The IRS Is Not Just About Taxes

Blog Post by Robert B. Teuber

The recent National Taxpayer Advocate’s mid-year report observes that the IRS has, over the past several years, developed into a dual role agency.

The report identifies that the IRS’ roles are now:

  1. To encourage tax compliance and
  2. To deliver social benefits and programs.

Most taxpayers are familiar with the IRS role of ensuring the filing of tax returns, the auditing of those returns and the collection of tax due. The Taxpayer Advocate report also appropriately identifies that the IRS resources are largely being diverted by the administration of social programs such as:

  • Administering billions of dollars to millions of taxpayers in economic stimulus payments.
  • Making work pay credits.
  • First time home buyer credits.
  • Hybrid car credits.

Without regard to the politics of these credits and social programs, there is a certain sense of logic to having the IRS administer these kinds of programs. The IRS has an existing infrastructure for managing and tracking the credits and payments. However, the significant observation by the Taxpayer Advocate is that the dual role of the IRS as it has evolved should receive a formalized acknowledgement in order to allow it to operate effectively.

Only by acknowledging the dual role of the IRS is it likely that additional resources will be provided to the IRS. This is necessary due to the substantial diversion of IRS resources to activities other than ensuring tax compliance. While the role of the IRS has increased, the resources allocated to it have not increased correspondingly. This is bad.

While it may be perceived as a bit counterintuitive that a tax attorney who is regularly engaged in disputes with the IRS would suggest that the IRS requires additional funding, this is exactly what the organization needs. Without adequate funds and staff, the IRS cannot function properly.

The Taxpayer Advocate’s report observes that the IRS is failing to consider all programs in place for resolving existing tax issues. This is largely due to the workload currently burying the IRS. Given the resources the agency has, its employees simply cannot be bothered to consider each taxpayer’s situation to find the best resolution. As a result, it holds fast to the “one-size fits all” approach to the majority of tax disputes.

Perhaps by accepting the social role that the IRS has grown into could lead to additional and adequate funding to prevent the current resources of the tax authority from being further overwhelmed. I withhold my opinion as to whether it is appropriate for the IRS to administer social programs in addition to ensuring tax compliance. However, I note that if the IRS is to serve multiple purposes, it should be funded and staffed to a level at which it can in fact serve the dual role.

Guidance Issued Regarding Procurement Cards and Sales and Use Tax Audits

Blog Post by Mark W. Siler

In the most recent Wisconsin Department of Revenue Sales and Use Tax Report, the Department provides guidelines with respect to sales and use tax issues associated with procurement card programs.  Generally, a procurement card program allows certain individuals within a company to purchase designated items without having to go through the company’s purchasing department and all of its pre-approval processes and paperwork requirements. A bank card company provides procurement cards to certain employees. These employees can use the cards to purchase specific items (which are pre-approved by the company) directly from suppliers. At the end of each month, the bank card company that administers the company’s procurement card program issues a monthly statement setting forth all of the purchases made through the program during the prior month. This convenience and reduction of paperwork (only a simple statement is required for all items purchased using the procurement card during the month, as opposed to an invoice for each transaction) concerns the Department.

Obviously, whether an item is purchased with a procurement card or through more conventional means has absolutely no impact on whether the purchase of that item is taxable; however, it may seriously impact the Department’s ability to perform an effective sales and use tax audit. The Department utilizes various methodologies for conducting sales and use tax audits and nearly all of them involve sampling invoices to examine the taxpayer’s purchasing activities. The use of a procurement card makes this type of sampling more difficult because rather than having an individual invoice for each transaction, many purchases are combined into each monthly statement provided by the card issuer, making it harder to locate the specific transaction the Department wishes to sample. To solve this problem, the Department has issued guidance as to what information a company should keep in order that the details of any particular purchase can be made available to the Department upon request.

At a minimum, the Department suggests maintaining the following minimum supporting documentation:

  1. A vendor issued invoice, receipt or statement detailing the total amount purchased, date purchased, general ledger being charged and associated sales tax charged, as applicable;
  2. Cancelled checks or other records indicating the amount actually paid for the purchase;
  3. Computations of any applicable self assessed use tax accruals;
  4. A record of the location where the good or services are used or consumed;
  5. Appropriate information to support a claimed exemption for a given purchase, where applicable.

Therefore, if your company has implemented a procurement card program, a review of your recordkeeping policy may be in order to ensure that you are prepared should the Wisconsin Department of Revenue come calling with an audit notice.

Court of Appeals Invites Change to Wisconsin’s Rule on Fiduciary Duty to Creditors

Blog Post by Barry R. White

The Wisconsin Court of Appeals recently reaffirmed Wisconsin’s rule that officers and directors of an insolvent corporation do not owe a fiduciary duty to the creditors of the corporation as long as the corporation is still operating. In most states the rule is that once the corporation becomes insolvent, the officers and directors must put the interests of the creditors ahead of their own personal interests and ahead of the interests of the shareholders.

In the case, Polsky v. Virnich, et al., a company went out of business leaving many creditors unpaid. A court appointed receiver sued two of the officers of the corporation (who were also the only shareholders) claiming that they took $6.5 million out of the company while it was insolvent, and that money should have been used to pay creditors. The case went to a jury trial and the receiver obtained a $6.5 million verdict against the two officers.

When the case went up on appeal, the Court of Appeals referred it directly to the Wisconsin Supreme Court asking the Wisconsin Supreme Court to clarify or change Wisconsin’s rule that a corporation must be both insolvent and no longer operating in order for the officers and directors to owe a fiduciary duty to creditors. The Wisconsin Supreme Court split on the issue and, therefore, the case was sent back to the Court of Appeals for a decision. The Court of Appeals reluctantly noted that it was bound by the prior Wisconsin case law which holds that officers and directors only have a fiduciary duty to creditors if the corporation is both insolvent and no longer a going concern. Since the two defendants in this case took the $6.5 million out of the corporation while it was still operating (although insolvent and unable to pay its creditors), the Court of Appeals reversed the jury verdict and the creditors got nothing. The Court of Appeals noted that Wisconsin’s minority rule is problematic, and encouraged the Wisconsin Supreme Court to modify the rule in the future. The opinion is available here through the Wisconsin Court System website.

The Taxpayer Advocate Says That The IRS is Undermining Tax Compliance

Blog Post by Robert B. Teuber

The office of the National Taxpayer Advocate, an independent government watchdog over the Internal Revenue Service, has issued its 2010 mid-year report evaluating the Internal Revenue Service’s practices.  The overall theme of this report (as in prior reports) is that the IRS’s collection practices are in grave need of overhaul.

Some of the highlights of the report include the following comments concerning the particularly onerous collection practices of the IRS:

It is increasingly difficult for taxpayers whose circumstances do not fit into checklist parameters to find someone able to address their problems.

The IRS is failing to address the needs of taxpayers who are experiencing economic difficulties and has not revised collection policies that harm taxpayers, thereby undermining its goal of increasing voluntary compliance.

The IRS has failed to utilize the significant collection alternatives available to it to resolve taxpayer debts, thus, leading to increasing accounts receivable on the IRS books, while taxpayers face staggering accruals of penalties and interest that impact their future compliance.

There is a general and extremely unfortunate perception in parts of the IRS that taxpayers who fall behind on their tax payments are “bad” taxpayers who deserve what they get.

What do these comments mean? They mean that the National Taxpayer Advocate, charged with oversight of the IRS, has observed the same thing that taxpayers across the country have experienced first hand.

What else does this mean? Probably very little. The onerous collection practices of the IRS and the failure to adequately consider collection alternatives based on a taxpayer’s circumstances, is something that has been reported in several of the reports. Until we see corrective action by the IRS or mandated by Congress, we have to consider that the tax authority will conduct “business as usual.” We should expect the IRS will do so in spite of these observations by the Taxpayer Advocate. This will likely result in additional unpaid taxes and greater non-compliance by the American public.

Disclaimer

The comments and opinions expressed in this blog are intended for informational purposes only and do not constitute legal advice. Reading or using the information in this blog does not create the existence of an attorney-client privilege. Due to the changing nature of the law, the blog posts may contain dated material. For an update on the current law and the application of the law to your particular facts and circumstances, consult a legal advisor. The information contained herein is not a substitute for obtaining legal advice from a qualified attorney licensed in your state.