty determination.

Bailey implicates an implicit statutory exception to Flora for the 6694 penalties. IRS asserted $70,000 in penalties due to what IRS felt was his willful or reckless conduct. As per Section 6694(c)(1), if a preparer pays at least 15% of the Section 6694 penalty within 30 days of IRS making notice and demand, the preparer can stay collection and file a refund claim. Section 6694(c)(2) also provides that if a preparer fails to file suit in district court within the earlier of (1) 30 days after the Service denies his claim for refund or 30 days of the expiration of 6 months after the day on which he filed the claim for refund, then paragraph (1) of Section 6694(c) no longer applies. That suggests that a preparer can avoid the full payment rule; to that end see note 1 of the 2016 Bailey opinion, discussing the logical Flora implication of Section 6694(c)(2).

In Bailey, the preparer paid $10,500, or 15 percent of the penalty within 30 days of the IRS notice. He filed a refund claim on March 28, 2014. At the time of the suit, IRS did not deny the claim. Thirty days after the expiration of 6 months (and a day) from the time he filed his claim was October 29, 2014. Bailey filed his refund suit in district court on November 12, 2014. That filing was two weeks late, and he no longer was eligible to take advantage of the exception to Flora.

Because the preparer missed the deadline, the district court granted the government’s motion to dismiss the suit. The failure to comply with the time requirements in Section 6694(c)(2) meant that absent the preparer’s full payment of the penalty, the district court did not have subject matter jurisdiction over the suit. Because the dismissal was without prejudice, the preparer could cure his error by fully paying the balance and refiling his complaint.

Instead of full paying, the preparer filed another action in federal court in 2017; this time, the suit alleged personal misconduct among IRS employees; in light of a motion to dismiss the preparer filed a motion to substitute the US as a party to the suit and restated his allegations that his conduct did not warrant a penalty. In November of last year the court dismissed that suit.