December 11, 2018
The Internal Revenue Service has a long history of pursuing law-abiding taxpayers in an effort to wring every penny from your wallet. A string of recent IRS actions, however, have harmed environmental conservation in addition to putting taxpayers through a great deal of needless pain.
In the 1970s and 1980s, a series of actions by Congress formalized the federal tax deduction for conservation easements — private land tracts set aside for environmental conservation. This and other programs have been extraordinarily successful, resulting in an eight-fold increase in acreage conserved in the last 30 years. The amount of land under environmental protection via private initiatives like easements is now more than 55 million acres — an area roughly the size of Minnesota.
Unfortunately, the IRS’s behavior when it comes to the tax treatment of conservation easements constitutes an all-too-familiar pattern of maladministration that must be addressed. In 2016, the agency issued IRS Notice 2017-10, which declared that certain “syndicated” conservation easements needed to be designated as “listed transactions.” This sledgehammer tactic is the highest level of scrutiny that IRS authorities have over taxpayers, and is wholly unnecessary when it comes to conservation easement deductions. The IRS has plenty of more cooperative processes and administrative precedents to ensure the law is being enforced fairly.
Furthermore, the IRS’s Large Business and International Division’s approaches to examinations and enforcement since 2015 have red flags everywhere. LB&I has shifted away from the use of Technical Advice Memorandums (TAMs, which generally require collaboration between the Service and taxpayers) and toward Chief Counsel Advice (CCAs, which are usually insulated from taxpayers). Problems with information document requests have risen at LB&I. The agency has increasingly treated the audit process with a mind toward litigation instead of administrative resolution of disputes — for example, unprecedented uses of its designated summons power. Tax experts are worried that these tactics could be wielded against small businesses, or even individuals.
The IRS is also acting as if it has wide latitude in the judicial system, which could undermine key protections that taxpayer rights groups helped to win in the landmark IRS Restructuring and Reform Act of 1998. Last month, National Taxpayers Union filed an amicus brief in the case of PBBM-Rose Hill v. Commissioner of Internal Revenue on the side of the appellants PBBM-Rose Hill. The case concerns a substantive but under-publicized issue in which the IRS is running roughshod over a key protection for taxpayers in audits that Congress provided in the sweeping 1998 reform legislation.
Although the underlying issue of PBBM-Rose Hill concerns the application of the longstanding federal tax deduction for conservation easements, our amicus brief focuses on one aspect of the case: that the court gave license to the tax agency’s failure to follow statutory law enacted in 1998 requiring the personal written approval of an IRS supervisor before government audit personnel can assess certain penalties (Section 6751 of the Internal Revenue Code).
The 1998 reform legislation had very specific congressional intent behind it, and the IRS is completely disregarding the spirit of the law. In our amicus brief in PBBM-Rose Hill, our counsel wrote that the IRS has largely overstepped its bounds and is disregarding specific guidance that they have been given on how to properly administer penalties:
Members of Congress expressed concern that IRS examiners were inflating initial penalty determinations to serve as “bargaining chip[s]” in settlement negotiations…” To stem this practice, § 6751 states that “[n]o penalty” under the Internal Revenue Code can be assessed “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.” … The panel’s recent decision … reads these key words out of the statute.
The court’s published opinion will carry outsized influence on how the IRS handles hundreds of thousands of cases.
For their part, some members of Congress have continued to seek stepped-up IRS enforcement activities against conservation partnership easement deductions. S. 2436, introduced by Sen. Steve Daines, R-Mont., and co-sponsored by three Senate Democrats, would essentially codify part of the IRS’s listed transaction by disallowing any deduction for the partnership donation of a conservation easement if the deduction would otherwise exceed 2.5 times the amount of a partner’s basis in the partnership. A companion bill, H.R. 4459, has been introduced by Rep. Mike Thompson, D-Calif., with 15 co-sponsors in the House.
These bills, which proponents may try to push through in the remaining days of this Congress, suffer from the same flawed philosophy as the IRS’s enforcement action: attempting to put an arbitrary limit on a deduction in order to “curb abuse,” when the actual instances of “abuse” are rooted in flawed appraisals, and lack of cooperation in developing preventative standards.
A better approach would be for the newly installed IRS Commissioner Chuck Rettig, nominated by President Trump and confirmed by the Senate, to roll back the IRS’s dangerous overreach in the area of enforcement against conservation easements deductions. The IRS needs to work with taxpayers, not against them, to ensure that conservation easements can continue to be a valuable and useful form of environmental conservation.
Pete Sepp is a contributor to the Washington Examiner’s Beltway Confidential blog. He is president of the National Taxpayers Union.
To access the op-ed, please click here.