The IRS is seeking a balance it has not yet found between taxpayers' rights to privacy and confidentiality and media and governments' demands for transparency, panelists at Tax Analysts' conference "Tax Transparency: The Good, the Bad, and the Future" said September 22.
The IRS is issuing fewer guidance documents than it has in decades, its process for answering Freedom of Information Act requests is cumbersome and slow, and the Service over-redacts documents it does release based on flimsy rationales of protecting taxpayer information under section 6103, said panelist Christopher S. Rizek of Caplin & Drysdale.
National Taxpayer Advocate Nina Olson argued that the Service too often adopts an attitude of "because I said so" or "just trust me" when answering requests for information, apparently unaware that the former justification usually sparks resistance, while the latter is belied by the fact that trust is more likely to be earned by disclosure than by stonewalling.
Yet Drita Tonuzi, IRS associate chief counsel (procedure and administration), said the IRS is protecting, not hiding, taxpayer information under section 6103. She added that complaints about the IRS's handling of FOIA inquiries sometimes result from overly broad FOIA requests or improper uses of the FOIA process. The IRS and the Office of Chief Counsel are committed to full FOIA compliance, she said.
The two-hour discussion at the Ronald Reagan International Trade Center in Washington was moderated by Robert Goulder, senior tax policy counsel with Tax Analysts, and covered a wide range of issues, from Rizek's description of a "seriously broken FOIA process," to pleas from Tonuzi that the IRS needs to preserve its ability to keep private some "pre-decisional" discussions about regulatory proposals, to Olson's concerns about IRS computer software that might automate decisions on taxpayer problems without obvious reference to laws or regulations.
Guidance Decline 'Indisputable'
"I don't think there's anybody who disagrees that more transparency and guidance is good; it's better than less guidance," Rizek said. "The law's just too complicated. The more complications there are in the law, the more demand there is for guidance."
"The numbers are indisputable," that formal guidance issued by the IRS has declined steeply since the 1950s, Rizek said. The IRS frequently published more than 600 revenue rulings per year in the 1950s, but since 2004, "there has not been a single year over 100," he said. He noted that in 2014 the IRS published 34 revenue rulings. Revenue procedure issuances have followed a similar downward trend, Rizek claimed, though not as steep.
"It's clear, I think, that over the past 40 years, since [sections] 6103 and 6110 were enacted in their present form, the expansion of access to informal guidance has gone in the opposite direction from the decline in the amount of formal guidance," Rizek said. Resource constraints could account for some of the decline, he said, though he added, "Is there a connection between the expansion of access to informal guidance, and the resulting need-slash-lack-of-need for the IRS to issue formal rulings?"
The Tax Court recently held in Altera v. Commissioner, 145 T.C. No. 3 (2015), that the Administrative Procedure Act requires the IRS to justify policy decisions, Rizek said. Tax controversy specialists are now data-mining regulatory files to discover whether a regulatory provision that snagged them was adequately justified, he noted.
"Maybe the short-term benefit that the government got from arguing for the uniform application of Chevron -- and no special treatment for tax guidance -- will have a long-term cost, which is that Treasury and the IRS really do have to justify every single policy decision they make in regulations, in more detail than they otherwise would have cared to," Rizek said. "And I have a sneaking suspicion that's going to slow down the reg process."
First Right: To Be Informed
Olson noted that the IRS in 2014 adopted a Taxpayer Bill of Rights (TBOR), something she has long advocated to protect taxpayers.
"The very first right is the right to be informed," Olson said. "If you don't know what's going on with government action, with your own information, with your own rights, with the law, then you have no other rights." That means taxpayers must have the right to know how to comply with tax laws, to clear explanations of tax law, and to IRS procedures in forms, notices, publications, instructions, correspondence, decisions, and outcomes, she said.
Under the TBOR, taxpayers also have the right to confidentiality, Olson said. Taxpayer information should not be disclosed except by the taxpayer or by law, she said. Yet consent options to provide taxpayer information and returns to mortgage lenders have ballooned since the late 1990s, Olson noted. Also, those options have blossomed under the Free Application for Federal Student Aid, "another consent-driven disclosure," and other laws, she said.
"There is constant pressure on the IRS by Congress, and the public, to have more of these consent-driven" provisions, Olson said, asking, "How could [taxpayers] be harmed? It's the taxpayers' own information." But while disclosure of taxpayer information is regulated, re-disclosure by local law enforcement, state tax authorities, private third parties, and others is not well defined, or regulated at all, Olson said.
"I am very, very sensitive to the balance between the deliberative process, and the urgent and legitimate need to hear about things in a pre-decisional context, before decisions have been made," Olson said. She recalled repeated meetings with IRS officials showing heavily redacted documents that have no discernible FOIA exceptions, but which included "do not disclose" statements that frustrated the Taxpayer Advocate Service when conducting its annual reports.
Olson also pointed to a disturbing trend of what she called "policy through programming," in which the IRS deploys computer technologies that make decisions about taxpayer controversies apparently without obvious reference to tax law or regulation.
While changes in the Internal Revenue Manual go through extensive internal revenue processes, Olson said, "There is so much guidance being built into the machines that nobody ever sees." She added: "Some analyst somewhere writes and says, 'Well, we'll program the machine to do this,' and then the machine does it. It's not circulated. I never see those business requirements that are put into what the machine is going to do. And then the machine makes decisions for people."
IRS: Committed to FOIA
Tonuzi, responding for the IRS, said, "Our objective is to provide meaningful and easy-to-find information about how the IRS works, and substantive tax information."
The Office of Chief Counsel posts online training manuals, private letter rulings, technical advice memoranda, chief counsel advice, program manager technical advice, and reviewed field advice, among many other information products, Tonuzi said.
The IRS website, IRS.gov, also posts most of the IRM, all of the chief counsel directive manual, and research tools to help people determine the Service's position on various issues and procedures, Tonuzi said. The only things not published are law enforcement techniques, which could be used to circumvent the law, she said.
Tonuzi said the chief counsel's office supports proactive disclosures, in part because the more information the office publishes, the fewer FOIA requests it has to process, and the more it can spend in other areas. She said that taxpayers and their representatives don't have to submit FOIA requests for their own tax records; they can request copies from their IRS examiner under section 6103(e).
Section 6103 "protects taxpayer information," Tonuzi noted. It "doesn't require us just to eliminate or redact the identification of the taxpayer. It's a comprehensive protection of the entire document that was produced in the context of the return and the examination. Anything that the IRS procured through an IRS tax administrative proceeding is protected, not just the [taxpayer's] name."
Tonuzi noted that only about 25 of 10,000 IRS FOIA cases are litigated each year. However, she added, those few cases that move to court may constitute a significant resource challenge to the IRS and the Justice Department, which litigates the cases for the Service. One recent FOIA litigation cost the IRS six months and a dozen attorneys to complete production of 250,000 pages of requested documents located all over the country, she said.
Tonuzi defended the IRS's practice of withholding internal deliberative information in the interests of protecting the general public. "The public disclosure of such communications could have a chilling effect on the deliberative process," she said.
"I think it's really important for the government to have that space where they can actually be free to think about possible alternatives and vet out all positions, without being afraid that that position might get out prematurely in the public realm and confuse taxpayers," Tonuzi said. "So we really do need the deliberation, the ability to deliberate in that context, and obviously other contexts."
This article first appeared in the September 23, 2015 edition of Tax Notes Today.