WSJ: A Case of Tax Fraud—At The IRS

Wall Street Journal Editorial, A Case of Tax Fraud—at the IRS:

The Internal Revenue Service makes clear that taxpayers who willfully conceal or alter tax documents risk severe penalties. But what happens when government auditors are caught manipulating documents and hiding those actions in court?

The IRS this month agreed to settle and drop a penalty in Lakepoint Land II LLC v. Commissioner. A judge in U.S. Tax Court had sanctioned the IRS in the case, ripping the agency’s counsel for acting in “bad faith” and having “multiplied the proceedings in this case unreasonably and vexatiously” by failing to tell the court that documents it used to assess a penalty had been backdated.

Several other Tax Court cases suggest wider IRS document fiddling as the agency has gone after “syndicated conservation easements.” Congress created conservation easements in the 1980s, letting land owners donate the development rights for acreage to a qualified charity in return for a tax deduction. ...

One legal rub: The federal tax code requires an IRS supervisor to approve in writing the initial determination of a penalty. That didn’t happen in Lakepoint. The company presented emails to Judge Christian Weiler showing that the IRS agent on the case failed to get her supervisor’s written approval in 2016 for a proposed $15 million penalty.

When the agent realized this—in February, 2017—her supervisor acknowledged in an email that this was a “HUGE oversight” and backdated her signature to seven months earlier. IRS attorneys nonetheless swore to the accuracy of this date, and they continued to mislead the court for months even after the falsification was discovered. Judge Weiler ordered the IRS to pay Lakepoint’s fees and expenses.

Three more partnerships—Arden Row Assets, Basswood Aggregates, and Delwood Resources—have presented evidence of similar backdating by a different IRS agent and manager. ... The cases suggest a culture of disregard for tax laws that the IRS requires taxpayers to follow to the tee. Imagine the fines or prison sentences awaiting average Joes who backdate tax documents and lie about it.

IRS abuse is all the more outrageous because the partnerships had the legal right to engage in easements at the time. Congress has since tightened the rules, and perhaps it should eliminate the loophole. But as long as they are legal, the job of the IRS isn’t to change the law through enforcement. According to a recent analysis in the publication Tax Notes, of the cases in which the Tax Court has ruled on valuations, judges have upheld some 81% of reported deductions. ...

[I]t’s a disgrace that the IRS had to be found out in court before it stopped its abuses. This is one of many reasons the recent $80 billion budget increase for the IRS should be eliminated.