IRS Disagrees with TIGTA Report That Finds IRS Control Procedures and Employees To Be Ineffective

Jan 11, 2011   

Following its audits of the Internal Revenue Services (IRS) Large and Mid-Size Business (LMSB) and Small Business/Self Employed(SB/SE) Divisions, the Treasury Inspector General for Tax Administration (TIGTA) recently released its findings regarding the “the effectiveness of controls and procedures” utilized by the two Divisions. Among other reasons, these audits were conducted “to ensure tax returns with Abusive Tax Avoidance Transaction (ATAT) issues are properly examined for abusive tax avoidance.” The full report is available here.

ATAT is defined by the IRS as “a specific tax transaction/promotion that reduces a tax liability by taking a tax position that is not supported by tax law or manipulates the law in a way that is not consistent with the intent of the law.” The IRS seeks to stop the marketing and promotion of ATATs by completing investigations of the individuals or businesses that promote these schemes, as well as the promoter clients who participate in the schemes. As the taxpayers falling under the LMSB and SB/SE divisions are the primary targets of those individuals or entities promoting ATATs, both divisions have established offices dedicated to the ATAT Program.

TIGTA expressed numerous concerns regarding the effectiveness of these offices, specifically pointing out conflicts between the procedures utilized by the officers with the taxpayers rights. TIGTA found that IRS employees made decisions to survey tax returns without proper approval or adequate justification, often while “jeopardizing taxpayers rights.”

Specific findings from a statistical sample of 311 surveyed returns included:

  • TIGTA determined 246 of the 311 returns were subject to guidelines requiring approval from the Planning and Special Programs function to survey the tax return. Of these 246 returns, 238 (97 percent) were surveyed by group managers without the requisite approval.
  • 88 of the 311 surveyed tax returns did not include any justification in the case files as to why the tax return was surveyed.
  • For 278 (89 percent) of the 311 surveyed tax returns, TIGTA found that IRS employees did not follow procedures when surveying tax returns with ATAT issues.

In the IRSs response, Commissioner of the SB/SE Division, Christopher Wagner acknowledged that the applicable procedures were not always followed, but indicated that deviation from procedure did not mean that the IRS was not effective in its decisions to survey tax returns.

While our cases did not always conform to the prescribed documentation procedures, we found no cases where the decision to survey was improper. Many of the cases reviewed during this audit involved highly complex transactions. As noted above, in these cases, the IMT and the ATTI staff worked closely with the area managers, examiners, and PSP staffs to ensure survey decisions were consistent and appropriate.

TIGTAs report also emphasized a direct conflict with taxpayers rights, specifically in numerous instances when the IRS surveyed tax returns after contacting taxpayers. With regard to this concern, TIGTA recommended:

The Director, Examination, SB/SE Division, should strengthen existing controls to protect the rights of taxpayers by ensuring examinations of ATAT cases are completed once taxpayers, or their representatives, have been contacted by IRS employees.

The IRS disagreed with this recommendation, indicating that surveying tax returns after taxpayer or representative contact was permissible according to the Internal Revenue Manual. Relying on IRM §4.10.2.5.1(3), the IRS found no issue with the procedure utilized by its employees.

Included in TIGTAs report, however, is TIGTAs Office of Audit Comment, which points out that the cited provision, IRM §4.10.2.5.1(3), was not effective until April 2, 2010, and the tax returns in TIGTAs sample were all surveyed during 2006 through 2008. Thus, TIGTA projected that the IRS employees violated the rights of as many as 196 taxpayers.

We previously reported recent actions of the IRS that reveal its disregard for taxpayer rights and privacy in our discussion of the newly enacted regulations requiring Uncertain Tax Position (UTP) disclosures. Here, the IRSs response to TIGTAs report reinforces this lack of concern, and portrays its growing approval of IRS employees intentionally violating procedures designed to protect the rights of taxpayers.

If you have any questions regarding TIGTAs report, IRS procedures and examinations, or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.