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IRS Chief Counsel Signals Increased Tax Enforcement

The Internal Revenue Service (IRS) Chief Counsel is the chief legal advisor to the Commissioner of Internal Revenue on all matters pertaining to the interpretation, administration and enforcement of the Internal Revenue Laws. In this regard, the IRS Office of Chief Counsel is responsible for litigating cases in the US Tax Court. Such cases can arise from examinations conducted by different divisions within the IRS, such as the Large Business & International (LB&I), Small Business/Self Employed (SB/SE), Tax Exempt & Government Entities (TE/GE) and Wage & Investment (W&I) Divisions.

On January 21, 2022, the IRS Office of Chief Counsel announced plans to hire up to 200 additional attorneys to assist with litigation efforts. The announcement specifically notes that new hires are necessary “to help the agency combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes.” They will also help the IRS manage its increasing caseload as part of its multiyear effort to combat what it believes are abusive schemes and to ensure that the appropriate taxes and penalties are paid. The new hires will be located around the country and focus on audits of complex corporate and partnership issues.

Additionally, there are a significant number of cases before the Tax Court that involve conservation easements and micro-captive insurance arrangements. The IRS’s attack on the donation of conservation easements is well known in the tax world. To date, the IRS has largely been successful in these cases based on non-valuation arguments that easement deeds do not comply with the applicable regulations. However, in the recent Hewitt v. Commissioner case, the US Court of Appeals for the Eleventh Circuit dealt a significant blow when it held that the IRS’s interpretation of Treas. Reg. § 1.170A-14(g)(6)(ii) was arbitrary and capricious and violated the Administrative Procedure Act because the US Department of the Treasury failed to respond to significant comments submitted during the notice-and-comment process. Many conservation easements are within the Eleventh Circuit’s jurisdiction and other appellate courts are expected to weigh in soon, which could result in the IRS and taxpayers proceeding to trial on valuation issues. Valuation issues are inherently fact intensive and will require the IRS to utilize substantial resources to litigate.

Practice Point: Much has been written about the trend of decreased enforcement by the IRS over the past several years, owing in part to decreased or stagnant funding from US Congress. Tax litigation, particularly in fact intensive cases involving valuation issues and transactions the IRS (but not necessarily the courts) deemed abusive, requires the expenditure of substantial resources by the IRS. The IRS has signaled that it is ready to reverse the trend. All IRS tax controversies start with the examination of the taxpayer’s positions on the return. We have seen an increase in IRS audit activity in the last year or so, especially with medium-sized businesses and high-net-worth individuals. The Chief Counsel is assembling his “army” to litigate positions developed during the examination. It’s a good time for taxpayers [...]

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The Results are in: IRS Appeals Retains Discretion to Continue to Allow Exam Teams and Chief Counsel to Attend Conferences

The IRS Independent Office of Appeals (IRS Appeals, Appeals) has seen many changes over the past several years. One of the more controversial and publicized change related to the 2017 pilot program to test whether inviting Large Business & International (LB&I) exam teams and Chief Counsel attorneys to engage with taxpayers and their representatives at the IRS Appeals conference would improve Appeals’ ability to work large, complex cases. The pilot program technically applied only to IRS Appeals’ largest and most complex cases, however, the IRS also revised the Internal Revenue Manual to provide IRS Appeals with discretion to invite exam teams and Chief Counsel attorneys to any conference. The pilot program ended on May 1, 2020, and the IRS has been gathering feedback and data from multiple sources (both within and outside the IRS) to determine the effectiveness of the program.

The results are in, as reflected in the recently released Appeals Team Case Leader Conferencing Initiative: Summary of Findings and Next Steps (IRS Appeals Summary). Generally, IRS Appeals Officers found that the exam team’s participation improved their understanding of the dispute and helped them identify, narrow and resolve factual and legal differences between the parties before engaging in settlement negotiations with taxpayers. On the other hand, some taxpayers expressed concerns over the presence of exam teams and Chief Counsel attorneys because they found it hindered the ability to resolve cases without litigation and required more concrete ground rules before the start of the conference.

The IRS Appeals Summary concluded that the process was generally helpful and that IRS Appeals would be given discretion to invite exam teams and Chief Counsel attorneys to attend the IRS Appeals conference in the future. In exercising such discretion, the Appeals Officer must consider several factors and solicit and consider both the taxpayers’ and the exam team’s views as to whether joint participation would be helpful.

Practice Point: Our experiences with the exam team and Chief Counsel attorneys attending the IRS Appeals conference has been mixed. Similar to concerns raised by other taxpayers, we have seen certain IRS personnel repeatedly interrupt the taxpayer during the presentation of their case and offer the exam team’s views of an acceptable settlement. However, we have also seen situations where the IRS Appeals Officer has been able to hold IRS personnel accountable by questioning factual and legal positions. In any event, exam team participation is here to stay and LB&I taxpayers and their representatives need to be aware of the new ground rules in this area.

Prior coverage of changes within the IRS Appeals can be accessed below.




Chief Counsel William J. Wilkins Resigns Effective January 20, 2017

William J. Wilkins has tendered his resignation as Chief Counsel effective as of noon on January 20, 2017. Mr. Wilkins was nominated by President Obama to replace Donald L. Korb, who resigned from the position in late 2008. Mr. Wilkins was confirmed by the Senate to serve as Chief Counsel in July 2009. Prior to becoming Chief Counsel, Mr. Wilkins was a partner with WilmerHale and previously worked for the United States Senate Committee on Finance and as an associate at King & Spalding. He previously served as Chair of the Section of Taxation of the American Bar Association. William M. Paul has been named as Acting Chief Counsel.

The Chief Counsel is appointed by the President of the United States with the advice and consent of the United States Senate. The Chief Counsel is the chief legal advisor to the Commissioner of Internal Revenue on all matters pertaining to the interpretation, administration and enforcement of the Internal Revenue Laws and provides legal guidance and interpretive advice to the Internal Revenue Service, Treasury and taxpayers.




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