Mark Allison Comments on IRS Enforcement in Tax Notes

The IRS’s enforcement strategy of focusing on specific issues can be beneficial for both taxpayers and the stretched-thin agency, but it sometimes catches unintended targets, according to tax lawyers.

At a recent program hosted by the New York University School of Professional Studies, Mark Allison of Caplin & Drysdale said that the IRS has focused its enforcement efforts for at least the last decade on areas with high risk of noncompliance or greater risk to tax administration.

For example, the IRS began concentrating on full disclosure of offshore income and assets and then naturally shifted that approach to encompass cryptocurrency, Allison said. The agency also showed interest in investigating possible misuse of COVID-19 pandemic programs and potentially abusive transactions hawked by promoters, including syndicated conservation easements and microcaptive insurance arrangements, he added.

And while Allison thinks this has all been a logical direction for the IRS, he sees one risk in what has largely been a programmatic focus — campaigns and reportable transactions used as a tool for identifying and sweeping up potentially abusive transactions. “There continues to be, from the practitioner perspective, a risk of going too much in one direction,” he said.

“By that I mean sweeping in transactions that don’t fit squarely within the core of the abusive transaction, but the IRS nevertheless sweeps it up because of the broad nature of these campaigns and these reportable transactions,” he added.

. . .

Allison described a client who had donated a piece of property that may have been an easement in 2003. The client claimed a charitable deduction that the IRS audited 13 years later, he noted.

“So a transaction that on its own would have been nothing unique or special in 2003 was caught up and became a major focus of the exam team because they had their minds on conservation easements. And the thought was any charitable donation of a piece of property that has any semblance of something that might be viewed today as a conservation easement today must have been bad,” Allison said.

That taxpayer had to pay substantial legal fees in a long battle over something that didn’t fit the IRS’s stated focus — abusive syndicated conservation easement tax shelter transactions — and what should have been a brief issue in one audit was played out into a 15- to 20-year investigation, Allison said. “All because of something that really got swept up in the hype of the IRS’s focus,” he added.

For the full article, please visit Tax Notes’ website (subscription required).