In a world where new laws and regulations seem to spring from nowhere, everything is subject to change. So, what should you do, TEI member? First, accept that uncertainty will be the norm with respect to domestic and international corporate tax policy. The congressional intent behind the laws that Treasury has to execute won’t be clear. Treasury’s authority to clarify the law through delegated authority is ever shifting, and courts will never be able to clearly define the limits of Treasury’s interpretation of those laws. On top of that, retroactive laws and rules are entirely possible.
That morass of uncertainty means that your advisors’ opinions on tax positions won’t be fixed, and your audit risks will fluctuate according to how aggressive tax enforcement is and how comfort levels shift as new guidance comes to light. Tax abuses and benefits are in the eye of the beholder or even the political party that happens to be in power. Sometimes the Internal Revenue Service will be too aggressive and get enforcement wrong. The IRS is sometimes right. Ultimately, you will end up amending your company’s tax returns going forward—multiple times and likely en masse.
But you’re in good company, TEI member. Change can be disruptive, but many opportunities exist in this new world of tax uncertainty. And as a corporate executive, your understanding of your company’s leverage as a taxpayer in the following four arenas will help maintain your opportunities to generate tax savings: policy ambiguity, filing flexibility, enforcement shifts, and advisor connections.
Leverage Policy Ambiguity
Remember the Trump administration’s March 2019 policy statement that Treasury won’t argue that subregulatory guidance has the force and effect of law? The reason was, simply, that subregulatory guidance doesn’t have the force and effect of law. Even IRS forms and instructions must be backed by statutory authority. Subregulatory guidance hasn’t been subject to the notice-and-comment procedures of the Administrative Procedure Act (APA) or other congressionally imposed requirements for Treasury’s words to have weight equal to full force and effect of Congress’ own. Judges aren’t going to support the executive branch’s attempts to usurp Congress’ power to legislate any more than they’d allow their own judicial powers to be usurped. But the IRS often binds itself through its positions, which, in all forms, confer some degree of interpretive value.
Budget reconciliation legislation is becoming the new norm. But enforcement can shift as quickly as a president can sign an executive order telling IRS agents to stand down. Your business directly and indirectly supports a massive amount of the revenue the fisc collects. Treasury’s power comes from the fact that you’re good at your job. You are essential to the economy.
I know, you’ve heard it before. But Treasury and the IRS have never been in this position before. They’ve never had to determine congressional intent when most congressmen and congresswomen themselves couldn’t tell you what the congressional intent was. Payroll Protection Program (PPP) loan deductibility, retroactively confirmed by the Consolidated Appropriations Act, 2021 (H.R. 133), was clear evidence of that uncertainty and a reason that courts, by necessity, must follow the law as written. Double benefits have bound Congress and the IRS, through Treasury Regulations, even when those benefits were later reversed through statutory and regulatory changes. Change is the only constant in this new era.
Fights on this are being fought now. The Tax Cuts and Jobs Act was murky. Taxpayers will win. You could be one of them. So, what if you lose? You fought the good fight. You did so in a world of uncertainty where the IRS frequently acts unreasonably. Political shifts, global crises, and clarifying guidance free up previously unclear losses and deferred tax assets. Prior uncertainty isn’t your cross to bear.
We know that Treasury can be generous. But it has no choice. It must be. Congress gives it flawed legislation without clear legislative intent. But Treasury does not define abuse or have a monopoly on deciding whether a benefit is just too good for Congress to have intended. Treasury’s decisions are just that, decisions. And Treasury is limited in what it can decide, because many judges follow the doctrine that revenue-raising laws should be construed against the government where ambiguous, and rightfully so. Therefore, Treasury’s clarifications should be taxpayer-friendly. If they are not, speak up.
Leverage Filing Flexibilities
“Pretty certain” is about as certain as you’re going to be when filing your tax returns from now on.
I once got comfortable helping a client take two conflicting basis positions that ended up on the same tax return. I simply followed Treasury’s guidance, which changes quite frequently. Should taxpayers bear the burdens of Treasury’s changes of heart or its changes of the guard? I know you know what I’m talking about. We must do the best we can with what we have—and so must the government.
You know it’s perfectly fine to file an amended return—because you did the best you could when it was originally filed. The IRS has never seen so many amended returns. Why? Because of changes in the law, including statutory, regulatory, and even subregulatory changes. The best of the best know more guidance is coming that will change current positions, and you also know there is nothing you can do about that.
Don’t pay more tax than you need to. But when you inevitably do because of the ever-changing tax world in which we now live, please amend. Why? Because to the best of your knowledge you can now pay less tax. This knowledge is new. Does anyone doubt that? They’d be stupid to. You’re listening to Congress, which didn’t have the knowledge. You’re listening to Treasury, who didn’t have the knowledge. You’re listening to the IRS, which figured out too late you didn’t need to pay what you did. Your advisors suspected. You suspected. But that’s not enough. Do the best with what you have.
I repeat, you’re going to file amended returns. All of you. But your audit risk is not going up relative to your peers.
Leverage Enforcement Shifts
Face it, you need the IRS. You certainly need it to check its mail. To process filings. To instruct you on how to file and comply with the Internal Revenue Code. Compliance is key.
Compliance is inextricably linked to the IRS enforcement powers. COVID-19 has merely exposed preexisting enforcement weaknesses that would eventually have had to be resolved. The money will be spent on computer software that likely predates your first BlackBerry. The money will be spent on helping you comply with the law. And, yes, the money will be spent on enforcing the law—at least as much as the IRS is allowed to.
So, let’s assume the agency gets $80 billion for compliance. Giving the IRS billions to improve tax collections can’t be good, or so it seems at first blush. But you have the power of technology as well—you can embrace it without Google Glass, Siri, or AI (machine learning or whatever it’s called) telling you what to do. It’s just Excel formulas in a different format or code.
And remember, the IRS should be uncomfortable, too. Your company can still pursue remedies if the agency oversteps. Should you band together to convey your discontent? Yes. Why? Because the IRS can tax no more than Congress permits. When it’s not clear that Congress has intended to punish, Treasury can’t say so. It can argue that something is an abuse, a violation of the economic substance doctrine, or not at arm’s length, but the IRS doesn’t have the final say and is frequently wrong.
Given recent unfavorable federal court decisions, the IRS should cool its jets. I also hope Congress tells it to respect every taxpayer’s rights, not just those making under $400,000. But I’m not confident that either Congress or the IRS will protect the largest contributors to the fisc and to the economy. That will hurt them. Neither should ignore you. I have represented many of you. Underestimating someone is a key mistake often made by the unwise in power. And egos in Congress can be blinding.
And again, the Department of the Treasury is obligated to help you. It has been delegated the responsibility of making the uncertain certain. In this new tax world, that means that Treasury is responsible for making the impossible possible. It must tell you what Congress wanted, even if it can’t. For better or worse, Treasury is your new friend.
Leverage Outside Expertise
One of the hardest things you must do is sift through all the nonsense. There is more of it now than ever. You’re not psychic. Stick to your guns and your trusted sources.
Your company’s level of sophistication requires that you have advisors. The complexity of tax requires that you have a strong internal team. Tax compliance costs money. Congress is doubling IRS resources to ensure compliance and increase enforcement. That means you’ve got to double yours. Staff up. You’re going to be very glad you did.
Build the team you need to make sure you’re not facing anything alone. No one underneath you should feel alone. Have mentorship in place. You needed a mentor. You still do. Your mentors are reading this, too. Call them after you’re done reading this. TEI can give you their contact information.
Hire the best people who are not unethical. I know, ethics can be relative. But the culture is changing what “ethical” means. It means people want purpose, support, and happiness. If you give it to them, you will not regret it. You are the leader. Lead and mentor, directly and indirectly, and they will follow.
Pair up your staff and your advisors at various levels. Encourage collaboration. Build a deeper bench that’s prepared for change. Lead by example with your peer advisors and ask them about their staff. Have more presentations. Forget the firing squads. Save your ammo for real deliberations, which everyone can learn from. Let your people take risks and be wrong on the spot, and then watch them push and help each other to improve with purpose.
If your advisor comes up with a reasonable position, I say go for it. At this point, who hasn’t had reputational concerns due to what is likely caused by political infighting over who and how much benefit was intended? Will the IRS claim the benefit wasn’t intended by Congress? Probably. And you’ll probably win in court, but more likely settle out before then. But maybe the IRS will realize it’s a losing battle, considering the opposition.
With the help of your advisors, you help save your company a fortune in tax dollars and help investors see its true worth. This helps employees. This helps investors. This helps the government. This helps industries beyond yours. Your TEI friends are in the same position—an increasingly uncertain one when it comes to tax. And together you’ll exceed expectations.
The coming change is real. And making real dollars simply makes sense.
Conclusion
What more can I say? Oh yes, uncertainty has plenty of cons, too. It makes for bad policy that nearly half of Americans won’t agree with. I think the filibuster should be strengthened, not eliminated. Budget reconciliation allows Congress to do what the current majority wants at the cost of complexity. Republicans want to pay for tax cuts and Democrats want infrastructure. They’re both overzealous. They point to the other as the reason. But their zeal is the reason they’re in Congress, so it should not be surprising.
Congressional Republicans waited until the last minute to reduce individual taxes and zero out the individual mandate in an effort to dismantle Obamacare. What does this year have in store? Who knows?
Something in this year’s reconciliation legislation will surprise you. Then six months later your advisors will surprise you again with a tax benefit found in the legislation. You’ll have to determine if it’s reasonable and if it’ll get shut down by the IRS and if you should get in early before the opportunity gets shorted.
Something in this year’s reconciliation legislation will surprise you. Then six months later your advisors will surprise you again with a tax benefit found in the legislation. You’ll have to determine if it’s reasonable and if it’ll get shut down by the IRS and if you should get in early before the opportunity gets shorted.
Final thought. I’m writing this in mid-September. You’ll read it in a few months. In October you saw me speak with some of the best tax minds around, including Dave Camp and Mike Desmond. Why is this write-up so informal? Because it can be. We explained the legal effects of Treasury’s guidance and its practical efforts. I’ve written over a hundred articles in Tax Notes. They’re good. Read them. Tell your people to read them. I know your advisors do. They probably take credit for my ideas. It’s cool. I’ve done it myself (although I am not that guy, generally). I’ve paid my dues.
You’re uncomfortable because you’re responsible for reconciling the numbers. Do it. Push your people. Push your advisors. Push your network. Push TEI. Push Treasury. Push Congress. And then let go. You’ve done all you can do. Things are still going to change.
Ben Willis is a contributing editor at Tax Analysts.
