Individual Asks IRSAC to Press for Appeals Transparency

Another Inspector General report of tiny big-business settlements,
Taxpayer Advocate wasteful-audit concerns, and the President's fairness
order demand IRS Appeals transparency

Dear Internal Revenue Service Advisory Council:

As a fellow member of the taxpaying public — and speaking only for myself — I again ask you to join me in urging the IRS to regularly lay out how its Independent Office of Appeals settles audits. (Last year, I focused on a 2016 report from the Treasury Inspector General for Tax Administration, the government's main IRS watchdog, about pennies-on-the-dollar results on Service's most important international tax issue, and on its 2017 report about Appeals' reasoning often not adding up.)ⁱ

This May, TIGTA revealed “Few Accuracy-Related Penalties Are Proposed in Large Business Examinations, and They Are Generally Not Sustained on Appeal.”ⁱⁱ How few? 6% of recent years' large business exams, versus 25% of small business exams. And how generally are they not sustained? Taxpayers took most of the large-business penalties up to Appeals, which had written off $765 million of the $773 million — 99 percent! — in the cases it had finished. An “accuracy-related” penalty generally would apply to a tax understatement that is large or due to a listed problem issue, at the rate of 20 to 40 percent of the incremental tax. And it generally has a built-in “reasonable cause” exception which the report says taxpayers can and do ask Exam itself to apply. So a much smaller number post-Appeals doesn't just reflect that a good-faith mistake can warrant a break, but indicates a troubling disconnect between how the IRS announces our tax rules work and how insiders might work the rules.

This summer, Taxpayer Advocate, another “independent” office in the IRS, followed up on its recommendation to track and report Appeals trends in order to spare taxpayers from ineffectual audits by observing that this could also identify issues needing clearer rules.ⁱⁱⁱ If a problem's worth writing up and fighting, isn't it worth a notice to nip in the bud? The bureau wouldn't bite: “the resulting adjustments or outcomes are uniquely drawn from the facts and circumstances. . . . therefore, tracking the results in the aggregate would not be informative.” But that's the point of statistics! Congress already directs the the IRS to publish statistics about “any . . . facts deemed . . . valuable” to “the operations of the internal revenue laws”, and compile statistics to help the Advocate find, prioritize and solve difficulties facing taxpayers and the Service.^iv And the IRS combines data analysis with employee suggestions to develop issue campaigns.^v In other words, numbers also need classification, clarification and analysis.

And just this October, the President himself ordered agencies to “act fairly and transparently with respect to all affected parties . . . in civil enforcement or adjudication,” and give “public notice of . . . the legal standards applicable.”^vi While there's an exception about “settlement negotiations,” it's only to the party's right to be heard — already happening in the negotiations themselves — not to publicity of the standards.^vii Mr. Trump specifically called out inapplicable penalty demands.^viii And fairness to small business, which is no small issue for the IRS: the Financial Times reported that more than a third of cross-border “investments” by their multinational competitors are just tax dodging. ^ix Seems to me that for an agency to regularly concede much of what it demands up front shades, or could even practically supersede, the public statute, regulation and case law. The practice and guidelines should be disclosed.^x

This would support Appeals' mission to resolve tax controversies without litigation fairly, consistency, efficiently, and with integrity.^xi Rigorous public reasoning, confirmation-hearing scrutiny, and accountability for those who install the judges help courts balance rather than erode the rest our government. The IRS knows how to delete identifying and sensitive details before publicly releasing material.^xii And owning up to challenges respects “customers” as citizens, not chumps.^xiii

Respectfully submitted,

Anand Desai

November 18, 2019