IRS Backdating Court Order Spotlights Culture, Attorneys Say

An unusual Tax Court order requiring the IRS to report what it knew and when about misstatements in a conservation easement case, as well as mounting claims of backdating forms at the agency, are highlighting what some tax attorneys said are festering IRS cultural problems, years in the making.

The US Tax Court this week ordered the IRS to identify when agency personnel found out about misstatements to the court about the date that a $15.2 million penalty against conservation easement donor LakePoint was approved.

The order is notable as the IRS has enjoyed a lot of deference from the court in the past, said Frank Agostino, a former IRS lawyer and Department of Justice criminal prosecutor, who now heads Agostino & Associates.

Orders such as these, Agostino added, are rare.

“I’ve been doing this 40-plus years, and I’ve only seen it once or twice,” he said. “Usually the IRS comes forward and convinces the Tax Court, ‘We’ve cleaned up our own house. There is no ethical lapse here.’ That wasn’t done here.”

More claims of penalty backdating loom.

Rod Rosenstein, former deputy US attorney general under President Donald Trump, is representing LakePoint in a FOIA lawsuit against the IRS and told Bloomberg Tax he’s reached out to the Treasury Inspector General for Tax Administration.

He plans to refer to the watchdog claims made by three other partnerships—Arden Row Assets LLC, Basswood Aggregates LLC, and Delwood Resources LLC—who are asking the IRS to admit its staff backdated penalty approval forms in their cases as well.

“The question is whether we’re seeing one isolated case or whether were seeing evidence of a pattern of misconduct in IRS,” Rosenstein said. “I think if you’ve looked at these other three cases, it does suggest that there is a pattern.”

He said cases such as this, and this latest Tax Court order, could lead to more opportunities for taxpayers to challenge the truth of the IRS’s claims in court.

“Whenever there is evidence of misrepresentation by the government, it encourages taxpayers to question the accuracy of government records and also gives the judges reason to grant more broad discovery,” Rosenstein said. “So I anticipate we’ll see broader discovery demands in cases in which penalties are assessed. We’re also likely to see more Freedom of Information Act cases.”

Discovery Request Issues

Michelle Abroms Levin, a former Justice Department Tax Division attorney, has represented several high-profile easement clients as a shareholder at Dentons. She said the order comes after years of increasing hostility by the IRS during the discovery process, but it has yet to be seen if the order reflects increased skepticism among judges of claims made by the agency.

“What we’re seeing more and more is the IRS is refusing to respond to discovery requests or not providing substantive responses to discovery requests. What I found instructive is it closes the door on a lot of the reasons the IRS has used,” Levin said of the order.

She also doesn’t expect LakePoint to see its penalty removed, despite the IRS’s backdating admission.

“I think they have a higher chance of getting back legal fees,” she said.

Tax attorneys say it’s the latest chapter highlighting festering issues of IRS culture being taken over by adversarial us-versus-them attitudes at the agency. Conservation easement cases have been especially contentious Levin said.

“What they have now is a win-at-all-costs culture, and I hope we can shift back to a ‘Let’s find a right answer. Let’s find the correct amount,’” she said.

Agostino said this attitude is eroding much-needed trust in the institution and fueling attitudes among taxpayers that the agency is breaking the rules to extract as much money from them as it can.

“We’re not the mob, but that’s the worry,” he said of the agency. “The IRS, if they don’t play by the rules, gets the perception of being the mob.”