Shulman Predicts Greater Compliance Focus on High-Wealth Individuals

Sophisticated business and individual taxpayers who operate on a global basis can expect greater scrutiny, IRS Commissioner Douglas H. Shulman told Congress on February 24. The Service is undertaking a multi-year tax compliance strategy targeted at high-wealth individuals and the business entities they control. Testifying before the House Appropriations Subcommittee on Financial Services and General Government, Shulman also promised to improve the Service's customer service, which has come under fire in recent weeks.

High-Worth Individuals

The IRS launched a new initiative in 2009 to focus compliance expertise on high-wealth individuals and their related entities, Shulman said (TAXDAY, 2009/10/27, I.4). The Global High-Wealth Industry Group will initially focus on individuals with tens of millions of dollars in assets or income. "Going forward, the IRS will take a unified look at the entire complex web of business entities controlled by high-wealth individuals, which will better enable the Service to assess the risk these arrangements pose to tax compliance."

Shulman told lawmakers that the positive results of the Service's recently concluded offshore voluntary compliance initiative will be felt into future years (TAXDAY, 2009/11/18, I.2). According to Shulman, more than 14,700 persons came forward under the initiative.

"Those who came in under the voluntary disclosure program will be in our tax system going forward." Shulman added that the initiative has also dampened the enthusiasm of taxpayers for strategies that "push the envelope" of tax compliance.

Customer Service

In January, National Taxpayer Advocate Nina E. Olson identified poor customer service from the IRS as the most serious problem facing taxpayers (IR-2010-2; TAXDAY, 2010/01/07, I.1). Olson urged the IRS to immediately improve its customer service as filing season gets underway and the number of calls to customer service personnel increases.

Shulman defended the Service's customer service. The IRS answered a total of 39 million calls in fiscal year (FY) 2009, he reported. "For FY 2010, the IRS is planning to answer 36 million calls."

Funding

Shulman urged lawmakers to support the administration's request for additional funding for compliance programs. "The FY 2011 budget request includes an enforcement increase of $293.4 million for investment in strong compliance programs." Shulman also renewed his request for adequate funding to continue updating the Service's information technology systems.

By George L. Yaksick, Jr., CCH News Staff

Written Testimony of IRS Commissioner Shulman

Tax Shelter Participant Not Entitled Rescission of Redemption Agreement Based on Public Policy Violation (Austin Firefighters Relief and Retirement Fund v. Brown, DC Miss.)

An agreement between an S corporation and a tax-exempt municipal employee retirement plan to participate in an S Corporation Charitable Contribution Strategy (SC2) tax shelter was not subject to rescission on the basis that it violated public policy. Private agreements may only be rescinded as matter of public policy when the contract violates some explicit well-defined public policy. However, Code Sec. 4965 does not contain an explicit, well defined, dominant public policy that would be violated by enforcement of the parties' agreement.

The excise tax imposed on managers who cause a plan to participate in such prohibited transactions is applicable only if the manager knew or had reason to know that the transaction was a prohibited tax shelter. However, neither party became involved in the transaction knowing, or with reason to know, that it was a prohibited tax shelter. On the contrary, both parties had been advised that the transaction was proper by the big four accounting firm that developed and marketed the transaction. Therefore, the transaction was not subject to rescission on the basis that it violated public policy.

Austin Firefighters Relief and Retirement Fund v. W.A. Brown, DC Miss., 2010-1 USTC ¶50,238

Other References:

Code Sec. 4965

CCH Reference - 2010FED ¶34,315.30

Tax Research Consultant

CCH Reference - TRC EXEMPT: 6,250

CCH Reference - TRC EXEMPT: 6,252.10

CCH Reference - TRC EXEMPT: 6,252.25

CCH Reference - TRC EXEMPT: 6,252.40

New York --Corporate, Personal Income Taxes: Senate Majority Takes Issue With Governor's Plan to Postpone Refunds

The New York State Senate has issued a release opposing Gov. David Patterson's attempts to delay more than $500 million in personal income tax refunds and $200 million in corporate income tax refunds. Under the governor's plan, the state's current cap on income tax refunds paid out before March 31 would be lowered from $1.75 billion to $1.25 billion, resulting in a nearly two-month delay for thousands of taxpayers awaiting refunds. Additionally, taxpayers will not be paid interest on their funds until June 1, while businesses would be denied any interest until the second half of March.

"Delaying the payment of income tax refunds is unacceptable especially when so many New Yorkers are financially strained," said Senate President Pro Tempore Malcolm A. Smith. "These are funds that were overpaid and it is a dangerous precedent for the governor to propose throwing away a tax filing and return policy which has worked well for decades. New Yorkers deserve to receive these funds without delay," Smith added.

Release, New York State Senate, February 23, 2010