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The avenues open to taxpayers for disputing IRS decisions may be far from perfect, but would a proposed new small-claims court solve the problems? Tax professionals wonder.
The Tax Court currently hears all taxpayer disputes with the Internal Revenue Service—from individual taxpayers to multimillion-dollar corporations—that aren’t settled in the IRS’s Appeals Office. With a new proposal for a separate court to handle smaller tax disputes, practitioners have raised concerns about whether the IRS and the proposed court would be sufficiently separate, and if emphasis on actual tax enforcement would dwindle with the addition of another avenue for tax protests.
House Republicans in June released their plan for a tax overhaul, in which they describe splitting the IRS into three units: one for families and individuals, one for businesses and one for a small-claims court. According to the GOP blueprint, the small-claims court would be independent of the IRS, and would allow taxpayers to resolve disputes more quickly, “so that small businesses no longer spend more in legal fees to resolve a dispute with the IRS than the amount of tax that was at stake.”
Although few details about the proposed small-claims court have been released, practitioners emphasize the importance of the tax appeals process being independent of the IRS, and warn that a quicker turnaround of tax cases isn’t always a positive thing.
Once a taxpayer has received a deficiency notice, practitioners say, the process of appealing a liability with the Appeals Office through its settlement officers, followed by a potential appeal to the U.S. Tax Court, can be a daunting task. According to some, educating individual taxpayers fighting a small deficiency might be a better alternative to adding a new court.
Robert Kovacev, a partner at Steptoe & Johnson LLP, told Bloomberg BNA that he thinks there is room for improvement in the appeals process, and that taxpayers who are understandably intimidated by dealing with government agencies like the IRS could benefit from a revamped process.
“I think definitely for small taxpayers and individuals with small businesses that there is a lot of room to streamline the process,” Kovacev said. “The appeals process works pretty well for large sophisticated taxpayers represented by experienced tax counsel, but for the little guy it’s pretty daunting.”
Other practitioners view budget concerns and IRS personnel issues as factors behind what some call an inefficient and expensive enforcement process.
Brian McManus, a partner at Latham & Watkins LLP, told Bloomberg BNA that the culture and processes at IRS Appeals have changed as the agency has struggled in recent years with budget cuts, retirements and low morale.
“Appeals officers are overworked and unable to devote adequate attention to fairly resolving individual tax disputes,” McManus said, adding that taxpayers are frustrated by the IRS’s enforcement and resolution process, which is in great need of change.
According to Kovacev, the time it takes to get a dispute through the IRS Appeals Office continues to grow. “Sometimes months go by before you get a rebuttal, then more months before there is an appeals conference. For an individual taxpayer, you might not realize that appealing to the Tax Court is an option—some don’t believe the appeals process is really independent from the IRS.”
In their proposal for a small-claims court, House Republicans emphasized that adding such a unit would allow taxpayer issues to be resolved faster. While practitioners consider streamlining the appeals process a priority, the idea of cases moving faster raises concerns about whether issues will get the attention they deserve.
Ronald D. Aucutt, a partner at McGuireWoods LLP, told Bloomberg BNA that while tax practitioners want to see their matters before the court move faster, complicated issues sometimes need time for case development.
“They don’t want to create a system that is so streamlined, so efficient, that basically every taxpayer wins and there is no checking of what the taxpayer says as to the facts and the law,” he said.
In terms of suggestions for the proposed small-claims court, Kovacev said that an independent mediator between the IRS Appeals Office and the Tax Court would be a step in the right direction.
McManus said the Appeals Office in its current state isn’t adequately independent from the IRS’s broader mission of tax collection and enforcement.
“I think further separation between the enforcement and appeals functions at the IRS is a good idea,” he said.
Aucutt echoed the importance of separation for taxpayers. “There’s a concern of independence with Appeals that won’t go away by changing names and calling it something else,” Aucutt said.
Kovacev said there are rules outlined in the Internal Revenue Manual that create safeguards for a taxpayer’s right to appeal to an office independent of the enforcement function. The safeguards are essential for taxpayers, he said, and need to be considered when reconfiguring the current appeals process because they force the Appeals Office to take an independent look at a taxpayer’s liability.
The Tax Court currently has a small-case docket that, according to practitioners, serves a function seemingly similar to that of the proposed small-claims court.
“There is a strong and extremely efficient ‘small-claims’ process already built into Tax Court, and low-income tax clinics around the country are doing remarkable work to assist taxpayers with resolving their claims,” McManus said, although he added that Tax Court litigation isn’t an adequate substitute for an efficient and fair enforcement process, especially for taxpayers who can’t afford representation.
Aucutt said that regarding IRS enforcement, Congress needs to appreciate that the IRS is a “profit center” when contemplating the idea of a small-claims court.
“The interest of the revenue service needs to be given a fair hearing also,” Aucutt said. “I’m concerned with seeing so little emphasis on enforcement that there might not be any expectation that folks in Congress will fund enforcement.”
The office of House Ways and Means Committee Chairman Kevin Brady (R-Texas) declined to provide further details on the small-claims court proposal, but said that House members are making good progress on revisions that will help frustrated taxpayers efficiently resolve their issues at the IRS.
With assistance from Aaron E. Lorenzo in Washington.
To contact the reporter on this story: Matthew Beddingfield in Washington at mBeddingfield@bna.com
To contact the editor responsible for this story: Meg Shreve at email@example.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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