The Surly Subgroup Turns One!

Time flies when you’re having fun, I guess. Today is the one-year blogiversary of the Surly Subgroup. What started off as a group-blogging experiment hatched at last year’s Critical Tax Conference at Tulane Law School has provided quite a bit of entertainment for Surly bloggers and our guest bloggers, and hopefully for our readers as well.

It’s obviously been a big year on tax and other fronts. Since our inception, we’ve published 206 blog posts on a variety of topics. And we’ve drawn readers from 140 different countries.

Surly regulars and guest bloggers have covered various tax-related issues surrounding politics and the 2016 election—including disclosure of presidential tax returns, the Emoluments Clause, the Trump Foundation, and the Clinton Foundation. We’ve written about churches, 501(c)(3)s and the IRS treatment of non-profits. We’ve discussed the tax reform proposals of the 2016 presidential candidates and the #DBCFT. We’ve written several administrative law posts about Treasury Regulations and rulemaking.

Politics aside we’ve also covered other important issues in tax policy—including taxation and poverty, healthcare, tax policy and disabilities, tax compliance, and tax aspects of the Puerto Rico fiscal crisis. We’ve discussed several issues in international and cross-border taxes, touching on the EU state aid debate, the CCCTB, taxation and migration, the Panama Papers, tax leaks more generally, and tax evasion in China.

We hosted our first ever online Mini-Symposium on Tax Enforcement and Administration, which featured posts by ten different authors on a variety of tax administration topics. The Mini-Symposium was spearheaded by Leandra Lederman. Leandra had organized and moderated a discussion group on “The Future of Tax Administration and Enforcement” at the 2017 AALS Annual Meeting, and many of the discussion group participants contributed to the online symposium. We hope to organize future online symposia on other topics.

We’ve blogged about various conferences, workshops, and papers, both tax related and not-so-much tax related. We’ve also had lots of fun writing about taxes in popular culture – Surly bloggers and guest bloggers have written about the tax aspects of Pokémon Go, tax fiction, music-related tax issues (Jazz Fest! Prince! “Taxman”!), soccer players, dogs, Harry Potter fan fiction, Star Trek, and John Oliver. Surly bloggers even recorded a few tax podcasts!

In short, it’s been a busy year, and we’ve had a lot of fun with the Surly platform. We hope you have as well. Going forward, we’re going to keep the blog posts coming. We also hope to draw more regular and guest bloggers and to organize other online symposia.

Thanks for reading!

Concluding Thoughts on the 2017 Mini-Symposium on “The Future of Tax Administration and Enforcement”

By: Leandra Lederman

Since January 18, 2017, the Surly Subgroup has hosted a mini-symposium featuring posts by members of the Discussion Group I organized for the Association of American Law Schools (AALS) annual meeting on the topic of The Future of Tax Administration and Enforcement.” Over the course of the mini-symposium, we have seen a wide range of posts, all of which are listed at the end of this post, following my take on the topic.

Specifically, Sam Brunson argued that, in light of the large tax gap and low IRS audit rate, it’s time for tax returns to be public (with information such as Social Security numbers redacted). Roberta Mann also blogged on possible solutions to the tax gap. In part, she points to improving the process for IRS guidance.

Chris Walker also focused on IRS guidance, blogging on “administrative law exceptionalism,” particularly in the context of the application of APA rules to Treasury rulemaking in Altera, a case in which he served as counsel of record for the U.S. Chamber of Commerce as amicus curiae in support of Petitioner-Appellee Altera in the 9th Circuit, and in which I participated in an amicus brief in support of the Commissioner.

Part of what has caused problems for the IRS has been the outrage in 2013 over its treatment of organizations applying for exemption as social welfare organizations under Code section 501(c)(4) despite names suggesting a focus on political activity. Lloyd Mayer’s post focused on the exempt organizations context, pointing to three issues impeding IRS enforcement: (1) unchecked growth in the use of tax-exempt entities; (2) vague facts-and-circumstances tests for qualifying for tax exemption; and (3) shrinking IRS resources, particularly in the exempt organizations area. He also proposed substantive law changes and a more robust enforcement vehicle. Continue reading “Concluding Thoughts on the 2017 Mini-Symposium on “The Future of Tax Administration and Enforcement””

As If It Were A “Tax”

Bobby L. Dexter
Professor, Chapman University, Dale E. Fowler School of Law

A complete and comprehensive discussion of the future of tax administration and enforcement requires, as an initial matter, some level of consensus with respect to the meaning of “tax.” For the most part, commentators referring to the word “tax” are comfortably on the same page, but as NFIB v. Sebelius, 132 S. Ct. 2566 (2012), recently taught us, the question of what does or does not constitute a tax can be contentious enough to make it to the nation’s highest court.  In Sebelius, the U.S. Supreme Court ruled that the penalty imposed on those failing to comply with the individual health care mandate of the Patient Protection and Affordable Care Act (“ObamaCare”) constituted a “tax” within the meaning of Article I, § 8 of the Constitution.  The Court thus confirmed that the notion of a “tax” is far more chameleon than one might think at first glance.  Then again, even if the Court had held otherwise, taxpayers might still have found themselves vulnerable.

Several years ago, section 6305 of the Internal Revenue Code of 1986 (as amended) (hereinafter, the “Code”) was used to allow aggressive pursuit of specific past due child support obligations.  Legislative fiat did the trick. Under that provision, the IRS could collect amounts certified by the Secretary of Health and Human Services “in the same manner, with the same powers, and . . . subject to the same limitations as if such amount were a tax . . . the collection of which would be jeopardized by delay . . .” (emphasis added). Thus, § 6305 not only morphed what many would consider non-tax items into tax status but also allowed the IRS to apply jeopardy assessment and collection measures.  Because pursuit of the revenue using § 6305 was deemed cumbersome even with enhanced collection powers, the new weapon of choice became § 6402.  That provision authorizes the seizure of federal income tax refunds with respect to a host of items including (1) past-due child support obligations; (2) past-due, legally enforceable debt owed to a federal agency (e.g., federally-guaranteed student loans); and (3) past-due, legally-enforceable state income tax obligations.  These provisions ultimately have the potential to substantially complicate “plain vanilla” tax administration and enforcement given that the federal government can serve, in essence, as debt collector for a host of obligations. Even if past due state income tax obligations and past-due child support obligations remain static, one cannot ignore the specter of ever-burgeoning, past-due, federally-guaranteed student debt owed to a federal agency (i.e., the Department of Education). A substantial portion of student debt now rests in the hands of the federal government, the cost of college-level and graduate education is skyrocketing, and student grant funding is under attack.

Some might argue that refund seizure is an extraordinarily efficient collection method given that it is largely electronic and therefore unlikely to result in enhanced administrative burden.  After all, unlike most unsecured creditors, the IRS sitting on a taxpayer refund need not seek out and secure a judgment, petition for a writ of execution, and attempt levy on widely-scattered, fortuitously unencumbered, and rapidly-evaporating assets. But at the end of the day, the measure may backfire. Badly. Although certain innocent spouses impacted by refund seizure under a joint return may enhance administrative burdens by pursuing partial refunds, the more ominous concern regarding administration and enforcement relates to what taxpayers may do in response to an initial seizure. The IRS’s creative display of power is just the first step in a sequential game.  Given their inevitable turn, taxpayers may alter withholdings to ensure that they do not end up in a refund posture or (assuming an initial seizure eliminated the obligation) embrace cheating as a way of “getting back” what was seized previously. Thus, the IRS’s willingness to seize a refund under one set of circumstances may ultimately introduce compliance and enforcement hurdles that were not initially present and may persist for years in the future. The refund intercept program also has potential privacy violation ramifications. A given taxpayer may suffer, for example, the revelation not only that they have a child outside their existing relationship but that they have failed to support the child.  Further, equity concerns present because a refund intercept program may affect only those subject to withholding while sparing those who submit quarterly estimated tax payments, notwithstanding the fact that both taxpayer classes are similarly-situated from an obligation default perspective.

Perhaps tax administrators should stay their hand and let those seeking payment from those with “non-tax” delinquencies pursue other channels. After all, the government may have the power to serve as debt collector, but it need not intervene in every instance, especially when administration and enforcement revenues have long been scarce. Indeed, intervention at the behest of a federal agency (or one of the several states) may ultimately make it more difficult for the IRS to accomplish its central and core mission of collecting revenue due the United States under its tax laws.

For further analysis of these issues, including those rooted in constitutional law, see Bobby L. Dexter, Transfiguration of the Deadbeat Dad and the Greedy Octogenarian:  An Intratextualist Critique of Tax Refund Seizures, 54 U. Kan. L. Rev. 643 (2006).

Is the Emperor Naked? Non-Enforcement of Tax-Exempt Organization Laws

Lloyd Hitoshi Mayer
Professor of Law, Notre Dame Law School

The Donald J. Trump Foundation admits to illegal self-dealing (The Washington Post). The Bill, Hillary & Chelsea Clinton Foundation files amended annual returns to correct numerous reporting errors (Amended Returns Fact Sheet). A white nationalist group avoids filing annual returns for several years, apparently in reliance on a bureaucratic misclassification (The Washington Post). On “Pulpit Freedom Sunday,” thousands of churches violate the prohibition on IRC section 501(c)(3) organizations supporting or opposing candidates (CNN). These and numerous other recent examples of behavior by tax-exempt organizations that clearly violates the applicable tax laws lead to one obvious question: where was the IRS? The growing perception – and sometimes although not always the reality – is that when it comes to the administration and enforcement of those laws there is no one home.

This trend should be of concern not only for tax scholars and policy makers but also for tax-exempt organizations themselves, if for no other reason than increasing instances of individuals and organizations taking advantage of this perceived lack of oversight almost certainly will lead to questions about the wisdom of providing tax and other benefits to such organizations in the first place. While charitable organizations are the most vulnerable in this respect because they enjoy the greatest such benefits and so face the highest public expectations regarding their behavior, commentators have begun to question even the more modest benefits enjoyed by other types of tax-exempt organizations (see, e.g., Philip T. Hackney, What We Talk About When We Talk About Tax Exemption, 33 Virginia Tax Review 115 (2013); David S. Miller, Reforming the Taxation of Exempt Organizations and Their Patrons, 67 The Tax Lawyer 451 (2014)). To understand this trend and therefore how to address it requires understanding the confluence of factors that have lend to its emergence. Continue reading “Is the Emperor Naked? Non-Enforcement of Tax-Exempt Organization Laws”

Rules and Standards in International Tax Enforcement

Steven Dean
Professor of Law, Brooklyn Law School

The international tax regime has struggled to make the leap to the era of big data.  The internet and other potent digital tools make it easy to accumulate and trade vast hoards of information.  Learning how to harness that data to improve fairness and efficiency by making it just as hard to evade taxes abroad as it is at home has proven more difficult.  Simply put, despite years of sustained effort, the algorithm that can do for international tax enforcement what Über has done for finding a ride remains out of reach.

In pursuit of that algorithm, the international tax regime has abandoned flexible standards in favor of precise rules.  Unfortunately, a rule capable of effortlessly bringing tax cheats to justice has so far proven elusive.  In Neither Rules Nor Standards, 87 Notre Dame L. Rev. 537 (2013), I described the appeal and the limits of the the hunt for algorithms (rules) to replace the standards that have long formed the core of the international tax regime.

Which is better for the international tax regime?  Rules seem to be the obvious answer.  And indeed, since the global financial crisis, nations have embraced rules calling for the supply of information according to precise specifications.  The U.S. FATCA regime calls for foreign banks to supply information about U.S. taxpayers to the I.R.S.  while the OECD’s Common Reporting Standard imposes comprehensive income reporting obligations on a broad network of states.  Each promises to provide tax authorities with extraterritorial tax information they need to crack down on tax cheats. Continue reading “Rules and Standards in International Tax Enforcement”

IRS Attorneys as Public Servants and Enforcers

Clint J. Locke
Instructor, The University of Alabama, Culverhouse School of Commerce

The mission of the IRS Office of Chief Counsel is to serve America’s taxpayers by impartially and fairly administering the tax laws while simultaneously providing high quality legal representation to the commissioner of the IRS.  At first glance this mission seems appropriately balanced between public service and legal enforcement.  However, further deliberation creates uncertainty as to how such a mission can be accomplished. ABA Model Rule 1.7 prevents attorneys from representing two clients in the same litigation proceeding when the interests of such clients are directly adverse to each other. Can IRS attorneys ethically serve the public and serve the IRS?

When a taxpayer files a Tax Court petition in response to a notice of deficiency, an adversarial relationship arises between the IRS attorney and the taxpayer.  This adversarial relationship exists within the judicial system and is contained within one specific Tax Court proceeding.  As a result, Model Rule 1.7 prevents an IRS attorney from representing the IRS and serving a taxpayer, regardless of informed consent.

It could be argued that representation of the IRS as a client and service to a taxpayer are two separate and distinct relationships, such that dual representation is not implicated.  This argument carries particular weight when a taxpayer is represented by an attorney.  However, a majority of Tax Court cases are filed pro se, putting the IRS attorney in a conflicting role.  The IRS attorney is now tasked with representing the IRS position, while at the same time informing the taxpayer of legal and factual issues.

There can be no question that the IRS attorney will be aware of factual or legal weaknesses in a taxpayer’s position.  The questions that do exist are: (1) which weaknesses will the IRS attorney reveal to the taxpayer, and (2) which legal authorities will the IRS attorney share with the taxpayer?  Representation of the IRS position directly conflicts with service to the taxpayer. Sharing a factual weakness with the taxpayer will be at the expense of the IRS position.  Informing the taxpayer of a specific legal authority will bolster the taxpayer’s argument or assist the taxpayer in meeting the factual requirements of the law.  Consequently, in the pro se context, public service crosses over into a quasi-client representation relationship.  This relationship is ethically impermissible pursuant to Model Rule 1.7.

Clearly there are circumstances, particularly with respect to IRS attorneys serving in the national office, where an IRS attorney can effectively and ethically enforce the law and serve the public.  However, as administration and enforcement of the law moves into the field offices, it becomes much more difficult for these two purposes to coexist.

Privacy Is Dead: Crowdsourcing Tax Enforcement

Sam Brunson
Professor, Loyola University Chicago School of Law

Periodically, the IRS estimates the tax gap (that is, the difference between taxes due and taxes owed). For the years 2008 through 2010, the IRS estimates the annual tax gap was about $458 billion. After including late payments and amounts collected through IRS enforcement efforts, the annual tax gap diminished by $52 billion a year, leaving a $406 billion tax gap in each of those three years.

The $406 billion tax gap is equivalent to just over 16 percent of taxes due. And the IRS is unlikely to significantly close this gap going forward. While the has proven remarkably efficient at collecting revenue—in fiscal year 2015, it collected $3.3 trillion on a budget of just under $11 billion—Congress has been cutting the IRS budget for the last decade or more, while, at the same time, assigning the IRS more responsibilities. In spite of its efficiency, the IRS must do more with less, and its ability to find taxpayers who do not pay their taxes is thus bound to suffer.

These constraints are reflected in the data about IRS enforcement activities: in 2015, the IRS audited about 0.8 percent of individual tax returns and 1.3 percent of corporate income tax returns. Not only does the IRS audit very few returns, but the number has been falling: in 2010, the IRS audited about 1.1 percent of all individual returns.

There is no easy solution to the tax gap, or to the audit rate. Increasing IRS funding, or decreasing its non-revenue-raising responsibilities, would perhaps be the most effective fix, but that currently appears unrealistic. In a 2015 Pew survey, 48 percent of Americans had an unfavorable view of the IRS, up from 40 percent five years earlier. And Republicans—who will control both the Executive and the Legislative branches of the federal government—score significant political points campaigning against the IRS. So properly funding the IRS appears unlikely in the near future.

An alternative solution, then, would be to reduce the costs to the IRS of enforcement. One way to reduce those costs? Crowdsource enforcement.

A Brief History of Tax Return Disclosure

Crowdsourcing tax enforcement is an old, albeit out-of-favor, idea. In fact, it was not until 1976 that Congress definitively ended more than a century’s experimentation with deputizing the public to help enforce the tax law. Beginning in 1861, the Civil War income tax law provided for public access to tax returns. To ensure that public access (and titillate their readers), newspapers published the returns of prominent citizens. This public disclosure ended when the income tax was allowed to expire, but Congress experimented anew with it in each successive iteration of the federal income tax.

Congress had one principal goal in publicizing tax returns: ensuring that taxpayers paid their taxes. Essentially, public access to taxpayers’ returns allowed the government to crowdsource enforcement—people would notice, for example, that their neighbor had paid suspiciously little in taxes. Knowing that the Panopticon was watching their returns, taxpayers would have every incentive to pay their full tax liabilities.

Not everybody appreciated this mandatory disclosure of tax returns, of course. From the start, public disclosure faced significant opposition. Every time Congress reintroduced public disclosure of tax returns, opponents of disclosure argued that such forced disclosure was both un-American and intrusive. According to critics, the publicity not only violated taxpayers’ privacy, but it might actually endanger taxpayers, exposing their wealth and addresses to criminals and kidnappers. Even without danger, the benefits, according to critics, were limited to individuals’ indulging their idle curiosity.

Moving to Privacy

By 1976, the public disclosure of tax returns had been severely curtailed. In spite of being “public records,” they were no longer generally available to newspapers or the public at large; rather, they were open to inspection by the general public under regulations approved by the president or pursuant to presidential order.

Federal agencies had more access to tax returns than the general public, but even federal agencies could only see them on a case-by-case basis, after providing a written request. In the 1970s, though, in the wake of Watergate and fears about the “proliferation of computerized data banks,” the government began to strengthen citizens’ privacy rights. The 1976 Tax Reform Act cemented those privacy rights, broadly forbidding government employees from disclosing taxpayers’ returns or return information.

Over the next two decades, privacy became such a central principle of American society that, in 1993, Professor Richard Pomp wrote that it was “unthinkable for proposals” for public disclosure of tax returns to be “taken seriously.” Less than a decade later, though, in the wake of Enron’s collapse, legislators, academics, policymakers, and the media were seriously discussing the implications of making corporate tax returns public.

A Post-Privacy World?

A decade and a half after Enron’s collapse, the table appears perfectly set for returning to public disclosure of tax returns. Earlier privacy concerns seem irrelevant, if not quaint, in today’s world. For many individuals, the public already has access to information about their salaries. At least half of the states maintain public databases of state employee salaries.[fn1] Securities and Exchange Commission rules require publicly-traded corporations to disclose the compensation of its five most highly-paid employees. And Forbes lists the income of the most highly-paid musicians, actors, and athletes, as well as its estimates of the net worth of the world’s wealthiest individuals.

Beyond this broad array of information already available, today’s privacy situation is almost the polar opposite of the post-Watergate world. While exponentially more personal information is stored on computer servers today than 40 years ago, Americans have largely put that information online voluntarily. Technology entrepreneurs argue that social norms have moved away from privacy. And while the entrepreneurs may have financial motivations for arguing that the norms have changed, they are not alone in that view. Many experts believe that within another decade, much of what we consider private today will no longer be considered private.

It may not even require movement with social norms to arrive at a post-privacy world with respect to tax returns. The IRS, tax, and accounting firms have, until now, done an admirable job keeping returns private. In contravention of decades of precedent, president-elect Donald Trump refused to release his tax returns. In spite of the pressure, only three pages of (state) tax returns were ever leaked. But the fact that he faced no leaked returns does not mean that they will not, in the future, be leaked: the extensive Panama Papers leaks suggest that no data—even private law firm data—is necessarily safe from public scrutiny. In fact, hackers may have accessed information on more than 700,000 taxpayers in an IRS data breach.

Of course, the fact that taxpayer information could be compromised, and that notions of privacy may change significantly in the future, do not present an affirmative case for requiring all taxpayers to disclose their tax returns.

Consequences of Crowdsourcing Enforcement

Requiring the public disclosure of tax returns has at least two beneficial results, from a tax compliance perspective. At the ex ante level, it forces taxpayers to think about how aggressive they want to be. When tax returns are private, only the taxpayer, her advisors, and maybe the IRS (if hers is one of the 0.8 percent of returns it audits) will know how she structured her tax life. She can thus maintain a public image as a tax-compliant citizen, even while pushing the boundaries. If, however, she knows that her tax returns will be available to the public, she is forced to internalize the non-monetary costs of her tax planning. Perhaps saving money by paying less in taxes is more important to her than being seen by her peers as complying with the tax law, in which case she may continue to take aggressive positions. To the extent there is a social norm of tax compliance, however, knowing that her peers will have access to her tax returns may cause a taxpayer to be more conservative.

At the ex post level, requiring taxpayers to publicly disclose their tax returns reduces the IRS’s search costs as it enforces the tax law. It would, of course, continue to use its matching system and other techniques for determining which returns to audit, but it would also have hundreds or thousands of additional eyes scrutinizing tax returns. Friends, neighbors, competitors, and former spouses may all have some interest in seeing tax returns, and potentially in reporting bad behavior.

This ex post crowdsourced auditing does have potential problems, of course. It would increase the noise, as presumably some percentage of tips would be false positives. And if it turns out that significant numbers of taxpayers are taking aggressive tax positions, it may encourage other similarly-situated taxpayers to take similarly aggressive positions.  In both cases, though, the sheer quantity of data may correct for the problem. The IRS may not want to act on every tip, but if it sees a pattern of behavior from a number of taxpayers, it may decide to look closely at returns that engage in that behavior. And if the IRS were to strategically target aggressive positions taken by a number of taxpayers, that could discourage other taxpayers from following suit.

Two Final Thoughts

Administratively, requiring disclosure would be tremendously easy. In 2015, almost 88 percent of individual returns were filed electronically. With electronically-filed returns, the IRS could automatically redact certain sensitive information (for example, social security numbers and, perhaps, names of dependents) and instantly make the returns available online. The 12 percent of returns filed on paper would take more work to redact, but the IRS could require taxpayers who filed on paper to file an unredacted and a redacted version of their returns.

But culturally, it would be hard. Although we may be approaching a post-privacy world, we are not there yet. Although people freely post all kinds of personal information to the internet, few people voluntarily publicize their tax returns, and mandatory disclosure could still face significant pushback.

As an intermediate step toward full publicity, then, perhaps the tax law should make such disclosure option, but offer a carrot to those who opt in. For example, such a program could provide that those who disclose their tax returns will be protected from penalties for a certain number of years.

[fn] I didn’t do an exhaustive search, but even a quick Google search found me databases for these states: Arkansas; California; Connecticut; Florida; Illinois; Indiana; Iowa; Kentucky; Maryland; Massachusetts; Minnesota; Missouri; Montana; New York; North Carolina; Ohio; Oklahoma; Pennsylvania; South Carolina; Tennessee; Texas; Utah; Virginia; Washington; Wisconsin.

Applying Offer-in-Compromise Principles to Student Loan Repayment

W. Edward “Ted” Afield
Associate Clinical Professor and Director, Philip C. Cook Low-Income Taxpayer Clinic, Georgia State University College of Law

Thanks to Leandra for organizing this group of posts from the excellent discussion our AALS Discussion Group had about the future of tax administration and enforcement.  During our discussion, I discussed how areas of tax administration and procedure are starting to become intertwined with other areas of law.  Currently, in an article that I am finalizing, I am exploring this theme in the context of the various student loan repayment programs, such as Income Based Repayment and Pay As You Earn, and examining how these programs would benefit from being modeled after tax liability relief programs that emphasize providing relief based on a taxpayer’s ability to pay.

Although the student repayment programs were not instituted through the Tax Code, they have nevertheless implicated the Code by tying repayment to adjusted gross income and creating a potential tax liability through debt forgiveness.  John Brooks has persuasively argued here and here that this model of student loan repayment is best analyzed as a system of taxation, or “quasi-public spending” rather than pure loan repayment.  As Brooks explains, under these repayment programs, government funds are used to finance student education and are repaid with a percentage of students’ incomes, making these programs appear very similar to a tax imposed to pay for a government benefit.  Brooks acknowledges that the analogy is not a perfect one, given that progressivity disappears at higher income levels, the “tax” is not due for life (rather, it is only due until the loan is repaid), there is currently a significant balloon payment for forgiven loans that produce taxable cancellation of debt income, the programs are administered by the Department of Education rather than by the Internal Revenue Service, and the benefit is predominantly funded by taxpayers who took out student loans (although taxpayers as a whole still fund a portion of the debt forgiveness).  Despite these differences between the loan repayment programs and the income tax, the fact that repayment is tied to income rather than the amount of the debt or the interest rate on the debt prevent student loan repayment programs from functioning as pure loans.

Tying these programs to taxpayer income produces distortions and unanticipated inequitable outcomes such as: Continue reading “Applying Offer-in-Compromise Principles to Student Loan Repayment”

Leak-Driven Lawmaking

Shu-Yi Oei
Hoffman F. Fuller Professor of Law, Tulane Law School

Over the past decade, a steady drip of tax leaks has begun to exert an extraordinary influence on how international tax laws and policies are made. The Panama Papers and Bahamas leaks are the most recent examples, but they are only the tip of the leaky iceberg. Other leaks include (in roughly chronological order) the UBS and LGT leaks; the Julius Baer leak; HSBC “SwissLeaks”; the British Havens leaks; and the LuxLeaks scandal.

These tax leaks have revealed the offshore financial holdings and tax evasion and avoidance practices of various taxpayers, financial institutions, and tax havens. In so doing, they have been valuable in correcting long-standing informational asymmetries between taxing authorities and taxpayers with respect to these activities. Spurred by leaked data, governments and taxing authorities around the world have gone about punishing taxpayers and their advisers, recouping revenues from offshore tax evasion, enacting new domestic laws, and signing multilateral agreements that create greater transparency and exchange of financial information between countries.

Thus, it is clear that leaked data has started to be a significant driver in how countries conduct cross-border tax enforcement and make international tax law and policy. But using leaks to direct and formulate tax policy responses comes with some potentially serious pitfalls.

In a new paper—coming soon to an SSRN near you[fn.1]Diane Ring and I explore the social welfare effects of leak-driven lawmaking. Our argument, very generally, is that while data leaks can be socially beneficial by virtue of the behavioral responses they trigger and the enforcement-related laws and policies generated in their wake, there are under-appreciated downside hazards and costs to relying on leaked data in deterring tax evasion and making tax policy.

Continue reading “Leak-Driven Lawmaking”

Mind the Gap: Effect of IRS Budget Cuts on the Tax Gap and Potential Solutions

Roberta Mann
Mr. and Mrs. L. L. Stewart Professor of Business Law, University of Oregon School of Law

The Internal Revenue Service faces many challenges: scandals, threats to impeach the Commissioner, increasing burdens from expanding responsibilities, and, of course, the tax gap. In 2015, Jon Forman and I published an article entitled “Making the IRS Work,” which discussed ways of making the IRS more efficient given likely continued budget cuts under a Republican majority Congress. We concluded that while the IRS could become more efficient, the best way to enhance compliance and protect taxpayers would be to increase the IRS budget.

Since then, the prospect of increasing the IRS budget has not improved. Commissioner Koskinen reported that the IRS budget is down by $900 million since 2010. While the Obama Administration requested $12.280 billion to be appropriated for the IRS in FY2017, representing $1.045 billion more than the amount enacted for FY2016, the House passed a bill providing $10.999 billion in appropriations for the IRS in FY2017, representing $236 million below the amount enacted for FY2016. The Senate bill maintained FY2016 funding in its appropriations for the IRS.

An underlying assumption of our analysis is that the IRS should continue to function as an effective revenue collector. With lower budgets, the IRS must become more efficient to continue to effectively collect revenue. Uncollected revenue leads to the tax gap, which in general terms is the difference between the revenue owed and the revenue collected. A large tax gap not only constrains revenue, but also can lead to reduced voluntary compliance. IRS budget cuts over the past several years have not yet significantly affected the tax gap, which the IRS updated in April 2016. Continue reading “Mind the Gap: Effect of IRS Budget Cuts on the Tax Gap and Potential Solutions”

The Stages of Administrative Law Exceptionalism

Christoper J. Walker
Associate Professor, The Ohio State University Moritz College of Law

At the American Bar Association’s annual Administrative Law Conference in December, I had the privilege of moderating a panel entitled Your Agency Is Not That Special: The Decline of Administrative Law Exceptionalism. The panel consisted of leading experts on administrative law exceptionalism from three distinct regulatory fields: Jill Family for immigration, Kristin Hickman for tax, and Melissa Wasserman for patent law. The panel also included Mark Freeman, a senior attorney from the Justice Department’s Civil Appellate Staff, who has briefed and argued a number of important administrative law exceptionalism cases.

As we explained in the panel description, “[a]dministrative law exceptionalism—the misperception that a particular regulatory field is so different from the rest of the regulatory state that general administrative law principles do not apply—has plagued the modern regulatory state. We have seen it front in center in a variety of regulatory contexts from tax and financial regulation to patent law and immigration.”

On the tax front, Professor Hickman and I discussed at some length the Tax Court’s decision in Altera, which is presently on appeal in the Ninth Circuit, as well as the U.S. Chamber of Commerce’s challenge to the IRS’s inversion rule, which is pending in federal district court in Texas. Both of these cases have significant implications for the future of tax exceptionalism, though that is not the purpose of this blog post. Continue reading “The Stages of Administrative Law Exceptionalism”

2017 Mini-Symposium on “The Future of Tax Administration and Enforcement”

By: Leandra Lederman

On January 7, 2017, I had the pleasure of moderating a Discussion Group I organized for the Association of American Law Schools (AALS) annual meeting. The topic of the discussion was “The Future of Tax Administration and Enforcement.” The topic was prompted by the funding crisis in which the IRS finds itself and the challenges that poses for tax administration, which I wrote about in two articles published last year, “The IRS, Politics, and Income Inequality,” 150 Tax Notes 1329 (Mar. 14, 2016) and “IRS Reform: Politics As Usual?,” 7 Columbia Tax J. 36 (2016) (the latter of which was part of a symposium Kristin Hickman organized on tax administration).

The AALS Discussion Group included experts on tax law, administrative law, and cybersecurity. The discussion spanned topics that included IRS resource and task priority issues, administrative law aspects of tax administration, and cross-border tax administration concerns. In the coming weeks, Surly Subgroup will be hosting a mini-symposium featuring posts by members of the Discussion Group. The first substantive post will be this Friday, January 20, and is by Christopher Walker from The Ohio State University, Michael E. Moritz College of Law, who is a member of the group but was unable to attend the discussion itself due to a flight cancellation. The panel on January 7 was as follows:

Over the next few weeks, watch for more Mini-Symposium posts! They will be categorized under “2017 Mini-Symposium on Tax Enforcement and Administration.”