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Back in July 2022, the media reported that two of President Trump’s rivals, former FBI Director James Comey and his deputy, Andrew McCabe, had both been selected for IRS examinations under the National Research Program (NRP). There were allegations that President Trump had sicced the IRS on his political foes. That Comey and McCabe were both selected for NRP audits seemed at best a statistical anomaly given the low nationwide audit rate. At worst, it conjured images of Nixon’s enemies list.
In a report dated November 28, 2022, the Treasury Inspector General for Tax Administration (TIGTA), following its investigation into the allegations that Comey and McCabe had been targeted, concluded that the selection of Comey and McCabe for NRP audits was not politically motivated. Given TIGTA’s reputation as an independent watchdog, TIGTA’s findings may wrap-up this particular drama involving the former President, and put this particular storyline to bed in the general media. There are, however, findings in the TIGTA report that deserve the further attention of tax practitioners and policy makers.
As background, the current version of NRP audits traces to the Reform and Restructuring Act of 1998. In the 1998 Act, Congress mandated the IRS to evaluate ways to deliver services to taxpayers in as cost-effective and least burdensome a manner as possible. The role of NRP examinations is to collect data on reporting, payment and filing compliance that supports strategic decisions about the placement and types of resources necessary to more efficiently and effectively administer the tax laws. The program aims to collect data from a diverse strata of taxpayers and with respect to various Federal taxes, resulting in a statistically valid representation of the compliance characteristics of the universe of US taxpayers.
For the data collected from the NRP program to be used as intended, the process for selecting taxpayers for examination should be appropriately random. This is generally the function of the IRS's Research Applied Analytics and Statistics (RAAS) organization. For the periods in which Comey’s and McCabe’s returns were selected, RAAS had implemented a process under which it selected samples of more than 10,900 tax returns for NRP audits for tax years 2017 and 2019. TIGTA assessed the original sample selection process and concluded that the IRS appropriately and randomly selected tax returns for NRP audits, and controls were in place to minimize the ability to select specific taxpayers for an NRP audit.
However, due to resource constraints that prevented the IRS from auditing the original 10,900 sample, the IRS winnowed down the sample into a subsample of a combined 4,000 tax returns for the 2017 and 2019 tax years. According to the TIGTA report, in establishing the subsample, RAAS deviated from the established return sample selection process, and did not document the new seed numbers prior to initiating the subsampling. The report observed that because the seed numbers were not selected independently and documented prior to initiating the subsampling, “there is a risk that the seed numbers used could have ensured that specific taxpayers from the original sample remained in the subsamples.”
The report, however, goes on to assure that TIGTA did not identify any actual misconduct, only that the subsampling process may have created the opportunity to compromise the integrity of the subsample selection process. The report also identifies a programming error included in the original source coding, which it seems has existed since 2010, and which adversely impacted the random selection process. The report also assures that the IRS is aware of and working to address these flaws in its NRP program. The bottom line is that the report, while contradicting allegations of political motivation, does not give the NRP selection process an unqualifiedly clean bill of health.
NRP audits are burdensome and intrusive, and to the chagrin of many taxpayers who have experienced NRP audits, the program does not appear to be going away any time soon, notwithstanding its flaws. We regularly assist clients with IRS audits and NRP audits tend to be more onerous than your traditional IRS examination (but typically less onerous than audits conducted under the Global high-wealth program and under the High-income initiative, also special breeds of IRS examinations). The NRP audit processes are essentially the same as regular audits, but their scope is often broader and less discriminate. At least for the time being, the IRS will continue to conduct NRP audits, undeterred by TIGTA’s findings.
Peter A. Lowy, a shareholder in Chamberlain Hrdlicka’s Houston office, is best known for his tax controversy work and deep experience in the energy sector. He also advises corporations and other taxpayers in a broad spectrum of ...