Expatriate Owl

A politically-incorrect perspective that does not necessarily tow the party line, on various matters including but not limited to taxation, academia, government and religion.

Monday, July 24, 2006

Pink Slips from IRS

I have been busy with various and sundry projects, including teaching my graduate course in Estate & Gift Taxation. It has thus far been quite challenging, and quite enjoyable.

It has been reported that the IRS plans to cut its Estate & Gift Tax audit workforce (for those of you who have access to Tax Analysts's Tax Notes Today, the cite is 2006 TNT 141-1). That's somewhere between 150 and 200 Estate Tax Attorneys to be pink-slipped by 30 September (which is the end of Uncle Sam's fiscal year). As further detailed in my post of 3 February 2006, the Estate Tax Attorneys are a unique group with specialized skills and training.

Though I certainly favor downsizing the Federal bureaucracy, I have significant reservations about this move. These misgivings go well beyond the obvious sentimental attachment I have with my former colleagues; many of those ETAs with whom I served when I was one of them are still doing the same thing for the IRS, and I certainly empathize with them.

But beyond my concern for my former co-workers, the IRS is sending the wrong message by cutting back on its Estate Tax examination function at this time. Shortly after handing in my badge to the IRS and went out into private practice, I encountered a prospective client who was contemplating a trust transfer in which a gift tax return was relevant. It seems that the previous gift tax return filed by the client a number of years previously had been incorrectly completed (for those of you with Estate & Gift Tax expertise, the annual exclusion had been applied to a future interest) but had nevertheless been accepted as filed by the IRS. I pointed this out, and expressed an intention to correct the mistake when computing the Gift Tax on the next retur. To put it delicately, I was told that there were other attorneys and accountants who would fill out a Gift Tax return that would cost the client less money.

I never got to fill out that Gift Tax return. I do not know who did (if, indeed, anyone did). What I do know is:

(A) if I had prepared a Gift Tax return that perpetuated the obvious error on the first return, and if that return would have been selected for audit (very likely), then I would have lost my credibility in the eyes of the IRS E&G attorneys who would have audited it. As mentioned above, these people are my former colleagues;

(B) Other attorneys and accountants are apparently willing to play the "audit roulette" game. If the tax return is accepted, great! If it is audited, they pay the interest and penalties. Over the course of 20 or 30 or 100 tax returns, they come out ahead in the long run. But the more practitioners who play "audit roulette," the more pressure is brought to bear upon those who will prepare their clients' tax returns in earnest. The IRS needs to have a noticed presence of audit personnel in the field in order to protect the honest practitioners.

Yes, the number of Estate and Gift Tax returns will likely to continue to decrease. But the IRS needs to send out a credible message that it is still being vigilant, else more people play "audit roulette." Now is not the time for sudden personnel cuts.

A better strategy would be to transfer some of the current E&G personnel to other appropriate IRS functions, with no loss in pay or rank or seniority (which I suspect might happen to at least some of the affected people). There are many attorneys in E&G who would be delighted to have a change in duties and scenery. The IRS spent much public tax money by sending these people to 4 weeks of basic training (more intense than anything I had in law school) plus other specialized training. Don't cut them loose after such an investment! Put them where they can continue to serve America!


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