ABA TaxSection Midyear Meeting Panel: Evolving Constraints on Tax Administration

With a major new tax act to implement, it would be nice if the IRS had a positive image, a steadily increasing budget, and clarity on how to best promulgate guidance. Sadly none of that is true. The IRS public image after the Tea Party crisis in 2013 is poor; its budget has lagged behind its needs over the past 5 years; and, the legal landscape in which it enacts guidance has begun to seriously shift particularly over the past 10 years with cases like Mayo, Altera and Chamber of Commerce making it difficult to know the best strategy for publishing useful guidance on the new 2017 Tax Act.

The Teaching Taxation committee, held a panel this past Friday at the ABA Tax Section’s Midyear Meeting called Evolving Constraints on Tax Administration to consider this landscape the IRS finds itself in at the start of 2018. Our panel included Caroline Ciraolo, a partner at Kostelanetz & Fink, LLP and former Acting Assistant Attorney General in the DOJ Tax Division, James R. Gadwood, Counsel, Miller & Chevalier,  Kristin E. Hickman,  law professor at Minnesota Law School, and fellow Surly blogger Leandra Lederman, professor at Indiana University Maurer School of Law.

Here is the description of the panel: “The IRS and Treasury Department have faced increasing budget and legal constraints over the past few years. Treasury is also experiencing limits on its rulemaking, both from the current Presidential Administration and from courts applying administrative law, such as with respect to the anti-inversion regulations. IRS budget constraints and workforce decreases started around 2011, and the IRS’s image has suffered following a 2013 report from the Treasury Inspector General for Tax Administration (TIGTA) on the IRS’s review of applications for determination of tax-exempt status. A 2017 TIGTA report revisited that issue in a balanced way, but where does it leave the IRS? This panel will look at how we got here, what it means, and what the ideal environment for tax administration looks like. The panelists will discuss the recent cases of Altera and Chamber of Commerce and assess how the IRS, taxpayers, and counsel should proceed given the ever-evolving constraints on tax administration.”

Leandra focused on the current state of the IRS, which she has written about here and here. It’s not a picture inspiring confidence. Leandra focused on the damage done to the IRS from the IRS Tea Party affair, the fact that the IRS budget and workforce has generally declined while the workload as we all know has grown in this environment. Here are Leandra’s slides: Lederman–2-9-18–UPDATED 2-13-18

What I wonder is whether these harms to the IRS have been translated into less tax compliance. Leandra believes that will be the effect of these harms, but that we will not see it until some time into the future. I tend to think this is right. It will be important to watch this issue in the coming years.

Leandra finished with a discussion of an amicus brief written by Susan Morse and Stephen Shay that Leandra signed on to to the Ninth Circuit on the Altera case. In Altera the US Tax Court found a 2003 Treasury regulation on a transfer pricing matter to be arbitrary and capricious under the Administrative Procedure Act. The brief challenges this Tax Court holding.

Kristin focused on the following questions. Are most Treasury regulations legislative rules? Must Treasury regulations satisfy the APA’s arbitrary and capricious standard? Does IRC § 7805(e) authorize temporary regulations without notice and comment or a good cause claim? Does the Anti-Injunction Act, IRC § 7421(a), preclude pre-enforcement judicial review of Treasury regulations? Kristin has written about these issues here and here as well as many other places. Here are Kristin’s Power Point slides ABA Tax Feb 2018 PowerPoint (1) with her thoughts on these matters.

Most of the answers to these questions seems to be that the IRS has a lot more work to do as it implements guidance for which it desires the force of law. It may be painful for the IRS, but in the end it is going to have to become more administrative law conscious than it has in the past. In light of the budget and image problems of the IRS I worry about the greater work involved in this effort, and don’t think all of the APA solutions are a good fit for the type of guidance/regulatory work in which the IRS engages. But, I do accept that there may be some real gains to be had in the IRS becoming more transparent in its administrative and enforcement efforts.

Jim then discussed the issues from a taxpayer perspective highlighting that while we in academia may be worried about taxpayers taking advantage of a weak IRS that in fact it is very costly for taxpayers to take positions that are adverse to the IRS. He emphasized how important it is today for a tax lawyer to also be a specialist in administrative law. Caroline focused on the many tools that the IRS has and uses at its disposal that make it an agency that taxpayers should hesitate to assume is a paper tiger. Both got me to think about the current challenges of the IRS in different ways. I really appreciated the contributions of both.

The panel left me thinking we in academia have a great role to play in thinking through how the IRS might best adapt to this quickly changing world.