There’s already plenty of reasons to doubt that the IRS truly has taxpayers’ best interests at heart. From the almost inherently adversarial relationship between the taxing authority and the taxpayer to high-profile leaks of taxpayer information to the agency’s recent budget blowout with a mandate to catch tax cheats, taxpayers would have to be quite naive indeed to place their trust in the IRS. But a recent IRS blunder suggests that the scale of IRS agents’ willingness to bend the rules in order to score a win may be even greater than previously imagined.
Back in 2013, LakePoint Land, a limited liability partnership, claimed $38 million in deductions for a donation of a conservation easement to a charitable organization. The IRS, which as part of its recent emphasis on enforcement has been heavily scrutinizing such deductions, imposed steep penalties on LakePoint in 2016 for allegedly misvaluing these deductions.
However, in doing so, IRS agents seem to have cut some corners when they found the approval process for these penalties to be inconvenient. Though agents’ penalty assessments must be signed off on by a supervisor, the agent failed to do so.
When this oversight came to the attention of the IRS’s Office of Chief Counsel, it let the agent know that it could not assess the penalties unless the agent had received written supervisor approval at the time. The agent then let their supervisor know, who responded with “HUGE oversight”... before proceeding to backdate the signature eight months after the fact and try to cover it up.
Seemingly everyone at the IRS who encountered this blatant violation of protocol instinctively responded by trying to perpetuate the cover-up. Not only did that same supervisor make a sworn declaration to the court that they approved the penalties on the false, backdated date, but the agency continued to rely on the falsified records before the Tax Court. It was only five months after IRS lawyers were made aware of the fraudulent date that they deigned to tell the court.
Throughout this debacle, the IRS has attempted to present the record backdating and resultant coverup as a regrettable but also inadvertent and largely irrelevant procedural failing, calling the errors “harmless.” Clearly the IRS didn’t think much of falsifying official records, as it has already been accused of doing the exact same thing three more times in similar cases.
It’s also an extremely revealing statement. The IRS is entrusted with extraordinary powers to penalize taxpayers for violations of the law, and should be held — and hold itself — to correspondingly extraordinary standards of integrity and openness. Instead, the IRS seems to have an institutional attitude that the ends justify the means.
Such an aggressive and hostile attitude by the IRS should be extremely worrisome for taxpayers. These administrative procedures that the IRS appears to view as optional are in place to ensure that the extraordinary powers that the IRS is vested with are not mistakenly wielded against taxpayers who make honest mistakes — or even those who don’t make any mistakes at all. Should they be set aside, taxpayers can no longer rely on mere innocence to protect them from trigger-happy IRS agents looking to catch themselves a tax cheat.
Neither are the courts happy with the IRS’s behavior. Just recently, the Tax Court sanctioned the IRS for its actions in this case, judging that it acted “in bad faith” and “unreasonably and vexatiously.” That’s quite a fiery judgment from a court system that tends to defer to federal bureaucrats in most cases.
Yet whether such blatant wrongdoing will sway the IRS’s enablers in Congress — who have been rewarding the increasingly rogue agency with more and more cash — remains an open question. In fact, the Build Back Better Act proposed in 2021 by Congressional Democrats would have repealed the requirement for supervisor approval of penalties entirely. Evidently, this was the best idea they could come up with for ensuring the IRS does not commit fraud.
In fact, the problem of IRS agents failing to receive supervisor approval for penalties is apparently so widespread that the Joint Committee on Taxation estimated that repealing this requirement would raise $1.4 billion in additional revenue over the next decade. If that much additional revenue sounds like a good thing, consider that these savings would come from otherwise disallowed penalties being assessed.
The IRS continues to provide reason after reason as to why it cannot be trusted with the enforcement powers and resources it already has, let alone $80 billion more. It’s about time that Congress starts to listen and stops relying on the courts to play whack-a-mole slapping the IRS on the wrist every time it gets caught.
