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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law

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Many clients have been contacting me these past several weeks and asking what my take is on the IRS after the change in administration.   Will enforcement activities decrease as a result of the new president’s own rancor for the agency?  Or will the Service instead react like the intelligence community, digging in its collective heels and strengthening its entrenched bureaucracy, perhaps even resurrecting the more draconian tactics of past times?

The answer I have been offering to my clients is both frustrating and disturbing:  I really have no idea.   And I do not think anyone really does know what to expect.  Playing a wait-and-see game makes substantive tax planning difficult, and tax controversy representation even more challenging. 

If the new President, with a supporting Congress, follow through on advertised tax reform proposals, the overall rates will be lowered, saving money for middle and upper income taxpayers.  And if the Affordable Care Act is repealed (Obamacare), so goes the 3.8% surtax on investment income.  While it is uncertain if these changes will happen at all, it is even more unclear now whether they would become effective for the 2017 or the 2018 tax year, making the deferral-of-income strategy a difficult recommendation to counsel at this point.

foreign account disclosures, Chicago tax law attorneyThe IRS recently finished a four-year rollout of a law called FATCA: the Foreign Account Tax Compliance Act. Explicitly, it says "Americans being taxed on their total international income, all financial institutions are henceforth required to annually turn over all data they have on any American using their service. Failure to do so will lock an institution out of all American markets unless they instead choose to withhold 30 percent of that American's deposits for tax purposes." In other words, for global financial institutions, FATCA is one tax controversy you definitely want to avoid at all costs.

FATCA has had a transformative effect on the nature of international finance, creating a level of transparency almost unheard of previously. After Credit Suisse pled guilty to willful FATCA violations and paid a $2.6 billion fine, the rest of the banking world pretty much scrambled to line up and hand the IRS any and all financial data they had on Americans. It's been an extremely effective tool for the IRS to prevent individuals and corporations from hiding money overseas.

Personal Impact

Of course, that's the big picture. To an individual person, the net effect is there is now a very painful cost-benefit analysis to be performed if you have any meaningful amount of unreported cash or accounts offshore. Because almost every financial institution in the world is complying with FATCA, it's essentially only a matter of time before you're caught and penalties are assessed.

Fortunately, the IRS has also restarted the Offshore Voluntary Disclosure Program (OVDP), a program that allows both individuals and corporate entities to voluntarily report money held overseas in exchange for a (significant) reduction in penalties assessed in response to the discovery of those funds. Don't think the information they get from FATCA means you can skip filing your Foreign Bank and Accounts Report (FBAR); it's still a vital part of the reporting process along with several other forms.

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After a short but welcome honeymoon period during which the IRS absolutely reversed its decades-long historical resistance to granting offers, it now appears as if the agency has returned to its old ways, making offer in compromise again the most difficult alternative for a taxpayer to resolve his or her un-payable debts.

There is simply no doubt that Examiners of Offer in Compromise, and their Appeals Officer counterparts conducting Collection Due Process hearings, have adopted a more reductive, across-the-board scrutiny of offer proposals over the past several months in order to discourage taxpayers from pursuing them.  Here are just a few of the most obvious examples:

  1. Summary "returns" of offers – without appeal rights - when the OIC processing clerk unilaterally determines that the taxpayer is "not in compliance" due to insufficient estimated tax payments made for the current tax year.
  2. For cases in a specific Revenue Officer’s jurisdiction, field determinations that the offers are being submitted "for delay purposes", again resulting in summary returns of the offers, without any appeal rights.  And yeah, the IRS keeps the filing fee and 20% deposit.
  3. Offer Examiners disregarding the 12 month-multiple (and bank account/vehicle exemption offsets) when they determine that the taxpayer could "full-pay" over the remaining months left on the 10-year collection statute – an approach blatantly inconsistent with Offer in Compromise forms and instructions.

It’s hard to conclude that the IRS is employing these draconian measures for any reason other than that the examiners are being told by management that too many offers are being granted, too easily.  Whether this constitutes deliberate, justified enforcement policies, based on frustration with the never-ending flow of submissions by offer mills (many of which admittedly reek of frivolity), or perhaps a targeted response to the specific tactics adopted by those "tax debt relief" firms, there is no doubt that the IRS is making life harder for deserving taxpayers who seek the fresh start promised by the offer in compromise program.

To be sure, we are still getting most offers granted on behalf of our clients.  But the environment has become much less inviting, and we often spend significant time persuading offer examiners to not arbitrarily prejudge the taxpayer and his or her unique situation.  The unintended consequence of these policies is that, when a taxpayer is represented by a knowledgeable, committed tax attorney, there is more, rather than less, managerial involvement and overall time spent on the offer processing.   Clearly, not what the IRS wants or needs at this point.

This rant is a little different, a True-False quiz to test your knowledge and perceptions of the Internal Revenue Service:

1. The IRS is an unresponsive, bloated bureaucracy that often treats similarly-situated taxpayers differently. True or False?

Historically, one of the absolutely legitimate complaints leveled against the IRS was its inability to internally coordinate discretionary decision-making, with the result that specific agency employees across the country would deal with similarly-situated taxpayers in radically divergent ways, resulting in not only the appearance, but a reality, of arbitrary and even discriminatory determinations.

In fact, this was one of the major conclusions reached by the consulting firm hired to examine the various allegations made against the IRS after the famed senate hearings of 1997 and 1998, which ultimately led to the restructuring of the IRS and the significant (third) Taxpayer Bill of Rights legislation passed by Congress in 1998.

But have things changed? In my opinion, not too much. Examiners proposing adjustments to tax returns, Revenue Officers considering which assets to levy, Appeals Officers attempting to resolve disputes without litigation, and Chief Counsel attorneys trying cases in the U.S Tax Court all seem to lack a consistent approach to handling taxpayers who fail to concede their positions. Much is left to subjective determinations and individual judgements which may or may not be exercised in an even-handed, objectively similar manner.

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