This is about a recent Supreme Court decision and the mis-reporting by some news agencies that reported a victory for taxpayers. We explain the case and the reporting first, and then we get to the Big Picture, which is what we’re concerned about, You should be too.
The case itself.
The Supreme Court decided the taxpayer has a right to conduct an examination of IRS officials when he has plausible reason to expect the IRS is acting in bad faith. The case, United States v. Clarke, grew out of an investigation of a partnership called Dynamo Holdings that had unusually high interest deduction claims. The investigation dragged on for several years. The IRS repeatedly asked the target to extend the three-year statute of limitations for assessing tax liability, which it agreed to do three times, presumably in the hopes of resolving the case in its favor. When the fourth request came around, Dynamo Holdings said no. The IRS then issued summonses to four people associated with the partnership. When they didn’t comply, the IRS enforced the summonses through court orders. Instead of quaking in their boots and complying, the four who were summoned fought back. They argued that the timing of the summonses, immediately after Dynamo Holdings refused to grant the extension, was evidence of impropriety. They further claimed that the IRS’s decision to enforce the summonses was to gain an advantage in a lawsuit that Dynamo Holdings had by then filed against the IRS.
In the Accounting Today view, in their first sentence of the final paragraph they reported that Clarke was a taxpayer victory. But in the prior paragraph, they quote Justice Kagan who makes it clear it’s not … “Making allegations of improper purpose are not enough. The taxpayer must show some credible evidence that gives rise to a plausible inference of improper motive. The taxpayer doesn’t have a blanket right to do that or conduct a fishing expedition and automatically get the right to a hearing.”
Update … Another bi-polar issue. Reuters reported a victory before reporting a loss. The two articles came out a paragraph apart. This is truly weird. Apparently few reporters read, and apparently no one double checks if they’re reporting on both sides of an issue. (Par for the course.) I find this same kind of competence runs rampant in the accounting profession.
Bloomberg, on the other hand, got it right. They reported that the 11th circuit opinion that had been a victory for taxpayers was reversed by the Supreme Court. The 11th circuit had held that a simple allegation of improper purpose was enough to get the IRS agents examined. But as we’ve just seen, the court, Justice Kagan’s, who wrote the opinion, makes it clear the victory was overturned. Another negative for taxpaying Americans.
Here’s the big picture …
With IRS misdeeds like targeting specific groups of Americans, destroying Lois Lerner’s emails, destroying other emails and probably even lying to Congress about it, with that still in headlines, the Supreme Court can see no need to rein in the IRS. Bloomberg, which is far from a conservative publication, concedes that the IRS is the closest thing to Dostoevsky’s Grand Inquisitor that our democracy allows.
While I don’t like a lot of things that are going on in our country today, on this particular issue I have some expertise.
The environment in the IRS and the attitude of its agents was once very similar to what it is today. I got so upset about it then that I ran for Congress. I lost, but the person who ran after me won when the sitting Congressman ran for the Senate. Midway through his first term he got hold of a penalty notice that included a late tax payment of a single dollar and penalties of more than $3,000. There are a lot of ways this could conceivably happen legitimately, but the Congressmen took the notice to the floor of Congress and made a rousing speech, and the issue went viral. After the hearings, which were well televised, the IRS apologized for their heavy handed ways and promised to straighten up. It’s too bad we let them off the hook because I believe the popular sentiment was to hamstring them. But alas and alack, we didn’t do that.
They did as they promised. For years they were the kinder and gentler IRS. But over time they slowly and surely inched their way back to the old heavy handed IRS. That process accelerated around 2008 when the government put the hammer down on tax collections and today we are right back to the old Gestapo-like IRS. In my experience today most agents think every taxpayer is a filthy, lying, cheating scoundrel.
As Bloomberg says … “The court established a reasonable-sounding rule: You can question the agents only if you can point to specific circumstances plausibly raising the inference of bad faith. Iin reality, however, it’ll be hard to pass this bar unless the courts share the skepticism of the IRS that is natural to most taxpayers.
Too bad. Initially I thought we had a good case here. But this is a horrible case.
bizztrategy @ Ellis CPA 