Federal Tax Procedure — Fall 2007 [Mazza]
1. Overview of Federal Tax Controversies
a. Introduction — federal tax controversies generally involve disputes between private party taxpayers – either individuals or entities such as corporations, and the Internal Revenue Service (IRS). The IRS is part of the Treasury Department, and is the administrative agency responsible for administering the Internal Revenue Code (IRC) and collecting federal taxes. Other entities involved include (1) Congress, which writes the tax law; (2) the Joint Committee on Taxation, which must approve all refunds exceeding $2M; (3) the Treasury Department, which promulgates regulations to effectuate the laws; and (4) the Department of Justice, which litigates civil tax cases other than those in the Tax Court, and also prosecutes all criminal tax cases.
b. The Self-Assessment System — the federal tax system is founded on the principle of “self-assessment.” The IRS doesn’t compute taxpayers’ liabilities in the first instance; rather, the Code requires taxpayers to determine their own tax liabilities, file returns reflecting those liabilities on proper forms, and pay the resulting liabilities by a certain date.
i. The “Tax Gap” — most taxpayers voluntarily comply with the system; however, the IRS estimates the tax gap, or amount of tax liability owed but not voluntarily and timely paid, at around $95B this year, just for individual taxpayers. This is approximately a 17% noncompliance rate for individual taxpayers.
ii. Techniques to Stimulate Compliant Behavior — the IRS currently relies on:
1. Withholding-at-source — a substantial portion of all collected tax is withheld at the source (e.g., employer) and submitted directly to the government.
2. Information-reporting systems — payors submit information returns (e.g., Form W-2 for wages) to both taxpayers and the IRS; taxpayers’ returns are checked against these documents for accuracy.
4. Civil Tax Penalties.
5. Criminal Prosecution.
c. The Internal Revenue Service — the agency is headed by the Commissioner of Internal Revenue, who is appointed by the President and confirmed by the Senate. IRC § 7802. Until recently, the IRS had a three-tier structure. There were 33 district offices (each headed by a District Director) and ten service centers, organized geographically. Each office was responsible for applying the law to every taxpayer within the office’s geographical boundaries. Four regional offices oversaw the district offices, and a national office in Washington, D.C. oversaw the regions. This structure was largely dismantled by the IRS Reform Act.
i. IRS Restructuring & Reform Act of 1998 — the national office continues to exist in Washington, D.C. but is now called the Nati
the IRS’s Coordinated Examination Program (CEP). Organized into five “industry segments”: (1) Retailers, Food and Pharmaceutical; (2) Natural Resources; (3) Financial Services; (4) Heavy Manufacturing and Transportation; and (5) Communications, Technology and Media.
Tax Exempt and Governmental Entities Division (TE/GE) — includes pension plans, exempt organizations, and governmental entities that collectively remit to the government in excess of $198B in employment tax and income tax withholding. Organized into five segments: (1) a headquarters operation, located in Washington, D.C.; (2) Customer Account Services (CAS), which is responsible for service activities such as answering phones and customer relations; (3) Employee Plans, which is responsible for pensions, profit-sharing, and individual retirement plans; (4) Exempt Organizations, which is responsible for public charities, private foundations, and section 527 political organizations; and (5) Governmental Entities, which is responsible for federal, state, and local government agencies, including tax-exempt bond financing, and Indian tribes.