The Internal Revenue Service makes clear that taxpayers who willfully conceal or alter tax documents risk severe penalties. But what happens when government auditors are caught manipulating documents and hiding those actions in court?
The IRS this month agreed to settle and drop a penalty in Lakepoint Land II LLC v. Commissioner. A judge in U.S. Tax Court had sanctioned the IRS in the case, ripping the agency’s counsel for acting in “bad faith” and having “multiplied the proceedings in this case unreasonably and vexatiously” by failing to tell the court that documents it used to assess a penalty had been backdated.
Several other Tax Court cases suggest wider IRS document fiddling as the agency has gone after “syndicated conservation easements.” Congress created conservation easements in the 1980s, letting land owners donate the development rights for acreage to a qualified charity in return for a tax deduction.
Those easements have become big business, as legal tax loopholes often do. Companies buy up land, have it appraised for its foregone developmental value, then sell stakes to investors who receive the tax benefit. This entirely legal commerce is disliked by the green lobby and some lawmakers.
The IRS began its crackdown in 2016, and by 2020 former Commissioner Charles Rettig had declared it a “top priority” to “actively identify, audit and litigate” these transactions that “defraud the government of revenue.” The IRS zeroed in on what it claimed were inflated land appraisals, denying deductions and slapping firms with hefty penalties.
One legal rub: The federal tax code requires an IRS supervisor to approve in writing the initial determination of a penalty. That didn’t happen in Lakepoint. The company presented emails to Judge Christian Weiler showing that the IRS agent on the case failed to get her supervisor’s written approval in 2016 for a proposed $15 million penalty.
When the agent realized this—in February, 2017—her supervisor acknowledged in an email that this was a “HUGE oversight” and backdated her signature to seven months earlier. IRS attorneys nonetheless swore to the accuracy of this date, and they continued to mislead the court for months even after the falsification was discovered. Judge Weiler ordered the IRS to pay Lakepoint’s fees and expenses.
Three more partnerships—Arden Row Assets, Basswood Aggregates, and Delwood Resources—have presented evidence of similar backdating by a different IRS agent and manager. That agent in a March 2022 email tells the manager that “the date you use to sign should either be the date you ‘approved’ penalties against the taxpayer (7/14/21) … or a little thereafter?” The manager a few days later responded: “All 3 are signed with date of July 14, 2021.” Note the wink-nod “approved.”
The cases suggest a culture of disregard for tax laws that the IRS requires taxpayers to follow to the tee. Imagine the fines or prison sentences awaiting average Joes who backdate tax documents and lie about it.
IRS abuse is all the more outrageous because the partnerships had the legal right to engage in easements at the time. Congress has since tightened the rules, and perhaps it should eliminate the loophole. But as long as they are legal, the job of the IRS isn’t to change the law through enforcement. According to a recent analysis in the publication Tax Notes, of the cases in which the Tax Court has ruled on valuations, judges have upheld some 81% of reported deductions.
In addition to settling with Lakepoint, the IRS says it has “undertaken an ongoing review of syndicated conservation easement cases to ensure that the evidentiary record about supervisory approval is properly presented and that the agency pursues or continues to pursue penalties only where appropriate.”
Glad to hear it, but it’s a disgrace that the IRS had to be found out in court before it stopped its abuses. This is one of many reasons the recent $80 billion budget increase for the IRS should be eliminated.
The Wall Street Journal
