IRS Stacks the Deck Against Taxpayers
IRS Stacks the Deck Against Taxpayers
The substantive and procedural harms resulting from Notice 2017-10 exacerbate the already untenable nature of IRS enforcement, particularly as it has been applied to donations of conservation easements.
For example, when the IRS sets its form and paperwork requirements, it also sets its own standards for substantial compliance to filing rules and deadlines. This may seem intuitive, but, with conservation easements, the agency has a history of challenging even the most minute procedural or paperwork shortfalls and oversights in order to invalidate deductions.
In the Cave Buttes, LLC v. Commissioner case, the IRS needled the taxpayer because the appraisal listed the qualifications of only one of two appraisers that worked on the easement, even though a fair reading of the IRS’s rules only require the information from one appraiser.
In addition, only one of the appraisers signed the Form 8283 disclosure, and the IRS challenged the deduction even though the form had only one signature line.
Fortunately, the taxpayers won that case, but far more often than not, taxpayers will end up losing their deductions when the IRS raises an issue with procedures or paperwork, even when the mistakes have no impact on the validity of the deduction or the agency’s ability to process it.
When auditing easement deductions, the IRS makes its own valuation and qualification determinations, sets the penalties, and oversees collection actions.
To be clear, both valuation and qualification are vital considerations and there should be plain and enforceable standards for both. The IRS has a distinguished track record of hamstringing taxpayers along these lines as well.
For instance, when challenging easement appraisals, the IRS has taken a “zero valuation” stance on numerous occasions, often providing ridiculous justifications for doing so.
In such cases, the IRS will usually insist on its own valuation assessments, often demanding and enforcing a massive haircut on the deduction. There are legitimate reasons for appraisers acting in good faith to have different opinions on factors that affect property values. Yet, the agency tends to insist on litigating disputes over their valuations in Tax Court.
An examination of the most relevant Tax Court cases – most of them addressing issues of valuation or procedural foot-faults on easement deduction claims – is illustrative here.
On average, the Tax Court issues a decision on these cases nine years after a donation is made. Assuming the IRS challenge to a deduction arises the year after it is claimed, taxpayers can reasonably expect to go through eight years of dispute and litigation before getting a resolution to their case.
All of that comes at significant expense to taxpayers without any guarantee that they will ever be made whole. In fact, if a taxpayer wins in Tax Court, their ability to recoup any attorney’s fees is severely limited – capped by statute at around $200 an hour and only if the IRS cannot establish that its position was “substantially justified,” which most tax practitioners acknowledge is a high bar for taxpayers seeking even partial recovery.
Other federal laws – such as Section 7421 of the Tax Code – put almost insurmountable restrictions on taxpayers seeking injunctions against the IRS, even if the IRS’s position or conduct is manifestly improper or unreasonable.
Therefore, it’s more than logical to conclude that, for the average taxpayer claiming an average easement deduction, the cost of engaging in years-long litigation over appraisals can be overwhelming and ultimately not worth the expense.
As stated previously, none of these practices originated with the issuance of Notice 2017-10.
Nevertheless, they are indicative of the mindset at the IRS that led to this point. And, once again, the Notice gives the IRS a new set of tools it can use against taxpayers claiming conservation easement deductions, even if the deductions are legitimate.