The IRS continues to try to rebuild itself following its mishandling of conservative groups’ exempt organization applications. The scandal dominated last year, leading to the resignation of the acting commissioner and the quick appointment of a restructuring expert, John Koskinen, as the permanent commissioner. But according to a self-styled whistleblower, the Service’s problems go much deeper than possible bias in the EO function.
William Henck is a 26-year veteran of the IRS who works in the chief counsel’s Richmond office. He is no stranger to calling attention to what he considers mismanagement and impropriety in the nation’s tax administration. In April Tax Analysts looked at Henck’s allegations regarding the black liquor controversy. He claimed that granting credits for the use of black liquor was opposed by most of chief counsel, but that a few senior managers changed the policy, allowing paper manufacturers to take advantage of a true tax loophole. “The decision-making process for a particular case or type of case is corrupted or compromised by high-level executives basically on a whim or fiat or in an arbitrary fashion,” Henck said.
Last week Henck again pushed his message of IRS corruption, this time to a CBS affiliate in West Palm Beach, Florida. In the interview, Henck repeated that high-level IRS managers frequently intervene in disputes over credits, often in an arbitrary way that is contrary to the law. He called for Congress to investigate.
Black liquor damaged the credibility of chief counsel. At first the IRS tried to simply let the credits stand, but after a great deal of public and lawmaker outrage, it finally published a memorandum in June 2009 saying why it thought the use of black liquor was eligible for a section 6426(e) credit. That decision cost the United States $25 billion in lost revenue (the Joint Committee on Taxation initially estimated that the credit would cost only $194 million over 10 years). The IRS’s action forced Congress to pass a legislative fix, overruling the Service, but the damage was already done.
Henck’s other allegations aren’t as specific and are more difficult to prove. One thing that he has called attention to, and that should be more closely investigated by the GAO, the Treasury Inspector General for Tax Administration, and Congress, is how the revolving door between Treasury, the IRS, and large accounting and law firms is affecting the creation of guidance and tax policy. Attorneys frequently move between public and private service. After they leave the IRS or Treasury, they often end up representing clients on matters directly related to their time in government. It is hard to know whether their future career prospects are in the back of their mind as they are writing regulations, letter rulings, or other forms of guidance. There is at least a whiff of impropriety that lends some credence to insiders like Henck.
It is hard to know what the solution is to the revolving door problem, or even whether it is a problem at all. The government needs qualified attorneys and professionals to help create and administer the law. It is only natural that those individuals be current tax practitioners. The best experts in any area of the tax law are those who have represented clients and have experience structuring transactions. But Treasury and the IRS need to do more to avoid at least the appearance of undue influence.