Article on Renewed Focus on Criminal Tax Enforcement (5/17/20)

Readers of this blog might be interested in the following article by a prominent tax crimes practitioner:  Scott Michel, INSIGHT: The IRS’s Renewed Focus on Fraud—Implications for Tax Practitioners (Bloomberg Tax 5/8/20), here.

Here’s a teaser from the opening:

The IRS’s fraud enforcement pendulum may be swinging back toward more enforcement after a decade of administrative difficulties for the agency. Scott Michel of Caplin & Drysdale identifies indicia of increased fraud enforcement and discusses the implications for tax practitioners. 

Tax practitioners often analogize tax enforcement to a pendulum, slowly swinging back and forth between greater and lesser IRS civil examination and criminal investigation activity. For example, in the mid-2000s, the IRS was recovering from the congressional bashing of the late 1990s, which lowered audit, enforcement, and collection activity, and it then embarked on a major enforcement push against marketed and structured tax shelter transactions. The IRS and the Department of Justice moved aggressively on multiple tracks at once, pursuing criminal indictments, civil promoter penalty examinations, and other initiatives. 

In 2007 two top private practitioners reacted to these developments in an article entitled “IRS Enforcement: The Pendulum Has Swung Too Far,” warning that these action could become an “institutionalized way of doing business,” possibly leading to “a state of permanent war” between the IRS and tax professionals. (K. Keneally and C. Rettig, Journal of Tax Practice and Procedure, Apr./May 2007. Ms. Keneally and Mr. Rettig later took hold of the pendulum themselves, the former as Assistant Attorney General for the DOJ Tax Division from 2012-2014, and the latter as current IRS Commissioner.) 

Ultimately, however, events overtook their concern. Over the past decade the IRS has faced substantial budget shortfalls, political headwinds, and massive workforce attrition, with the result that except in selected areas, such as unreported foreign accounts and assets, enforcement has waned, and audits, fraud referrals, and criminal investigations have reached historic lows. 

Before the onset of the Covid-19 pandemic, the IRS took a number of steps to swing the pendulum back toward more fraud enforcement. Once the IRS and the rest of us are beyond the extraordinary adjustments underway now to our tax administration system and our lives, these actions will begin to take hold. This article will consider these increasingly clear signals from the IRS that when that happens, investigating and punishing fraud will again be a growing focus for the IRS, with important implications for tax practitioners advising clients in audit and collection matters.