Tax Lawyer's Blog

From Paul Caron:

The ABA Committee on Government Affairs on Friday sent this letter to the IRS expressing its opposition to the proposals to require taxpayers to disclose uncertain tax positions to the IRS: 

On behalf of the ABA, I write to express our concerns regarding the proposals contained in IRS Announcement 2010-9, 2010-7 I.R.B. 408, Announcement 2010-17, 2010-13 I.R.B. 515, and Announcement 2010-30, 2010-19 I.R.B. 668 (collectively, the Announcements). The Announcements would require disclosure of uncertain tax positions through the required filing of Schedule UTP by certain business taxpayers….

We are concerned that the disclosure proposals set forth in the Announcements, by requiring identification of specific uncertain tax positions and elaboration of the taxpayer’s views and assessments of those positions, will undermine the protections afforded by the attorney-client privilege and attorney work product doctrine, as well as the related § 7525 tax practitioner’s privilege….

[T]he ABA urges the Service to withdraw the disclosure proposals in the Announcements and instead rely on existing methods of obtaining information.

On the other hand, Carl Levin, Chair of the Senate Permanent Subcommittee on Investigations, sent this letter to the IRS praising its approach in the three announcements and urging that “the proposal be strentghened to cover more taxpayers.”

I agree with the ABA’s position. The tax code is so complex that virtually any tax position taken by a tax preparer might be considered uncertain and thereby require disclosure.

Also, the forcing of tax return preparers to identify and disclose tax positions that are merely uncertain emasculates the right to representation provided in the taxpayer bill of rights.¹ If the right to representation is to have any meaning whatsoever, the government cannot be allowed to dilute the value of that right by creating a conflict of interest between the representative and his his client.²

Of course, the objective behind the new rules is obvious: The IRS has limited resources and as a consequence can only select a very small percentage of tax returns for audit. But by compelling tax preparers to make in depth evaluations of the tax return positions taken by their clients and then disclose to the IRS those positions that are uncertain, the IRS is in effect outsourcing the audit function to tax preparers without compensating those preparers.

Footnotes:

¹  Tax preparers regularly and rightly* advise taxpayers whether or not to take a certain tax position on their tax returns based on whether the taking of that position will increase the chances of their return being selected for audit. The reason they do this is because an IRS audit is time consuming, stressful and may result in the assessment of additional taxes, interest and penalties that the taxpayer will be forced to dispute in Tax Court. Even if the audit ultimately results in no change to the taxpayer’s originally filed tax return, it is a disruptive force in a person’s life and/or business and should be avoided whenever possible.

* Some people have suggested that preparing a tax return in such a manner so as to decrease the likelihood of an audit is a form of tax evasion and should be made illegal. For more on this issue read my blog post Audit Avoidance a Tax Crime? 

²  By requiring tax preparers to disclose uncertain positions taken on their clients’ returns the IRS is setting up a conflict between the preparer’s interests and those of his client. By disclosing all uncertain positions the preparer will be able to avoid preparer penalties and potential sanctions by the Office of Professional Responsibility, but by doing so he virtually guarantees that his client’s tax return will be selected for audit.

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