Taking A Cooperative Approach To Your Legal Issues


On Behalf of | Jan 14, 2016 | Firm News


This talk could easily have been titled “a look at the IRS in difficult times.” Unfortunately it is not a pretty picture. I want to share some perspectives with you which should make you concerned if you are engaged as I am in representing people before the agency on matters which for many, are the most significant economic events in their entire lives.

I have devoted my entire professional career to working in the area of tax administration with 30 years in the government and now 14 years in private practice. Of those 30 years, about half were spent in Washington in the National Office and half in the field.

There is a natural tension in the IRS corporate culture between the field and the National Office and that in turn shapes much of what we are seeing now in the way the IRS does its job working with taxpayers and what comes out of Washington.

I want to focus on three elements which work together to set the stage and shape a new paradigm for the IRS, and the tone for the way the IRS does business today and the impact that has on our voluntary self-reporting system which is the very cornerstone of our taxation system here in the United States.

The first is the way the concept of information return reporting especially in the
foreign area
, is undermining the concept of voluntary self-reporting and the concept of self-assessment.

The second is the impact of the big IRS reorganization which took place 18 years ago–the effects of which are really settling in now and is reflected in the way in which the IRS performs at the most basic level.

The third element is the way the whole area of tax administration has been politicized today to the point where the IRS has become a kind of scapegoat to blame for problems which are really not its fault.

Let’s start with a few words about the budget.

Last month’s budget agreement between Congress and the White House to give the IRS an additional $290 million for taxpayer service is good, but it is way too little too late. Nevertheless, this will assist the tens of millions of callers who are able to get through to the IRS on the phone this filing season.

This funding increase is the first in a long time. Since the 2010 fiscal year, the agency’s budget has been cut by nearly a fifth, after taking inflation into account, and its ranks have been reduced by thousands of employees. These cuts harm taxpayers first and foremost, and further open the door to unregulated and untrained preparers preying on vulnerable taxpayers.

Remember, this is the agency which collected over $2.8 trillion in the last fiscal year, more than 90 percent of all federal revenue.

The National Taxpayer Advocate reports that the IRS loses $450 billion annually due to taxpayer noncompliance. That includes underreporting income, overstating deductions and credits, non-filing, and nonpayment.

IRS notices have increased 570% from 2001.

IRS examinations increased 100% from 2001 with correspondence exams making up 74% of the total.

This is to say nothing about the impact of the budget cuts on the morale of the IRS worker bees.

Suffice it to say that an additional $290 million dollars for taxpayer service will be a big help but just like the drought in California, it is going to take a lot more than a good rainfall year to make things right.

The Founding Fathers

Let’s talk about the first of my three elements which takes us back to some American history and the political philosophy underlying the principle of voluntary self-reporting.

Think about your history lessons and recall that the Declaration of Independence dates back to 1776, but it was not until 11 years later with the Constitutional Convention in 1787 where the foundation was laid for the government we have today. In order for a proposal to be passed, it had to be considered and approved first by each branch of the Congress, and then on top of everything, the chief executive gets to exercise his veto power over the whole thing if he doesn’t like it.

Where on earth did that come from? Well it came from the guys who were attending the Constitutional Convention in 1787.

Who were these guys? First and foremost they were wealthy businessmen and land owners. Recall that historians believe that one of the earliest drafts or source documents for the Declaration of Independence spoke about “life liberty and the pursuit of property”  before it was changed  to read “life liberty and the pursuit of

Actually, this change was a pretty good public relations move because we all know that nothing makes us happier than to accumulate property—summer homes, boats and planes, jewelry for our wives and Ivy League tuitions for our children.

So think back about what we know about that summer from May to September of 1787 in hot and stuffy Philadelphia of all places, where they were stuck in a place with no air conditioning.

Remember, these were the guys who hated government and were enraged by the King of England’s shake down of the colonies for stamp taxes, tea taxes, and a whole host of other tributes and extortion which directly interfered with their unfettered ability to accumulate wealth. These were the folks who believed that they were “giving back” to society simply by settling in these mosquito infested colonies in the first place.

They saw their purpose in Philadelphia that summer in 1787 as an opportunity to craft something that would make it as hard as ever for the government to get anything done so they wouldn’t have to be bothered again by the whole mess which led up to and caused the Revolutionary War.

They’re sitting there in Philadelphia, a place which will never make the top ten destinations to visit in the Americas, and all they wanted to do was to get back to their vast estates, their wine cellars and having a good time hunting and fishing.

Fast forward to the Civil War where we had an income tax but then again it took an amendment to the constitution itself, which passed Congress in 1909 and was not ratified until 1913 which finally authorized Congress to levy a tax on income. The Revenue Act of 1913 provided a 1% tax on net personal incomes above $3,000, with a 6% surtax on incomes above $500,000.

But when we look back over the years and think about our system of a bicameral legislature with a weak chief executive, this all fit quite nicely with all the noble sounding stuff guys like Thomas Paine, James Madison and Thomas Jefferson were writing about which glorified the respect for individual rights, personal privacy and freedom from unreasonable searches and

And it was this respect for individual rights and privacy that laid the foundation quite nicely for the very democratic idea that the American tax system should be founded on this premise: an enlightened citizenry can be counted on to honestly report its taxable events on an annually filed return, and self-assess and voluntarily pay, the amount of tax due according to current law. 

Now fast forward again to today and consider the role that simple and complex information returns play in the process of making our clients compliant with the rules today.

So think about it; in a way, the whole idea of an information return is inapposite to the underlying notion of voluntary self-reporting.


And that brings us to FATCA and FBARs which takes the idea of a voluntary self-reporting/self-assessment and absolutely stands it on its head. Here the idea is “from now on, you tell us what you have(at least just overseas for now) and we will let you know if we need to have a little chat.”

In fact I think it can be argued that the fundamental foundation of our system of voluntary self­ reporting/self-assessment is being replaced.

FBARs: The Bank Secrecy Act has been around since 1970 but it was not until the Treasury Department transferred enforcement jurisdiction to the IRS
in 2004 that the government began in earnest to collect information from United States persons who have financial interests in, or signature authority over financial accounts maintained with financial institutions located outside of the United States.

The Bank Secrecy Act requires the filing of report 114, if the aggregate maximum values of the foreign financial accounts exceed $10,000 at any time during the calendar year.

Purpose of the FBAR

The government of course pays lip service to the idea that overseas financial accounts are maintained by U.S. persons for a variety of legitimate reasons, including convenience and access; but it is also a tool used by the government to identify persons who may be using foreign financial accounts to circumvent the law. Information contained in FBARs can be used to identify or trace funds used for illicit purposes or to identify unreported income maintained or generated off shore.

So the FBAR is simply another of the many information returns in play today and is perhaps the most notorious.


If you are listening, the next thing I tell you should be alarming to you:  FATCA requires every bank in the world whose business involves, even indirectly, the movement of U.S. source income, to register electronically with either the IRS itself or its own government (which has already agreed to cooperate with the IRS), to turn over to the IRS and report the names of all their depositors which show some signs of being American.

FATCA and all its complexities have its origins long before the current four year/eight year cycle of electing the president of the United States. It is not the brain child of the current occupant of 1600 Pennsylvania Avenue. We are not talking about top level elected officials who have launched FATCA on us all here; rather, FATCA was under consideration for years by very senior career, difficult-to-remove, civil servants, long before it was enacted in 2010.
These are the folks who really make the government work and stay on the job administration after administration. You can be sure that every time a modern industrialized nation changes prime ministers or presidents, one of the first things they receive their first day on the job is a big fat briefing book on the status of the bureaucrats’ dream of creating a virtual international
banking and financial institution data base.

High level Treasury staffers and their compadres on the Senate Finance, Joint Committee, and House Ways and Means Committee have been working on this for years.

Again: the fundamental principle of FATCA turns our Jeffersonian model on its head and presumes that people cannot be trusted to honestly self-assess their annual taxes and says, “disclose every foreign financial asset you have which is not in the United States, and the government will let you know if they want to talk to you.”

Now for the second leg of this new paradigm: the 1998 reorganization.

Almost eighteen years ago, the IRS “reinvented” itself with a massive reorganization which changed the IRS corporate culture and the way the IRS had been doing business since 1952.

Before 1998, the IRS was organized by geographical districts and regions which were virtual fiefdoms where district directors ruled over chiefs of collection, examination, and criminal investigations.

In the 1998 reorganization, the districts and regions were abolished. Under the new regime, the 100,000 IRS employees were realigned by the functions in which they specialized so that front line managers reported directly to “area” managers who in turn reported directly to Washington.

The management gurus called this a “stove pipe” structure because of its emphasis on a top to bottom vertical management construct.

Starting in 1998, it took the IRS almost four years to sort things out before employees and the public figured out who was in charge and who was making key decisions.

IRS employee morale plummeted for a long time and enforcement statistics made Congress and IRS practitioners wonder whether anyone at all was working at the IRS but that has all been worked out and IRS enforcement is now hitting its stride in examinations, collections, and criminal investigations.

Now remember: the purpose behind the old structure (which dates back to the Truman administration in 1952), before the stove pipe reorganization in 1998, was to organize the agency in a way which had responsible, visible, and accountable people in place at the local level who were empowered and smart enough to make it at least look like the government knew what it was doing.

One of the best pieces of writing recently about the IRS’ continued downward slide, is Professor Emeritus Frank Wolpe’s white paper which was published by the taxation section of the American Bar Association in its news quarterly, 2014 winter issue, as its cover story.

Briefly, Professor Wolpe says the huge 1998 IRS reorganization was wrong-headed because it scrapped a perfectly good organizational structure which included locally accountable districts and district directors for a “stove pipe” structure which put in place a “too top-heavy and hierarchical structure.”

The result was to centralize power in Washington making tax administration a “remotely managed” governmental function with no senior-executive on site oversight.

Again, Professor Wolpe reminds us, the old IRS alignment served as a “self-protective structure for early detection” of potential problems.

The district director’s job was to keep his eye on the ball.

Apart from fending off the regional office and the National oOffice, the key to be being a good district director was to have in place a system of open communication and accountably where he or she knew what was going on and knew when, or if, it was time to get personally involved in a substantive issue or personnel matter. This was so, especially in matters which, if done clumsily, could
embarrass the Service.

The district director knew that his mission was to keep the public’s perception of the integrity of the organization in high esteem. (In fact its integrity remains at the highest levels ever, but perception is everything).

Professor Wolpe’s White Paper spells out why having a visible local person, or district director in charge of the IRS is so critical:

Education and outreach was part of the job so that it was expected that each district director would become a community leader, partnering with local chambers and other stakeholders, and identifying with charitable activities. They earned their spurs by being respected in their
posts of duty as fair-minded hands-on service senior executives.

It’s not part of the Internal Revenue Manual, but one of the unwritten rules on “how to be a good IRS District Director” is “at all times, keep the turkeys off the roof.” A skillful district director knew how to respectfully serve up the National Office, worthless ground glass without letting them know that that was what they were asking for.

The Short-Lived Sacramento District: So after 15 years with the IRS in Washington, I had the privilege of opening up a new office for the Chief Counsel to accompany one of the three newly-formed districts in California in 1984.  The newly-appointed Sacramento District Director, a very cool guy named Ray Spillman, was both a CPA and an attorney from Chicago who came up through the ranks as an outstanding Revenue Agent. The custom in the IRS is for the counsel organization to mirror the “client organization”- the 85,000 people we served as “house counsel,” ergo the need for a new counsel office.

It took the IRS four years to make all the changes. During that time, field office enforced collections almost came to a complete halt nation-wide and audit activity drastically declined. Once the new organization charts were drawn and everyone figured out to whom they were supposed to report, the basic jobs stayed the same but the chain of command was drastically different.

The management gurus in Washington were so smugly secure in the wisdom of their new-found stove pipe dogma, it was decided that it wasn’t even necessary for the commissioner himself to know anything at all about taxes. As Professor Wolpe implies, the new conventional wisdom held that knowledge of information technology was all that was needed and the newly-appointed
commissioner was the first commissioner ever to have neither a law nor an accounting degree.

Viewing the reorganization from the vantage point of the counsel organization was a good perspective. My relationship with the district director was somewhat akin to an attorney/client relationship in the private sector.

Ray didn’t supervise me, meaning he had no “line authority” over me. His division chiefs had to laugh at his jokes at staff meetings but I could tell him if I didn’t like his tie.

I would meet with him for 15 minutes before his weekly staff meetings and we would enter the staff meeting together through his private door. Ray sometimes delighted in calling me his “consigliere” and he would give me a heads up on issues he was about to discuss with the chiefs and their aides. If there was a topic on the table to which he had already given some thought, I made it my business to get up to speed to support him if need be.

Opening a new district office in California was fun because everyone was new to the job. There was a real feeling of comradery and pride in setting up a Central Valley district, separate and apart from the dominant San Francisco and Oakland posts of duty.

I never had a bad or unpleasant job with the office of chief counsel in my 30 years with the IRS, but my new position as District Counsel was one of the best jobs anyone in the government could have. Opening up a new district in a beautiful part of the country with a new district director and a bright energetic staff was really exciting for a government lawyer in the middle of his career; especially a Jersey boy who grew up in an industrial town between Garden State Parkway and the new Jersey Turnpike.

The new district was made up of plenty of local Northern California IRS folks, National Office people who wanted to see how the “real world” worked, new hires, and people from all over the country who were willing to move to California and leave their hometowns to take part in a new venture.

I went from the innards of the National Office where orders and protocols were devised and issued, to a field office three thousand miles away where the actual work of the Internal Revenue Service was done: audits, collections, criminal investigations, and Tax Court litigation.

Sometimes the latest management directives from the National Office were viewed by the troops as just another “flavor of the month” order where the first reaction to what they were asking for was, “You want us to do what now?!”

A good example was the so-called quality initiative we were forced to endure in the eighties and early nineties where even our leaders “in region” could barely keep from bursting out in laughter when they tried at tremendous expense, to coax us into doing some of the silly things which were part of a program to sensitize us to the subtleties of the art of managing people.

Moving from Washington DC to California soon made me realize that part of the tension between the National Office and the field was an east coast/west coast thing.

Easterners who move to California or other parts of the west soon come to learn that “buttoned down” Washington will never get why geography and life styles out here matter so much. The new Sacramento district was comprised of thirty one California counties, the entire Northern third of the state; an area bigger than many entire states. At the time, there were close to a dozen posts of duty throughout, including a one person post of duty in Yreka near the Oregon border. Some of the offices staffed with five or less people but there were large ones too with hundreds of people in Walnut Creek and Sacramento. The Sacramento district was urban, suburban, vast expanses of farmland, nature preserves, rugged mountains and wilderness, and plain old
empty space which probably will never fall victim to human excess in our lifetime simply because it is so big.

Mr. Spillman had people out there in the posts of duty who were the public face of the most feared and hated institution in the land. Coming up through the ranks, he knew how important it was to personally visit each post of duty at least every other year. Because he was friendly and
truly enjoyed a good “meet and greet,” he would kibitz with the front liners and let them ask any question which popped into their heads.

“Any word on the hiring freeze?” “Is there any plan at all to get us some training on the new law?” “Will we ever be able to communicate with taxpayers by email?” “Doesn’t Congress realize that adequately funding the IRS allows us to do our jobs without one hand tied behind our
backs?” “Will there be any new job opening at headquarters in Sacramento which
could lead to a management position perhaps at another post of duty?” 

The point is, the district was like a family and we looked out for each other and the district director embodied leadership. On site leadership.

The district director staff meetings I attended were “good government” happening right in front of you. The areas of enforcement focus were generally set forth annually by the National Office in what was then known as a program letter for exam, collections, and CID; but Ray Spillman was the quarterback, team captain and cheerleader all in one, and he saw his job as
doing whatever he had to do so that his troops could do their jobs.

This was often in spite of the sometimes distracting demands of the region and the National Office.

The staff meetings with the district director were sometimes fun. As the district director’s “consigliere” (i.e. district counsel), I got to sit in. The district director’s staff meetings promoted comradery and were often rather mirthful. It was a chance for the division chiefs to hear what was going on in their counterparts’ area of specialization. The district director would go around the table and have each division chief report on hot current topics and cases in their inventories. It was not uncommon for the district director to ask his examination chief, “Your revenue agent is taking what(!?) position in this group of cases? You need to set up a meeting with me and your agent so that I can find out what this is all about! It might also be a good idea to have counsel present.”

Needless to say, when we all found out in Sacramento in 1998 that we had new bosses who weren’t even going to be working regularly on site, we were devastated.

What’s more, our dear new Sacramento district which we painstakingly put together just fourteen years ago was to be abolished.

We were truly heartbroken. Never in a million years would we have ever thought that our Sacramento district 10th anniversary commemorative t-shirts were soon to be a collector’s item. A district-wide contest to design a Sacramento district logo when we first opened for business produced a snazzy art work depicting 49ers panning for gold on the North Fork of the American River and a likeness of the state capitol building.

We were the heartland of California: we didn’t need any reproductions of the Golden Gate Bridge as our symbol.

Today under “stove top” there is not even a chain of command or any line authority for an upper-level manager to order a mid-level manager to visit a post of duty. They wouldn’t know whom to visit. And assuming someone from the prestigious large business division had time to pull himself away from Washington to visit, for example, the friendly little office in Eureka in the far northwestern corner of the state, do they just ignore the lowly revenue agents working there from the mom and pop/homeless taxpayers division (read: small business/self-employed division) simply because they were part of another division?

Under the “stove pipe” concoction, the old chain of command was cut off two levels below the chiefs who were firmly under the “line management of the district director.

Under stove top, the division chiefs and branch managers were no longer even there!

In spite of the new formation concocted by Washington, the good people of the IRS on the front lines eventually got back to work and the IRS enforcement numbers gradually got back up to more “normal” levels. Morale amongst the 90,000 IRS employees worldwide plummeted, except for
those who actually got promotions, but the changes were cynically seen by the rank and file as essentially different labels on empty bottles.

The new structure was so tight it became much harder for front liners to move up the career ladder. Those who got stuck in the new small business/self-employed division became jealous of those who were assigned to the sexier specialties in large business and international. It became almost impossible to move from the former to the latter. Transfers and promotions from within the IRS became, and still are, a whole new ball game. Managers started to play games with staffing models which favored the prestigious large business folks. Managers in the small business division became embittered like minor leaguers who got what was left over after the large business big boys picked over their top draft choices.

Career insiders still working for the service say morale has never recovered since the 1998 convoluted scheme was put in place; but the front line troops at the IRS have somehow managed to do their jobs in spite of the mess caused by Washington.

Professor Wolpe’s wakeup call comes sixteen years after the big changes but most of us working at the service on the front lines knew right away what outsiders are only realizing now. It made no sense whatsoever to have people working in California report to a manager who was somewhere in another state, or at worst, back in slow-moving Washington.

One of the most frustrating aspects of the post 1998 IRS reorganization for practitioners is the apparent lack of accountability on the part of lower and mid-level managers. Agents still report to the group managers but group managers now report to the area directors who may be stationed at posts of duty almost anywhere. They in turn report directly to the titanic, muscle bound National Office which is so big and redundant it has only two speeds, slow and slower.

As Professor Wolpe points out, under the stove pipe current structure, the flow of information is restricted “like heat within a plumber’s pipe, to up-down movement through its long narrow shell, which inhibits or prevents cross-organizational communication.”

The danger of the stove pipe model, as we see from the IRS today, is that it “tolerates top-to-bottom remote distances between management and staff” and promotes “isolation from other branches of the organization.”

The IRS has never been generous about giving out phone numbers of its people in Washington, but for the practitioner who sometimes needs to “elevate” an issue to a higher level manger, there is often really no one to talk to. Some front line workers make it obvious they are merely mouthing messages from someone from afar but nevertheless insist that everything go through them with no direct communication with the real deciders.

Even when an agent is willing to admit that some puppeteer is really calling the shots, their “industry specialist” is usually in some other time zone and is hard to get ahold of, while the manager is three hundred miles away in the other direction. It is not uncommon to require an
agent or even an appeals officer to have their work on a single case approved by two or more managers in different locations where there are multiple issues in a case.

What is truly galling right now, but on more than one occasion after waiting for a period of months to get to talk to one of these so-called industry specialists they are so busy and overworked that they sometimes don’t even read the protest and appeals letters we have charged our clients a fortune to write.

One quick word about the people who work for the IRS:

My IRS experience permits me to state without qualification that the overwhelming majority of people who work for the IRS do so in good faith and sincerely believe they are performing a valid public service organized around rules which are fair, and make the government cut
square corners with the people whose lives they touch. Approaching an IRS agent
or attorney with the same respect and dignity as I would any other person in
the private sector usually makes things go a lot easier.

This is purely anecdotal, but my guess is the folks who work for the IRS are over represented compared to the rest of the population when it comes to involvement in community service organizations, attending religious services, volunteering-type activities, and all the other kinds of human conduct we like to think make up a well-informed and responsible citizenry. The people who work for the IRS are you and me, the same people you see in the Safeway and at your kids’ soccer games.

Finally, the third element which has tremendous impact on this new paradigm and that is the way the IRS has been politicized in recent
years and especially now in the 2016 presidential campaign.

It is almost fashionable today to jump on the IRS-bashing band wagon. For some members of Congress, IRS bashing is good sport because the message to the folks back home is their rep in Washington is standing up to the most obvious symbol of unthinking big government and the erosion of personal freedom.

For some practitioners it is fair game because the IRS really cannot fight back. For one thing, it is not set up that way and for the people who work there hyperbolic screed, mouthing off, and the wrath of crack pot conspiracy theorists just comes with territory.

Some candidates have pledged to abolish the agency entirely which is an amazing idea when one considers the fact that the IRS collects almost all the money the government needs to do its job. How can the government fulfill its mandate to govern when the cash collection function and its people are maligned and demonized seemingly for political purposes?

Finally, no one of good will takes any comfort in the fact that some people who work for the IRS are not feeling that great about their jobs. Good morale amongst the troops is as vital to effective tax administration as having the right systems in place to get the job done.

It is every American’s birthright to be skeptical of the tax man, but the lack of respect for the IRS presently is not a situation which should be tolerated much longer.

After all, the American tax system was founded on the principle that in a truly enlightened democratic society, the people will voluntarily tell their government what was going on tax-wise during the previous year. What a downer for “voluntary compliance” when the people think they can’t trust the tax collector. What a shame on us as a people where tax administration is scorned as if it were being run like the rackets by Washington insiders and cliques.