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Where Have Tax Court Deficiency Cases Come from in the Past Decade?

Posted on Jan. 28, 2022

Almost 95% of the cases in Tax Court involve deficiency procedures.  You can see the Court’s description of the numbers and kinds of cases it receives here on p. 21.  The National Taxpayer Advocate’s annual report provides a look at where the deficiency cases have come from over the past several years in a chart from page 198 of that report.  Here it is:

Figure: Screen-Shot-2022-01-27-at-8.36.09-PM.png

It comes as no big surprise that the bulk of Tax Court cases come from Correspondence Examination, which means that the bulk of Tax Court cases are from low or lower middle-income taxpayers, which means that the bulk of Tax Court petitioners are pro se. Another graph the NTA displayed in her report shows this very well. See here:

Figure: Screen-Shot-2022-01-27-at-8.37.16-PM.png

Looking at the chart about the types of cases that come to Tax Court also allows you to see that when the recent blog post showed that Appeals’ percentage of settled cases is declining, this means that it is failing to settle the cases of low income taxpayers.

There could be multiple reasons for that, not all of which have anything to do with the effectiveness of Appeals. Low income taxpayers may be less likely to settle cases because they don’t know how to use the system to its fullest and also don’t know whether something is a good settlement or not. Appeals may also be uncomfortable settling cases that will heavily turn on the testimony and the credibility of a witness they cannot see across the table. As the mix of cases is skewing more and more to the lowest income, least represented segment of the population, Appeals has struggled to keep up its settlement numbers.

There is a tight correlation between the types of people the IRS examines and the cases that come to the Tax Court. This is not a news flash. I witnessed a huge swing in the types of cases coming into a field office in Chief Counsel during my three decades. Undoubtedly, the mix of cases will continue to change as the IRS prioritizes different work and as Congress passes laws or provides funding that also change priorities and possibilities. Related to this, see the recent announcement from Chief Counsel that signals a possible big shift in the cases it will work:

Issue Number:    IR-2022-17

Inside This Issue

IRS Chief Counsel looking for 200 experienced attorneys to focus on abusive tax deals; job openings posted

WASHINGTON – The Internal Revenue Service’s Office of Chief Counsel today announced plans to hire up to 200 additional attorneys to help the agency combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes.

“Combating abusive tax transactions that threaten to undermine our tax system remains a top priority for our enforcement efforts,” said IRS Commissioner Chuck Rettig. “It’s critical we work to ensure a fair tax system and adding these new attorneys will help us in on our ongoing efforts in this arena.”

These positions will be available around the country, and the IRS encourages qualified candidates to apply. The first announcements for these positions have already been posted on USAJOBS. Interested persons should apply today or as soon as possible via the following announcements:

– Large Business & International Positions: USAJOBS – LB&I Attorney Announcement

– Small Business/Self Employed Positions: USAJOBS – SB/SE Attorney Announcement

– Technical Positions: USAJOBS – Technical Job Announcement

Promoters have been particularly active developing and marketing tax shelter schemes that purportedly enable taxpayers to avoid paying what they legally owe. These new hires will help the IRS manage the increasing caseload in its multi-year effort to stamp out these abusive schemes and ensure that those participating in them pay the tax they owe plus penalties.

“This is an excellent opportunity for attorneys with experience in litigation, partnership tax law and planning complex transactions to join the Office of Chief Counsel and make a real difference for our tax system,” said Principal Deputy Chief Counsel William M. Paul.

These positions will be available in more than 50 locations, including Washington D.C. Those hired will provide legal advice to IRS professionals as they conduct audits of complex corporate and partnership issues and increasingly sophisticated and abusive transactions. The Chief Counsel office, working closely with IRS and the Treasury Department, provides world-class litigation and substantive tax training for all experience levels.

New hires will work in a variety of areas, including handling cases in the United States Tax Court, as well as serving on trial teams in our largest and most complex trials involving fact and expert witnesses, depositions and multi-week trials. They will also work with the Department of Justice Tax Division, which handles refund cases in district courts and the Court of Federal Claims.

Others hired will serve in the IRS national office with a focus on developing global regulatory solutions to the most sophisticated and abusive transactions and providing highly specialized advice to IRS litigation teams.

Abusive syndicated conservation easement deals remain a major focus for the IRS. These transactions generally use inflated appraisals of undeveloped land and partnerships devoid of legitimate business purpose designed to generate inflated and unwarranted tax deductions.

“Bogus syndicated conservation easement transactions undermine the public’s trust in private land conservation and defraud the government,” Rettig said. “Putting an end to these schemes is imperative.”

Abusive micro-captive insurance arrangements also remain a key focus of IRS enforcement. These deals are generally sold to owners of closely held entities. The deals commonly lack many of the necessary attributes of insurance, have excessive premiums, insure highly improbable risks and have no connection to genuine business and insurance needs.

These are just some of the abusive schemes that the new hires will be working on.

Paul noted that there are numerous advantages to joining Chief Counsel. The Office of Chief Counsel has successfully transitioned in response to the Covid-19 Pandemic. Chief Counsel is currently in full telework mode and will have a competitive telework policy going forward.

To learn more about these opportunities, visit IRS Office of Chief Counsel | IRS Careers. The mission of the Office of Chief Counsel is to serve America’s taxpayers fairly and with integrity by providing correct and impartial interpretation of the Internal Revenue laws and the highest quality legal advice and representation for the Internal Revenue Service.

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