IRS battles coverup accusations in Tax Court

Delivered every Monday by 10 a.m., Weekly Tax examines the latest news in tax politics and policy.

Jun 05, 2023 View in browser   By Benjamin Guggenheim THE IRS’S TRUST DEFECIT: As newly appointed IRS Commissioner Danny Werfel seeks to transform the agency with tens of billions of new funding from the Inflation Reduction Act, the agency is simultaneously grappling with several highly politicized issues. The two most prominent cases — one involving alleged intimidation of journalist Matt Taibbi and another involving claims of political interference in Hunter Biden’s tax case — have been widely leveraged by conservative lawmakers to argue that the agency is undeserving of the public’s trust and should be subjected to sweeping budget cuts. The IRS, of course, is a favorite target of many Republicans, and Werfel, while unable to discuss specific cases, has defended the agency’s credibility against accusations of bias. The agency is also involved in a fracas that hasn't gotten much attention outside the tax community because it involves rather technical applications of agency procedures, that have cast doubt on whether the IRS fairly enforces the tax laws. The case involves a partnership that claimed tax breaks for conservation deals and accuses the IRS of engaging in a coverup of a mishandling of documents by the agency that could make a difference of millions of dollars of penalties assessed against the taxpayer. Motions filed by the partnership, LakePoint Land Group, allege the IRS intentionally backdated a document that it needed to impose steep gross misvaluation penalties on $38 million in deductions claimed by the partnership. LakePoint says attorneys for the IRS then failed to notify the Tax Court of the backdating and tried to obfuscate the fact that the IRS had used the documents — with sworn declarations submitted to the court record testifying to the date of the records that later turned out to be false. “All to create the false appearance that the IRS had followed the rules imposed by Congress to protect the citizenry against IRS abuse,” Rod J. Rosenstein said on behalf of LakePoint in a separate Freedom of Information Act complaint filed May 31. The agency has acknowledged the error, saying it was unintentional and shouldn't invalidate penalties levied against LakePoint. BUT FIRST: A hearty welcome to the week from the tax team at POLITICO. On the topic of IRS challenges: As our Caitlin Oprysko wrote last week, tax prep companies are hard at work lobbying against the idea of a direct free filing system at the IRS and have recruited former staff heavyweights from the House Ways and Means and Senate Finance committees in as the Biden administration undertakes a direct filing pilot program. Don’t let us miss anything. Email: bfaler@politico.com, bguggenheim@politico.com and teckert@politico.com. Or Twitter: @tobyeckert, @brian_faler, @ben_guggenheim, @POLITICOPro and @Morning_Tax. Want to receive this newsletter every weekday? Subscribe to POLITICO Pro. You’ll also receive daily policy news and other intelligence you need to act on the day’s biggest stories.   GET READY FOR GLOBAL TECH DAY: Join POLITICO Live as we launch our first Global Tech Day alongside London Tech Week on Thursday, June 15. Register now for continuing updates and to be a part of this momentous and program-packed day! From the blockchain, to AI, and autonomous vehicles, technology is changing how power is exercised around the world, so who will write the rules? REGISTER HERE.     FOR THOSE OF US WHO AREN’T TAX LAWYERS the LakePoint case can be a little difficult to understand, but the gist of it if this: Under the tax code a revenue agent at the IRS responsible for initially determining the penalties in a tax case needs to get the approval of their supervisor before the IRS sends out a notice of the penalties to a taxpayer. In this case, the IRS originally said that the “lead sheet” laying out the penalties to be assessed against LakePoint was signed by an agency supervisor on July 2016, around eight months before the IRS sent out an adjustment notice to the partnership. But LakePoint says documents uncovered during the discovery process show the revenue agent had actually overlooked including the hefty misvaluation penalty in the July 2016 “lead sheet” and then went back to their supervisor in February 2017 to ask to include the penalty. “HUGE oversight,” the supervisor said in emails obtained by LakePoint’s lawyers when alerted to the omission. The partnership says the supervisor then signed off on the updated “lead sheet” and manually typed the backdated “7/16/2016.” A “digital signature” that the supervisor had used before would have reflected the true date of the signature, LakePoint says. The partnership argues that the IRS attorneys should have become aware that the date of the approval was wrong by November 2022 but that the attorneys did not attempt to rectify the court record, which included both the fraudulent documents and false sworn statements. Nor, LakePoint says, did the IRS attorneys provide key evidence in a clearly organized way that is required in the discovery process. What happens from here: There’s some legal ambiguity around how long in advance the IRS has to get a supervisor’s approval for penalty assessment and it’s possible that a tardy approval could have put the agency’s case in jeopardy, yet the signing of a fraudulent document as part of an audit by anyone in the government is no joke: it constitutes a felony. In an April motion with the Tax Court the IRS admitted to the error but said it was unintentional, adding that the “commissioner expresses his contrition and apologizes to the Court and to petitioner for this error.” But the IRS continues to argue that the penalties assessed against LakePoint should be upheld, while LakePoint wants compensation for attorney fees and sanctions against the IRS. The agency did not immediately respond to a request for comment on the case from Weekly Tax. A NEW TOP LAWYER: Perhaps amidst all the change at the IRS, there couldn’t have been a better time for the Treasury to finally get a new IRS chief counsel. After a vacancy of more than two years, President Joe Biden tapped Marjorie Rollinson to be the IRS’s top lawyer on Friday. Rollinson was most recently Deputy National Tax Leader at EY and was formerly an associate chief counsel at the IRS, overseeing an office of 100 tax lawyers that worked on, among other things, regulations related to the international tax laws implemented by the Tax Cuts and Jobs Act. “[Marjorie] will be able to hit the ground running at IRS, having worked at the agency for years in both Democratic and Republican administrations,” said Treasury Deputy Secretary Wally Adeyemo. The chief counsel will be heavily involved in the crafting of the legal interpretations of tax provisions of the Inflation Reduction Act, including those related to a 15 percent corporate minimum tax on the largest American companies as well as a new tax on stock buy backs. DEMS HAMMER IRS DEFUNDING: As for the last thing on our agenda, Democrats aren’t terribly happy about the $21.4 billion reduction in IRS funding that was included in the debt ceiling agreement, and you might find it interesting that Sen. Sheldon Whitehouse (D-R.I.) is wielding new Congressional Budget Office estimates that indicate the agency cuts would add $19 billion to the deficit. “Republicans’ fealty to their megadonors is on full display, as is the hypocrisy of forcing cuts to the IRS that add $19 billion to the deficit,” Whitehouse said. And here’s Finance Committee Chair Ron Wyden (D-Ore.), who voted for the broader Fiscal Responsibility Act despite being one of the IRS’s biggest advocates in Congress: “It should outrage every American that Republicans were ready to tank the economy just to help the rich cheat on their taxes.” Around the World Bloomberg: “What UAE’s New Corporate Tax Means for Its Business-Hub Status” The Independent: “Rishi Sunak ‘wants to cut tax by 2p’ before general election” Reuters: “China Will Extend Purchase Tax Exemption for NEVs -Cabinet Meeting” Around the Nation Bloomberg: “Hedge Funds Cash In on Covid-Era Tax Credit With IRS Backlog” LA Times: “Celebs dodged millions in L.A.'s 'mansion tax.' Meet the industry guarding their wealth” Also Worth Your Time AP: “After decades of attempts, major Alabama bill to cut state's 4% grocery tax wins final passage” Tax Notes: “Your Quick Guide to Our Uncertain and Scary Fiscal Future” Guardian: “People are going homeless in this Victorian getaway spot. Could an Airbnb tax be the answer?” Did you know? The Family Research Council, a conservative activist group that filed amicus briefs advocating for the overturning of constitutionally guaranteed abortion rights, is a church in the eyes of the IRS.   DON’T MISS POLITICO’S HEALTH CARE SUMMIT: The Covid-19 pandemic helped spur innovation in health care, from the wide adoption of telemedicine, health apps and online pharmacies to mRNA vaccines. But what will the next health care innovations look like? Join POLITICO on Wednesday June 7 for our Health Care Summit to explore how tech and innovation are transforming care and the challenges ahead for access and delivery in the United States. REGISTER NOW.       Follow us on Twitter Toby Eckert @tobyeckert Bernie Becker @berniebecker3 Brian Faler @brian_faler Benjamin Guggenheim @ben_guggenheim   Follow us

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