The Internal Revenue Service might be taking steps to address its failings, but Commissioner Charles O. Rossotti says it still has some way to go. Mr. Rossotti was responding to findings by the IRS Oversight Board that the agencyis falling short of its own strategic goals and objectives.
Larry Levitan, chairman of the seven-member board, says in its report that the IRS does not "provide top-quality service to each taxpayer in every interaction." He points to frequent unanswered phone calls to the IRS, and he says notices are "often difficult to understand."
Mr. Levitan cites an "unreasonably low level" of audits and other enforcement activities. In addition, the IRS does not "provide productivity through a quality work environment," he says. He attributes this to outdated technology.
The board's basic conclusion "is correct," Mr. Rossotti recently told lawmakers. "Although we are moving steadily in the right direction, we have not reached the point where we can achieve our three strategic goals of service to each taxpayer, service to all taxpayers and productivity through a quality work environment."
Mr. Rossotti said an audit rate that declined every year was "a very dangerous thing for the tax system" - not only because the trend might tempt some to play the audit lottery, but also because it raises fundamental questions of fairness.
Specifically, the commissioner expressed concern about the fairness of a system under which the tax administrator can easily check the amount of income reported by wage earners but not the amount of income reported by investors.
Testifying before the House Appropriations subcommittee on treasury, postal service and general government, Mr. Rossotti said the whole tax system depends on citizens' belief that the system is fair.
"Upper income is the kind of income we need to find," the commissioner said, noting that the IRS' current document-matching programs are not tailored to taxpayers whose income is derived from capital gains.
"Well, we're finding more and more errors on the little guys - but we're not able to find errors on upper-income people just because of the source of their income," Mr. Rossotti said. "When that's the case, people begin to believe the system is not as fair as it should be. I think that's a fairness problem, and that concerns me."
Meanwhile, the number of taxpayers submitting returns reflecting data that could be checked by matching returns to Schedule K-1 "has grown very, very significantly" to 7 million returns, representing $5 trillion in gross receipts, Mr. Rossotti said.
Trust and partnership return filing have steadily grown since 1995, increasing 7.4% and 26.2%, respectively.
Trust return filings are the largest business filing population at 3.5 million filers, Mr. Rossotti said, while partnerships surpassed 2 million filers in fiscal 2000.
Buy the company, get property free
The IRS has ruled that the acquisition of the sole interest in a limited-liability company that owns real property will be treated as the acquisition of qualifying like-kind replacement property.
To avoid incurring a liability for the local real estate transfer fees, a taxpayer proposed to have the LLC act as an "exchange accommodator" by acquiring real property owned by its sole member.
The taxpayer would then acquire the LLC from its sole member. The LLC has not elected to be classified as an association.
The IRS noted that non-recognition of gain under Section 1031, "Like-Kind Exchanges," applies only to the extent that the property is of a like kind.
Cite: LTR 200118023
From overpayment to deficiency
The U.S. Tax Court noted that the IRS had correctly credited an individual's overpayment from 1997 against an earlier liability. But it held that, because that overpayment was determined to be overstated in error, the individual now has a deficiency in income tax for 1997.
Robert Barkley Sr. filed a Form 1040A, "Amended Income Tax Return," for 1997, claiming a credit for child- and dependent-care expenses. Mr. Barkley attached Schedule 2, "Child and Dependent Care Expenses for Form 1040A Filers," but failed to complete Part III, "Dependent Care Benefits." That caused the claimed credit to be overstated.
At the time that the 1997 return was filed, Mr. Barkley had unpaid income taxes for 1988 and 1989, and the IRS credited the 1997 overpayment against his 1988 liability.
In 1998, Mr. Barkley submitted an offer in compromise, offering to pay a fixed amount and agreeing to various terms and conditions, to settle his 1988 and 1989 liabilities. The IRS accepted.
The IRS then examined Mr. Barkley's 1997 return and issued a deficiency notice in 1999 for $960. The IRS conceded that the deficiency notice was in error, and the deficiency was $709.
Mr. Barkley conceded that his child-care credit was overstated, and that he had a balance due of $15 on his 1997 return.
Mr. Barkley claimed that the IRS shouldn't have credited the overpayment to his 1988 liability because the offer in compromise resolved his 1988 liability. Mr. Barkley also contended that the credited amount remained available to offset all but the $15 of excess child-care credit claimed.
Tax Court Special Trial Court Judge Robert N. Armen Jr. rejected Mr. Barkley's argument that the IRS shouldn't credit the overpayment against the liability, noting that the offer in compromise wasn't accepted until after the overpayment was credited.
The court rejected Mr. Barkley's other arguments and concluded that Mr. Barkley owed the IRS $709.
Cite: Robert W. Barkley Sr. v. Commissioner, T.C. Memo 2001-101
Worthless payment lands payer in jail
An unusual case surfaced recently in the 4th U.S. Circuit Court of Appeals, one that involved an individual's sentence for obstructing the administration of the tax laws.
Ernest Coble, retired and in his early 70s, was a commercial-airline pilot. On Dec. 11, 1995, the IRS issued him a deficiency notice for $264,904, to which he responded with a letter accompanied by a "comptroller warrant" for $529,808.
Mr. Coble demanded a refund of the difference between the warrant and his liability, and he threatened to bill interest if the IRS failed to pay him.
The warrant, one of many issued by Leroy Schweitzer, head of the outlaw Freemen organization in Montana, was worthless. An IRS agent visited Mr. Coble and notified him that the warrant was worthless. Mr. Coble, however, sent two more letters demanding that the IRS accept the warrant as payment for his taxes.
In 1999, Mr. Coble was convicted in federal court of attempting to obstruct administration. He was sentenced to probation and a period of home confinement. The IRS appealed the sentence.
The appeals court concluded that the continuing letters and demands for repayment undermined the argument that the initial act was the product of a thoughtless, aberrant moment. Thus the court rejected that basis for a lighter sentence.
The appeals court next considered the lower court's reliance on the "discouraged factors" to justify a light sentence, such as physical condition or age. The court found that the factors did not warrant that lighter sentence.
Thus the appeals court reversed the light sentence and remanded the case to the lower court for re-sentencing.
Cite: United States v. Ernest F. Coble Jr., No. 00-4247 (4th Cir. April 27, 2001)
