IRS Criticised Over Suspected Tax Avoidance Cases

by Leroy Baker, Tax-News.com, New York

30 December 2010

United States Internal Revenue Service (IRS) employees ‘surveyed’ tax returns with abusive tax avoidance transaction (ATAT) issues without management approval, according to a report released by the Treasury Inspector General for Tax Administration (TIGTA).

It was said that combating ATATs is one of the IRS’s highest priorities. The IRS defines an ATAT as a transaction that reduces a tax liability by taking a tax position not supported by tax law or inconsistent with the intent of the law. A ‘survey’ is a determination by an IRS employee that the examination of the tax return is not warranted. On the other hand, it is generally expected that tax returns selected for examination will be worked to completion, and could result in assessing additional tax and bringing the taxpayer into compliance.

The TIGTA reviewed 311 tax returns with ATAT issues from 2006 to 2008 and found that group managers in the IRS’s small business/self-employed division did not always follow IRS surveying guidelines and did not always have justification for surveying specific tax returns.

“Surveying such tax returns without proper justification or approval could be counterproductive to the IRS’s goal to combat abusive schemes,” said J. Russell George, the TIGTA. “This approach can erode the public’s confidence in the IRS’s ability to enforce tax laws in a fair, equitable, and consistent manner.”

The TIGTA recommended that the IRS should develop internal controls and provide training for employees to ensure proper survey justification for tax returns with ATAT issues. He also recommended that returns be reviewed by an independent function, and that procedures be developed to ensure surveyed tax returns are included in the quality review process. The IRS agreed with these recommendations.

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