Originally published on Forbes.com Sept 21st, 2013
According to the TaxProf, (Who in the tax blogosphere would have the temerity to question him ?), we are on Day 135 of the IRS Scandal. The Treasury Inspector General for Tax Administration (TIGTA)issues regular reports, so there is no reason why the scandal cannot go on forever. I wonder if the other Inspectors General are getting jealous. Nobody seems to care that Park Rangers were not keeping good track of their weapons or that the Post Office could greatly improve its use of social media.
Latest From TIGTA
I have to admit that I have not been very scandalized by most of it. It is almost a relief that TIGTA is finally at least alluding to something that really is scandalous. The latest report – Chief Counsel Should Take Steps to Minimize the Risk of Outside Influence on Its Letter Rulings – sounds pretty boring:
The audit was initiated to assess Chief Counsel’s policy to limit the number of letter ruling requests handled by its attorneys from the same taxpayer or practitioner. Chief Counsel implemented this policy in order to address the taxpayers’ and practitioners’ reported strategy to increase their chances of obtaining expeditious and favorable letter rulings by having their requests handled by a preferred attorney.
Think about that. There are people who have “preferred attorneys” at the Chief Counsel’s, that they want to steer their stuff to. Why is that ?
Because of the fees associated with requesting a letter ruling (ranging from $2,000 to $18,000), associated attorney costs to prepare a letter ruling request (that can be as much as several hundred thousand dollars), and the potential tax impact of a favorable ruling, many practitioners view this strategy as a good business practice.
Apparently there is nothing surreptitious about the practice:
The basic strategy practitioners use to have their letter ruling requests assigned to a preferred attorney in Chief Counsel includes making direct, extended contact with an attorney whom they have a positive relationship, including scheduling a presubmission conference. If the Chief Counsel attorney indicates during the conference that a favorable ruling is likely, the practitioner will reference the preferred attorney in the letter ruling request for potential case assignment.
Is Anything Being Done ?
TIGTA found that there is almost no attempt to exercise any control over rulings being directed to particular attorneys. One of the six offices has a two-thirds rule. Attorneys are allowed to keep two-thirds of the ruling requests that are directed to them from a single firm. TIGTA found that there were really no systems in place to enforce even this modest rule. One of the offices explained why they could not even try to have a rule like that.
For example, one associate office’s main source of letter ruling requests is from the four largest accounting firms. As a result, management within this associate office believes a policy of limiting letter ruling assignments from the same source is impractical to implement.
So essentially, one of the six offices of the IRS Chief Counsel is a Big 4 outpost. What is so scandalous about that ?
I have not had that much exposure to the most ethereal levels of tax practice. I was on an AICPA national technical committee – Partnership Taxation – for a couple of years and I finished my career with seventeen undistinguished months in a not quite Big 4 firm. I’m pretty hard to shock, but twice I was shocked.
The So-So Citizens At The AICPA
On the national technical committee, we made recommendations to make things simpler and clearer. All in all, we were behaving like good citizens. I remember one time a particularly obscure question being discussed and one of the Big 4 guys on the committee saying “You know what. We would be just as happy if that rule remained unclear.”
This was in the early nineties, when the Big 4 was engineering what Jack Townsend called a “massive raid on the treasury“. Towards the turn of the millennium, someone like Richard Egan of EMC rather than pay the federal government 20% on a capital gain would pay KPMG 3%. It was all based on hyper-technical misinterpretations of partnership provisions, perhaps the very ones that my fellow committee member preferred remain unclear.
Your Once And Future Boss
I had been the ultimate partnership tax geek in my small part of the world for many years, so one of the great joys of working for the national firm was having somebody I could call up every once in a while to talk about 704(b) and 704(c) and the like.
One of those guys explained the other shocking thing to me. When somebody at the chief counsel’s office, let’s call him Joe, thinks about going out on a limb on some sort of ruling, he will tend to want to run it by his former boss, call her Mary. Mary does not work for the IRS Chief Counsel anymore. Mary works for Big4. Big4 is where Joe wants to work in a couple of years. So Joe is getting intellectual guidance from his once and future boss who now works for the other side.
Now thanks to TIGTA, we learn that Mary can with relative ease route her ruling requests to Joe or, if she knows that Joe is too smart and not inclined to play ball, to somebody else.
Why Does Joe Want To Work For Big 4 ?
Recently there was a list released of the 1,000 top paid federal employees. Number 1,000 was Elizabeth Salini who works for the SEC at a salary of $216,345. Nobody on the list worked for IRS. In the regional firm where I worked we had a term for partners who made the kind of money Ms Salini made. We were called the bottom quartile.
Working for the IRS Joe gets a better work life balance and a defined benefit pension plan. He also has ultimate bosses in Congress who give him contradictory instructions and constantly bad mouth him. In Big 4, he has bosses who give him contradictory instructions and talk about how great he is. If he becomes a partner his pension will be one Enron style debacle away from being obliterated. It still probably beats being a cowboy.
The Solution
The solution is probably politically impossible, but here it is. The kinder gentler IRS is what is required for dealing with the general public and most businesses. For tax assessments over $10,000,000 or so, IRS should not be fighting with one arm tied behind its back. They should be able to employ the same greedy, sociopathic geniuses who devised the Son-of-Boss deals and pay them whatever the traffic will bear. Only they have to barred for decades from representing taxpayers after they leave IRS.
You can follow me on twitter @peterreillycpa.