Sauce for the Goose: Standards Applicable to Taxpayers, Practitioners — and the IRS
The contention among the parties results not from a lack of reasonable standards, but rather from an apparent failure by some IRS personnel to follow those standards in practice and the relative lack of accountability.

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The relationship between the Internal Revenue Service’s Large Business & International (LB&I) Division and its constituent taxpayers is complex, marked by alternating episodes of cooperation and contention. LB&I often invites taxpayers and their representative groups to participate in the agency’s critical self-evaluation and listens closely to suggestions and complaints. At the same time, there are frequent areas of open hostility and feverish dispute with, for example, the agency’s ill-considered decision to hire an outside law firm to assist in the inherently governmental function of auditing a taxpayer’s transfer pricing.1

Increasingly, large corporate taxpayers express frustration with the arc of their audits. Their perception is that IRS exam teams do not listen to their input and arguments, fail to advance audits in a timely manner, or raise issues that taxpayers feel should not even be on the table, and then become relentless in pursuing those same questionable items. IRS agents express similar frustrations, often believing that taxpayers take unduly long to respond to requests, treat them with disrespect, hide issues, pursue unreasonable positions, and use their perceived greater resources to “lawyer the IRS into submission.”2

Two crucial aspects of this relationship should be compared: the standards to which IRS personnel are held and should be held in managing audits and a comparison of such standards to those that govern the conduct of taxpayers and their representatives. The problem is not an absence of reasonable standards but rather a failure by some IRS personnel to follow the existing standards and the relative lack of accountability when agents fail to meet IRS management’s expectations and guidelines.

The Three Legs of the Standards Stool

Taxpayers complain that there is an asymmetry of standards, in that they are held to rigorous requirements for reporting positions on tax returns, whereas agents can raise nearly any issue they choose. Although agents are probably not quite so cavalier, an asymmetry may exist between return filing and IRS examination standards. At first blush, this difference appears unfair. However, this is not the right basis of comparison. Instead, what should be compared are the rules governing how taxpayers may defend their returns on audit and the rules governing the agents engaged in the campaign against them. In other words, do similar standards apply to both parties during the audit? In principle, the answer is mostly “yes,” but in practice the answer is different. There are also a few meaningful distinctions in the standards worth noting.

The First Leg: Return Preparation

The United States has a self-reporting system of federal income tax. “There is legal compulsion, to be sure, but basically the government depends upon the good faith and integrity of each potential taxpayer to disclose honestly all information relevant to tax liability.”3 As a carrot, taxpayers are free to arrange their affairs to minimize their taxes, but an accuracy-related penalty for underpayment of tax that is attributable to negligence or disregard of rules or regulations is a stick the IRS uses to facilitate compliance.

This penalty, however, does not apply if the taxpayer has a “reasonable basis” (with or without disclosure, depending on the circumstances) for the tax position, thereby protecting from sanction a taxpayer acting in good faith.4 The reasonable basis standard is generally satisfied if the position is reasonably based on one or more of the authorities set forth in Treas. Reg. Sections 1.6662-4(d)(3)(iii), taking into account the relevance and persuasiveness of the authorities and subsequent developments.5 The reasonable basis standard is a “relatively high” standard, and a position that is “merely arguable” or is a “colorable claim” will not satisfy the requirement.6 In effect, that reasonable basis standard serves as the statutory floor for taxpayer good faith and integrity.7 Moreover, many corporate taxpayers hold themselves to an even higher standard and will not take a position on their tax returns unless they are more likely than not to prevail on the merits if challenged.8

In addition to the accuracy-related penalty regime, in-house and outside tax practitioners are subject to a variety of ethics rules and other professional responsibilities. For example, accountants are subject to the standards provided by the American Institute of Certified Public Accountants (AICPA), which require they act with integrity and objectivity.9 Similarly, tax lawyers must comply with state bar association rules, which require candor toward the tribunal and fairness to the opposing party.10 A tax practitioner whose actions fall short of these standards may be sanctioned.

In addition to those general professional standards, Treasury Department Circular 230 imposes additional rules on practitioners (attorneys, CPAs, etc.) who prepare and submit returns. Karen Hawkins, while director of the IRS Office of Professional Responsibility, stressed that in-house counsel are subject to Circular 230.11 (For more on Hawkins’ views on this matter, see Tax Executive, September/October 2015) In short, any specified professional whose responsibilities relate to reporting an item on a tax return must comply with Circular 230.

In 2003, the IRS significantly strengthened Circular 230 in response to the perceived abuses of corporate tax shelter transactions. Then-IRS Commissioner Mark W. Everson stated that the revisions “changed…the playing field for tax advisors” and sent “a strong message to tax professionals considering selling a questionable product to clients.”12 Hawkins emphasized that Circular 230 extends far beyond tax shelters. Circular 230 “scoops in first-time home buyer stuff… it scoops in the new [foreign bank account reporting] stuff” over which the IRS has oversight.13 Circular 230 now requires practitioners to adhere to best practices in return filing, including “relating the applicable law (including applicable judicial doctrines) to the relevant facts and arriving at conclusions supported by the law,” “advising the client regarding the import of the conclusions reached,” and “acting fairly and with integrity in practice before the Internal Revenue Service.”14 In addition, Circular 230 prohibits practitioners from advising a taxpayer to take a position on a return that lacks a reasonable basis.15 The penalties for violating Circular 230 are severe: a practitioner can be fined, censured, suspended, or disbarred from practice before the IRS.16

The result of all these standards is well defined, and there are strict rules for what can be reported on a tax return in the first place. They are the sticks designed to ensure that the self-reporting regime works.

The Second Leg: Defending an Audit

The rules for taxpayers and their advisors in defending audits are less well developed, rigorous, and restrictive than the reasonable basis standard for reporting positions on tax returns. These rules allow taxpayers much greater freedom to defend positions. This greater freedom is evident within the structure of Circular 230 itself. Section 10.34(a) states that the reasonable basis standard is limited to positions taken in preparing tax returns and claims for refund. Under Section 10.34(b), when dealing with documents, affidavits, and other papers submitted to the IRS, the standard shifts to a significantly lower threshold of (1) not for the purpose of delay, (2) not frivolous, and (3) not an omission of information in a manner that evidences an intentional disregard for the rules.

The lower audit standards are not the only standards in play. Neither taxpayers nor their advisors may make any sort of false statement to the IRS in connection with an examination, at the risk of both civil and criminal sanctions.17 When responding to information document requests (IDRs) and discovery requests, taxpayers must be certain their answers are honest, complete, and do not misrepresent in any way what is being provided.18 Circular 230 similarly provides that any practitioner (which includes inside and outside tax representatives of the company) who is addressing the IRS has an obligation to ensure the accuracy of statements made.19 Likewise, anyone providing information to the IRS must exercise due diligence in preparing or assisting in the preparation, approval, and filing of documents, affidavits, and other papers relating to IRS matters and in determining the accuracy of oral or written statements made by the practitioner to the IRS.20

Moreover, Circular 230 defines practice before the IRS broadly so as to include many audit-related activities—all matters connected with a presentation to the IRS relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the IRS.21 Such presentations include but are not limited to: preparing documents; filing documents; corresponding and communicating with the IRS; and representing a client at conferences, hearings, and meetings. These general rules, and the requirements of Circular 230 that practitioners adhere to best practices, apply in the audit context as well. While acting fairly and with integrity is not precisely defined in the audit context, it does not seem to prohibit advancing any and all arguments to support a position previously taken on a tax return, even if such arguments are relatively weak and contrary to the weight of authority, so long as the arguments are not frivolous.22

Similarly, the penalties for negligence or intentional disregard of rules and regulations do not apply to taxpayers or their representatives in defending an audit. So long as the taxpayer is honest and acts fairly and with integrity, they may advocate a position that is not frivolous to defend their return. Presumably, because the return was subject to the higher standards when it was filed, the position the taxpayer is advocating for on audit will have at least a reasonable basis. However, even if the taxpayer initially thought the position met the reasonable basis standard when the return was prepared and later thinks it does not, the taxpayer may still defend the position unless it is baseless.23

IRS agents express similar frustrations, often believing taxpayers take unduly long to respond to requests, treat them with disrespect, try to hide issues, pursue unreasonable positions, and try to use their perceived greater resources to “lawyer the IRS into submission.”

The Third Leg: What About the IRS?

The IRS sets its own standards for how an examination is conducted, and the vast bulk of those standards are published and available for review by taxpayers in the Internal Revenue Manual, Practice Units, and other guides and handbooks. Even so, taxpayers often complain that agents are unregulated or feel free to take unreasonable positions to extract the tax equivalent of ransom. Even if those perceptions are not true, the mere fact that so many taxpayers believe them reflects a systemwide infirmity that should be addressed. Moreover, there are some distinctions between the rules that govern agents and those that govern taxpayers on audit that should be considered.

First, Circular 230 applies to practice before the IRS and not practice by the IRS. Thus, the rules that govern how taxpayers conduct themselves in dealing with the IRS do not govern the very people with whom the taxpayers deal.

Second, in asserting audit positions, agents are not subject to the same statutory standards that guide taxpayers in preparing returns. As just one example, although a taxpayer may be subject to penalties if the taxpayer reports positions that fall below the reasonable basis threshold, no corresponding objective standards apply to the IRS with respect to examining tax returns or litigating tax positions.

Instead of standards directly parallel with taxpayer standards, the IRS articulates its own overarching principles and factors that its employees should consider in making examination-related decisions. The purpose of the examination process is to “promote the highest degree of voluntary compliance on the part of taxpayers.”24 The goal of each examination is to determine the “substantially correct” tax liability on a return.25 During an examination, the exam team is charged with applying the law to the facts in a fair and impartial manner.26 If the law is unclear, the exam team must weigh the various legal authorities to determine the merits of the issues.27 “Issues should only be raised by examining officers when [the issues] have merit, never arbitrarily or for trading purposes.”28 No IRS employee is to adopt a “strained construction in the belief that he or she is ‘protecting the revenue.’ ”29 At the same time, the examining agent should “never hesitate to raise a meritorious issue.”30 Taken together, these statements suggest an examiner can and should raise issues based upon any interpretation of law that rises above a “strained construction.” While that sounds close to the not-frivolous standard in Circular 230 Section 10.34(b), the Manual might also be read to impose a reasonableness standard similar to that to which taxpayers are subject in preparing returns. Unfortunately, there does not seem to exist any useful guidance as to what the IRS means when it tells its agents not to adopt a strained construction.

These general standards seemingly encourage a process whereby agents obtain information, analyze it fairly and impartially, and take only positions that have at least some merit. In that regard, the standards are not that different from those which a taxpayer must follow in defending an audit and may even be more rigorous.

The IRS actually has less freedom in applying the law to the facts in some ways than do taxpayers. Although agents must avoid a strained interpretation of the law, there is an important and taxpayer-favorable distinction between the positions that can be raised by the exam team and the positions that can be raised by taxpayers. The exam team and its counsel must take positions that are consistent with the Code and published guidance.31 IRS tax policy is not to be made through litigation.32 Exam teams and counsel that attempt to argue against published guidance do so at their peril. For example, while revenue rulings are not binding upon a taxpayer (or, indeed, a judge), the Commissioner is bound to follow them, and courts treat revenue rulings as concessions by the Commissioner.33 Moreover, the IRS “field office must process the taxpayer’s case on the basis of the conclusions” in a technical advice memorandum (TAM).34 Taxpayers are not bound to follow the administrative guidance.35

On the other hand, not all of the rules are identical or as rigorous for the IRS. One of the most significant differences is that a practitioner deemed to cause undue delay on behalf of a taxpayer may be in violation of Circular 230, whereas if an exam team moves slowly, delays, or fails to reach a conclusion and asks for extensions, there are no obvious repercussions that protect taxpayers’ interests. An exam team may issue a delinquency notice if the taxpayer is a day, or even a few hours, late in responding to an IDR. The exam team itself may, on the other hand, take six months or more to review the information the taxpayer was required to compile within thirty days. This disparity causes substantial tension between exam teams and taxpayers because of the disruption, cost, and uncertainty that delays in resolving issues cause the latter. Exam teams sometimes seem to have little appreciation for just how expensive audits and their attendant uncertainties are for taxpayers, and there are no enforceable standards to impose timeliness on the IRS, short of refusing to extend the statute of limitations.

Other rules that guide the IRS’ practices exacerbate the perception that too many weaker issues are pursued. Having identified a potentially meritorious issue that is based on an unstrained construction of the Code and published guidance, the exam team must apply judgment and experience in weighing the taxpayer’s and the government’s tax positions, based on the applicable laws, when resolving the issue.36 However, an agent does not have authority to settle issues based on the perceived hazards of litigation.37 As a result, examiners have an incentive to write up issues even if the IRS’ position is weak, but not frivolous or strained. If examiners fail to do so, they are throwing away a position that may have value, even on a risk-adjusted basis. This can sometimes result in a lengthy Notice of Proposed Adjustment (NOPA) raising multiple alternative and oftentimes extremely weak grounds in proposing adjustments.

As with the taxpayer and its representatives, the ethical and professional responsibility constraints imposed on IRS employees minimally restrain Exam’s actions. Government lawyers are subject to the same state laws and rules governing any other attorney in the state.38 The Office of Chief Counsel, unlike other divisions of the IRS, directs the reader of the Manual to publicly available materials on professional ethics. The Office states that its attorney personnel are bound by the professional codes where the attorneys are admitted to practice.39 The Office also recognizes the ABA Model Rules of Professional Conduct as a “generally accepted ethical standard for attorneys.”40 In addition, agents who are CPAs may be subject to the ethical rules set out by the AICPA. Thus, for the most part, the rules governing agents and taxpayers in audits apply similar, minimal standards to identifying and pursuing positions.41

Further, with the tax law being as uncertain as it is and the IRS wanting and needing to be able to challenge existing interpretations of the law that it has a reasonable good faith basis for believing are incorrect, such a standard would hamstring the effective administration of the law.

Moreover, as noted above, unlike a private practitioner who may be suspended or disbarred from practice before the IRS as a result of violating a provision of Circular 230, IRS employees are not subject to Circular 230. Instead, IRS employees look to their minimum requirements for what are known as the “ten deadly sins.”42 These “sins” are largely willfully improper actions so offensive that they should not be viewed as a threshold for acting in good faith and with integrity.

Considering all of these rules together, if one agrees that the appropriate comparison is between what taxpayers can do in defending their positions and what agents can do in auditing them, there seems to be an insufficient disparity to warrant the public consternation suggesting agents have an unfettered ability to raise any issue they want. Agents have rules and guidelines they are supposed to follow that seem largely reasonable and fair, yet, at least anecdotally, some taxpayers feel their examinations are dysfunctional and unfair.

From whence cometh the public outcry? First, there seems to be something of a squeaky wheel aspect to it. The path to an agreed case may be tortuous and many audits may take too long, but more often than not, taxpayers and the IRS reach a fair, or at least acceptable, outcome. Taking into account the salutary role played by IRS Appeals, very few cases progress to litigation; so the process is working, at least to some extent. But if a few taxpayers have truly disastrous audits, and a few more complain about the negative aspects of their otherwise reasonable examination, what arises is the perception of a process run amok.

Second, one might argue that agents should be subject to the same standards in asserting audit positions as taxpayers are subject to in taking the positions on their returns in the first place. If that is the appropriate comparison, then the relatively low standards imposed upon exam teams for raising issues in audits may create a disparity, although it is not clear how much below reasonable basis an unstrained interpretation of law standard falls. Further, one might believe that agents should not take any positions if they cannot conclude that their position is more likely than not the correct one. Such a standard would represent a sea change in the audit process and almost certainly have a negative effect on voluntary compliance. Further, with the tax law being as uncertain as it is and the IRS wanting and needing to be able to challenge existing interpretations of the law that it has a reasonable good faith basis for believing are incorrect, such a standard would hamstring the effective administration of the law.

Most important, the problem, such as it is, does not result from an absence of standards. Instead, it arises through the application and interpretation of the standards and the lack of a mechanism to compel compliance in the limited number of cases where an audit truly goes off the rails.

Actions Without Consequences

Most agents are highly capable and responsible public servants trying their best to do a difficult job in an increasingly resource-challenged environment.43 However, just as not all taxpayers are equally compliant, not all agents play by the rules, and frustrations arise when the guidelines are not followed and taxpayers have no recourse.

First, different agents will likely interpret the definition of “strained” differently. It is neither a legal standard defined by judges nor an objective easily understood. Moreover, many agents are trained first and foremost in the skills necessary to gather and analyze facts and apply settled legal principles to those facts. While intelligent and capable, some lack legal education or equivalent training in reading cases critically, separating out the holding from the dictum and determining whether distinctions between the case in question and the issue being audited mandate a different outcome.44 A position may be based on a strained interpretation of the law, not because an agent has chosen to disregard the authority, but because he has misread the case. Thus, what may seem like an unstrained interpretation to an agent may seem strained to a taxpayer.

Strained interpretations also arise where the exam team becomes overly invested in an issue. Once an agent puts his views in writing, the taxpayer’s careful response pointing out the errors in the NOPA may not make the issue go away, even if the NOPA is wrong. Instead, the response may only harden the agent’s resolve or cause the agent to provide a new and equally questionable basis for the discredited position. Like taxpayers and their representatives, exam team members are only human, and humans get invested in their own positions—particularly those taken in writing.

The recent LB&I reorganization, while not driven by a desire to address these concerns, may alleviate them to some extent. The people now charged with interpreting the law and developing the IRS’ legal position are personnel trained to do just that and presumably will do so fairly. There will still be areas of disagreement, but hopefully they will most often be principled and based on two competing, but reasonable, interpretations of the law.45

While disputes over the law do occur, more often than not the disagreements at the examination level are over facts and how they should be interpreted. For example, in an abandonment loss case, the argument is likely to focus on whether the taxpayer abandoned the building, not what the standard for abandonment is. The standards for conducting examinations do not and probably cannot dictate how any one person will see the facts and resolve conflicts in the facts. Particularly when each side is dug in, those disputes cannot be resolved at the examination level, but that does not mean the exam team lacks standards.

However, the guidelines for agents described above are much more aspirational and do not get down to the nitty-gritty of how to evaluate the facts fairly and comprehensively any more than the ethical rules for private practitioners do. In other words, the problem is not necessarily a lack of fair or comparable standards for when to assert an issue. Rather, it is either a failure to provide detailed enough instructions for what a comprehensive fact-finding endeavor should look like and dictate what exactly is expected of agents to determine if an issue is meritorious or a failure of a very limited number of agents to understand or follow those instructions. The reality is presumably mostly the latter.

The IRS believes, correctly, that the facts are under the control of the taxpayer, and thus that the taxpayer should come forward with the facts supporting its position. At the same time, the audit process is not one which requires taxpayers simply to hand over every document they think might be relevant. Often, taxpayers do not even know what issue the exam team is looking at, so instead of providing an overly inclusive document dump, they wait for IDRs and provide what is requested. Sometimes the agents do not ask for everything and instead deliberately or by happenstance develop a pool of evidence supporting an unfavorable outcome. If an agent asks for a limited set of materials and bases decisions on that, she may not be applying a strained interpretation of the law, but instead applying the law in a reasonable manner to an incomplete or fictional set of the facts.46

Agents also seem to have freedom to judge the credibility of different materials. The Manual provides that “self-serving, uncontradicted statements which are not improbable or unreasonable should not be disregarded. The degree of reliability placed on taxpayer’s oral statements must be based on the credibility of the taxpayer and the surrounding circumstantial evidence.”47 If an agent says, “I found the memo from Mr. X to be self-serving and lacking credibility,” there seems to be no way to refute that conclusion, save for finding another decision-maker who sees it differently. Moreover, there are apparently no repercussions for agents if the conclusions they draw are later determined to be unreasonable.

One should not therefore conclude that agents are relatively free to pick and choose among facts that support a conclusion, whereas taxpayers must consider the universe of facts and risk penalties if they give lesser weight to outliers that do not support their own positions. Surely this is not what the IRS expects of its agents. Indeed, the Manual makes clear that the agent’s determination “must be made on the basis of all available facts, including facts supporting the taxpayer’s position.”48 Nonetheless, between being able to blame the taxpayer for not providing conflicting and helpful information and being able to rely on a jaundiced assessment of credibility, agents have great license to apply the law to an incomplete set of facts. Most do not do so and instead try to get it right (although they and the taxpayer may have a different judgment of “right”), but the few who do not tend to garner the most attention and lead to the most frustration.

The IRS’ recent Publication 5125 ideally will alleviate some of these factual frustrations.49 Regarding factual disagreements, the exam team is expected to seek the taxpayer’s acknowledgment on the facts, resolve any factual differences, and document the factual disputes. The issue manager is charged with ensuring that “all relevant facts, including additional or disputed facts, are appropriately considered before a [NOPA] is issued.” Taxpayers will frequently have an opportunity, prior to receiving the final NOPA, to see what the exam team believes to be the facts and to highlight errors and incorporate additional facts it finds important through an IDR.

Unfortunately, other than noting any factual disagreements, LB&I guidance gives no indication as to what happens if the agents fail to address areas of disagreement and proceed under their version of the facts. Publication 5125’s guidance does not even go as far as the procedures for requesting a technical advice memorandum do, in which “[i]f the taxpayer and the field office disagree about ultimate findings of fact or about the relevance of facts, all of the facts should be included with an explanation that highlights the areas of disagreement.”50 Thus, while a move in the right direction, this is unlikely to resolve all the factual dispute and credibility questions. These credibility questions may still be pushed to the next decision-maker.

Proposals for Imposing Modest Standards for the IRS

Although the Manual is replete with helpful, aspirational principles, in this regard, real life is messy. And apparently, the existing code of conduct has been insufficient to prevent the frustration of taxpayers. While certain of the recent LB&I initiatives are positive developments to resolve some taxpayer frustrations, the biggest problem continues to be not with the absence of standards but with the absence of a mechanism for a taxpayer to combat situations where those standards are ignored. First, the Manual does not give taxpayers any substantive rights.51 As a result, even if an agent willfully fails to follow the guidelines and directives in the Manual, the taxpayer has no recourse. Conversely, if a taxpayer violates the rules applicable to it, that taxpayer may be subject to severe sanctions. The idea that there can be thousands of pages of directions to agents that they may ignore is anathema to most responsible taxpayers.

A recent example of how this problem manifests itself in the context of the recent LB&I initiatives is the new LB&I IDR directive.52 It provides direction for both exam teams and taxpayers to make the information-gathering process more collaborative. The directive imposes behavioral requirements on both constituencies. For many taxpayers, the new process works, and their input on draft IDRs is carefully considered. However, others expend substantial resources explaining the problems with draft IDRs and offering alternatives, and yet in response receive one unchanged IDR after another. Exam teams have been heard to assert that the IDR belongs to them and they can act as they please. Taxpayers seem not to have any legal or practical recourse to force examiners to comply with the IDR directive.

While the IRS lauds its own transparency, one place where it is entirely opaque is in understanding what happens to agents who do not follow the rules. Taxpayers have little recourse when an agent adopts a strained reading of the law or an unreasonable view of the facts. Even when taxpayers complain, they typically see no outward change, and at the resource-challenged IRS, getting an unreasonable agent removed from a case is nearly impossible. Given that, going up the chain of command is often a Sisyphean effort, resulting in an audit under the control of an agent who knows the taxpayer criticized him to his bosses. Perhaps there are corrective actions taken behind the scenes, but they are not visible to the affected taxpayer.


  1. Taxpayers should continue the conversation with LB&I about problems with the audit process. The conversation should not be in the context of an individual taxpayer complaining about its own audit, but rather in the context of a group of concerned taxpayers bringing the systemic issues they see to an attentive agency. This already happens to some extent, but it should be enhanced and needs to be met by IRS management with something other than a circle-the-wagons mentality. As Publication 5125 notes, “LB&I and taxpayers share an interest in obtaining tax certainty by completing examinations in a fair, efficient, and timely manner.” Feedback to IRS management with respect to systemic problems in the process should be an integral part of making examinations more fair, efficient, and timely.
  2. Greater public clarity is needed to determine exactly what standards IRS management expects agents to use in writing up issues in the NOPAs. For example, the IRS should explain what the unstrained construction requirement means. It would be ideal if IRS management described these standards in terms like those that apply to return positions (reasonable basis, substantial authority) so exam teams and taxpayers can understand the expectations. While that might not eliminate arguments over whether an interpretation is strained, it would ensure that everyone understands the standards—and if the same standards are applicable to taxpayers and the IRS, what is sauce for the goose must be sauce for the gander.
  3. The IRS should provide more objective standards for judging the credibility and sufficiency of the evidence produced by the taxpayer. Perhaps the appropriate standard is analogous to the one imposed upon a taxpayer in order to be granted an evidentiary hearing in a summons dispute.53 The agent could disregard the taxpayer’s version of the facts when the agent “can point to specific facts or circumstances plausibly raising an inference” that the taxpayer’s factual statements are incorrect.54 Naked allegations by the agent should be insufficient. The agent should be required to “offer some credible evidence supporting his charge. But circumstantial evidence can suffice to meet that burden; after all, direct evidence of another person’s actions or intent, at this threshold stage, will rarely, if ever, be available.”55 Such a standard would eliminate some issues that turn solely on Exam’s perception of credibility.
  4. Even if a standard for finding facts is not imposed, at a minimum, if there is a disagreement as to the facts, all facts should be included in the NOPA with an explanation that highlights the areas of disagreement and justifies the exam team’s factual conclusions. Taxpayer frustrations will be increased, not diminished, if the taxpayer is required to respond to an IDR identifying all of its factual disagreements with the draft NOPA and the exam team can wholly disregard that response in preparing the final NOPA. If a witness’ viewpoint is ignored, a reason should be given other than “I didn’t trust him.” This will help ensure all relevant facts have been considered and that the determination is fair and complete.
  5. Although it may be impractical with the IRS’ resource constraints, it would be helpful if a NOPA and the taxpayer’s response were subject to consideration by an IRS reviewer not involved in the audit. This review would not be comprehensive and would not be designed to resolve issues properly in dispute, but would provide a set of less-invested eyes to screen for meritless positions. That would save the agents’ time in preparing a revenue agent’s report and a rebuttal, save the taxpayer’s time in writing a protest, save Appeals’ time in evaluating the issue, and help taxpayers believe LB&I is doing more to eliminate unsupportable adjustments.
  6. The taxpayer community and LB&I should agree on a series of survey questions to determine how an audit has proceeded that would provide IRS management meaningful information about team performance, adherence to the Manual, and other directives and guidance. Then, every time an exam team cycles off a taxpayer’s case, the taxpayer should be offered the opportunity to complete the survey.56 The survey would not focus on (and might even prohibit) comments about interpersonal relationships and professionalism and would instead address the types of substantive problems that may have arisen in the audit:
    • Instances in which taxpayer input on draft IDRs was rejected without explanation
    • Instances in which taxpayer input on reasonable deadlines for IDR responses was rejected without explanation
    • Instances in which there was a significant time gap between IDRs for the same issue, causing the taxpayer additional expense and inefficiency due to the exam team’s delay
    • Instances where strained readings of authorities were adopted and no meaningful discussion occurred
    • Instances where incomplete facts were presented and the taxpayer’s corrections or additions were rejected
    • Instances where applicable Manual or directive procedures were not followed

    Put differently, the survey would seek to identify where the stated objective standards were not met. The relevant exam team leadership would review and consider the meaningful and thoughtful comments and address them specifically. Repeat “offenders” would be subject to training to reinforce best practices.57 Agents would be precluded from discussing the survey results with anyone responsible for the taxpayer’s next audit to avoid prejudicing the new team. This survey process would have the potential benefit of reinforcing IRS best practices and making the IRS’ “customers” feel as if they have a true voice.

  7. Agents’ sustention rates at Appeals should be studied and reported internally to the extent this practice is not currently in place. If an agent has a significant percentage of issues wholly or largely conceded, especially before the taxpayer’s conference, the IRS should examine those issues and the audit and help educate the agents as to what they are doing incorrectly. Those are the types of issues that, for a resource-strained IRS, should not have been written up in the first place. On the flip side, agents should be trained to understand that if they write up an issue in a draft NOPA and are swayed by the taxpayer’s response, it is a sign of the agent’s strength, not weakness, to change the agent’s position.
  8. Taxpayers should have substantive rights in the case of gross violations of the Manual. The failure to follow every single rule should not lead to any repercussions, just as taxpayers often prevail based on substantial compliance. However, significant failures should lead to issue preclusion or some other appropriate sanction. This would help ensure compliance with the Manual and give taxpayers a greater sense of fairness. Rules like these are already imposed in litigation for discovery violations (e.g., spoliation). To be sure, individual consequences of such violations would be harmful to the fisc, but viewed from a systemwide perspective, overall confidence and compliance may be improved.
  9. There needs to be a stick for the rare agent who fails to conduct himself with integrity “in a way that is true to the public trust.”58 Just as the IRS increased the potency of Circular 230 following the tax shelter scandals of the late 1990s, and it worked, in the wake of the IRS scandals it may be appropriate for the Treasury Department to impose similar Circular 230 requirements on the IRS itself. The Office of Professional Responsibility already has a mechanism in place for investigating ethical violations by tax practitioners. A parallel regime could be imposed upon the IRS employees to ensure that both sides of the examination are behaving in good faith and with integrity.

Of course, imposing a regime similar to Circular 230 on IRS employees would be difficult in practice. Many IRS employees are members of the National Treasury Employees Union and afforded the job protection benefits that typically accompany union membership. Without coordination with the union contracts and buy-in by the union officials, any professional responsibilities externally imposed upon IRS employees may be as unsuccessful as the implementation of punishment for committing one of the ten deadly sins.59 However, if the Treasury does not act on its own, Congress may impose more draconian, unnecessary constraints via legislation.60

Additionally, each of these suggestions would tax an already resource-constrained IRS, but could be implemented in a manner that justifies the expense. Compliance will be enhanced if taxpayers believe that the audit process is fair and that agents respect the rules, and the audit process may actually become more efficient and less prone to yielding adjustments that are rejected by Appeals and in court if the rules are followed. Moreover, the goal in each of these suggestions is not to punish agents with poor survey results, for example, but to offer them additional training to rectify issues, on the belief that agents want to do the right thing and can be better trained to do so. In a self-reporting tax system, trust between the IRS and the taxpayer is necessary to maintain taxpayer compliance, and a few modest changes may reduce the current frustration.

Matthew Lerner | Kevin Pyror | Katharine Funkhouser
Matthew Lerner and Kevin Pryor are partners and Katharine Funkhouser is an associate at Sidley Austin LLP.


  1. Eric Kroh, Tax Pros Wary After IRS Hires Quinn Emanuel Litigators, Law 360 (April 6, 2015).
  2. All of those are complaints that merit attention but are beyond the scope of this article.
  3. United States v. Bisceglia, 420 U.S. 141, 145 (1975).
  4. Treas. Reg. § 1.6662-3(b)(1).
  5. Treas. Reg. § 1.6662-3(b)(3).
  6. Id.
  7. If the underpayment is a “substantial understatement” then the taxpayer is penalized, unless there is “substantial authority” to justify the taxpayer’s return position. Treas. Reg. § 1.6662-4(b). Substantial authority is a higher standard than reasonable basis.
  8. Accounting Standard Codification 740 may require certain taxpayers to take a reserve for any tax position for which the more-likely-than-not standard is not met.
  9. Code of Professional Conduct 1.100.001 (Am. Int. of Cert. Pub. Accountants Inc.) (Effective December 15, 2014).
  10. See, e.g., Model Rules of Professional Conduct 3.3 and 3.4 (Am. Bar. Assoc.).
  11. Charles Gnaedinger, Circular 230 Can Apply to In-House Counsel, IRS Official Says, 127 Tax Notes 1196 (June 14, 2010).
  12. IRS News Release IR-2004-152 (Dec. 17, 2004), available at
  13. 127 Tax Notes 1196, supra note 11.
  14. Circular 230 § 10.33(a)(2)-(3).
  15. Circular 230 § 10.34(a)(1)(ii)(A).
  16. Circular 230 § 10.50.
  17. IRC §§ 6663, 7206; 18 U.S.C. 1001.
  18. Model Code of Professional Responsibility Rules 4.1, 8.4(c) (Am. Bar. Assoc. 2014); See also ABA Formal Op. 85-352 (1985).
  19. Circular 230 § 10.22.
  20. Circular 230 § 10.20.
  21. Circular 230 § 10.2(a)(4).
  22. Circular 230 § 10.34(b).
  23. Id.
  24. IRM
  25. IRM
  26. IRM
  27. IRM
  28. Rev. Proc. 64-22, 1964-1 C.B. 689.
  29. IRM
  30. Rev. Proc. 64-22, 1964-1 C.B. 689.
  31. IRS Office of Chief Counsel Notice (CC-2003-014)(May 8, 2003).
  32. Id.
  33. Rauenhorst v. Commissioner, 119 T.C. 157 (2002).
  34. Rev. Proc. 2016-2, § 12.01.
  35. CC-2003-014.
  36. IRM
  37. IRM
  38. 28 U.S.C. § 530B.
  39. IRM However, the Office of Chief Counsel will not discipline its attorneys for a violation of these codes unless the violation also violates statutes applicable to the IRS’ employees. See Office of Government Ethics, Standards of Ethical Conduct for Employees of the Executive Branch, 5 C.F.R. Part 2635; Supplemental Standards of Ethical Conduct for Employees of the Department of the Treasury, 5 C.F.R. Part 3101; Department of the Treasury Employee Rules of Conduct, 31 C.F.R. Part 0; and Office of Personnel Management on Employee Responsibilities and Conduct, 5 C.F.R. Part 735.
  40. Id.
  41. Some commentators believe that is not sufficient. Because the government has responsibility for the system’s integrity and appearance of fairness, those commentators believe government representatives should be held to a higher standard. See, e.g., Frederic G. Corneel, “The Service and the Private Practitioner,” The American Journal of Tax Policy, vol. 11:2:343, at 359-360. While that argument may have merit, it is beyond the scope of this article. We would be reluctant, however, to argue for hamstringing the tax collecting agency to the point that it has difficulty collecting revenues to which it is entitled.
  42. Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, sec. 1203(b).
  43. Further, taxpayers may have unreasonable expectations as well. Audits are adversarial proceedings and through the course of two to three years spent together working on issues where agents and taxpayers have different interests, there will naturally be disagreements and even frustration. Here we address examinations during which the entire process is perceived as having broken down.
  44. We have seen numerous instances where strong, taxpayer-favorable authorities are disregarded on the thinnest of irrelevant reeds.
  45. We are not naïve. We know that heated disputes will still exist, in some instances involving interpretations that taxpayers find very strained. Still, ideally, disputes where one party finds the other’s interpretation of the law to be strained will diminish.
  46. If his conclusion later proves to be wrong, the agent may blame the taxpayer for not providing the other materials that would have allowed a better-informed decision.
  47. IRM
  48. IRM
  49. Taxpayers have plenty of other valid complaints about this process, but this one aspect of it may provide a benefit.
  50. Rev. Proc. 2016-2, 2016-1 IRB 102 § 7.01.
  51. See, e.g., United States v. Will, 671 F.2d 963, 967 (6th Cir. 1982).
  52. LB&I Directive 04-0214-004.
  53. United States v. Clarke, 134 S. Ct. 2361 (2014).
  54. Id.
  55. Id.
  56. We know there are already a number of mechanisms for feedback, but we would like one that focuses on compliance with stated requirements by Exam.
  57. This should be coupled with tracking the taxpayer’s survey responses so taxpayers who complain about everyone are identified, and their complaints are discounted.
  58. Statement by President Obama, May 15, 2013, available online at
  59. Treasury Inspector General for Tax Administration, Review of the Internal Revenue Service’s Process to Address Violations of Tax Law by Its Own Employees, April 14, 2015 (Ref. No. 2015-10-002).
  60. In 2016, members of Congress have introduced several bills to reform the IRS in response to the recent bad press, including legislation banning the IRS from rehiring employees discharged for misconduct; a prohibition on hiring any new IRS employees until the Secretary of the Treasury certifies that no IRS employee is subject to a “seriously delinquent debt” or notifies Congress that such certification is not possible, and explains what information would be required to provide such a certification; and a bill to prevent the IRS from issuing bonuses until Treasury develops and implements a comprehensive service strategy. H.R. 3724; H.R. 1206; H.R. 4890.

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