The TIGTA report, dated August 29, is the result of a seven-month-long audit that was prompted in part by the January 2012 Tax Notes article "The New Limits on Corporate Letter Rulings Explained".
In its report, TIGTA found that five of the six IRS associate chief counsel offices that provide letter rulings did not have policies in place or sufficient information to assess the risk of outside influence on the assignment of their rulings. The sixth -- the IRS Office of Associate Chief Counsel (Corporate) -- had a policy to limit the number of rulings assigned to an attorney from the same taxpayer or practitioner, but the policy was not effectively implemented, TIGTA said.
TIGTA recommended (1) that all associate chief counsel offices -- not just Corporate -- develop written policies to minimize the risk of outside influence on letter rulings; (2) that the corporate office centralize its letter ruling receipt, assignment, and review process to improve oversight; and (3) that management periodically review the technical management information system (TECHMIS) -- which contains inventory information about letter ruling requests -- to ensure that the best information is being used to identify possible areas of noncompliance with the new policies.
In an August 1 letter responding to a draft of the report, Erik Corwin, IRS deputy chief counsel (technical), promised to implement all recommendations by August 1, 2014.
The report sheds new light on the guidelines put in place by the Office of Associate Chief Counsel (Corporate) to mitigate practitioners' ability to place their rulings with a preferred attorney. While the Tax Notes article described the guidelines as more of a "three strikes and you're out" type of system -- whereby a firm can place a ruling with a preferred attorney two or three times and then is prohibited from working with that attorney again -- the TIGTA report describes the office's guidelines differently.
TIGTA dubbed Corporate's guidelines the "two-thirds rule," and explained that attorneys within Corporate "can keep up to two-thirds of letter ruling requests received directly from a firm." Requests that exceed the two-thirds rule must be declined by the preferred attorney and rerouted to the front office for assignment.
"We found that this policy would not effectively limit taxpayers and practitioners from placing their letter ruling requests with a preferred attorney," TIGTA wrote. Moreover, the report says, assignment information isn't reliably entered into TECHMIS to facilitate tracking, and "management does not perform any reviews of inventory assignments to ensure that the case assignment policy is being followed."
TIGTA continued: "The appearance that practitioners could possibly manipulate the letter ruling process may result in the risk that inappropriate favorable rulings could cost the Government substantial revenue."
In a statement provided to Tax Analysts, the IRS said the Office of Chief Counsel "takes its obligation to provide taxpayers with prompt, unbiased and legally correct interpretations of the law very seriously. We strongly believe that the existing processes for assigning letter ruling requests, together with our procedures for substantive review of letter rulings prior to issuance, provide the necessary safeguards to prevent attempts by practitioners to inappropriately influence the system. Neither TIGTA nor the IRS has identified any instances in which practitioner influence led to the issuance of inappropriate rulings."
The IRS added that chief counsel is strengthening management oversight of the letter ruling process to "ensure that the extent to which an attorney has previously been assigned ruling requests from the same practitioner will be taken into account in making letter ruling assignments along with other considerations, such as the specialized expertise of particular Counsel attorneys and the need to balance workload among attorneys."
Jasper L. Cummings, Jr., of Alston & Bird LLP said he was troubled by the TIGTA report. "It is unfortunate that this report seems to focus on the corporate division when the corporate division is least at fault, if there is any fault to be had," he said. "In the first place, it addressed the issue when it arose, which no other division seems to have done. In the second place, it has long had in place a general policy designed to head off just this type of problem by not assigning particular subject matter issues to particular branches."
Cummings also took issue with TIGTA's suggestion that there might be actual impropriety in the letter ruling assignment process. "The report could not have found any such impropriety because it states that it did not evaluate any issues of law," he said. "Therefore, the report should not have even brought up an implication of actual impropriety and should have explained itself as only trying to avoid the appearance of impropriety."
If it's indeed the case that ruling assignments have not been as carefully handled by the front office, that could be because of a lack of sufficient staffing, Cummings said. "The senior-level non-lawyer manager in Corporate who previously was responsible for ruling assignments retired some time ago and has not been replaced, presumably to save money," he said.
Other practitioners weighed in on why they have tried to direct ruling assignments in the past. "Usually you want the guy that knows the most about the issue -- not because he's your buddy, but because he's going to get to the right answer," said a practitioner with experience submitting rulings to Corporate who wished to remain anonymous. "If you end up with someone who doesn't know the area . . . you could end up in a situation where . . . the default answer is, 'No, we won't give it to you.'"
Mark Schneider of Deloitte Tax LLP agreed. "When I would try to land a letter ruling, it was never because I thought I would get an undue advantage or a different result. It was always because I felt that the reviewer might handle it more efficiently than somebody who maybe doesn't review as many [letter rulings]," he said.
Cummings also stressed the importance of expeditious handling of letter ruling requests. "Expedition is an issue in all ruling requests and probably is the main factor in any rulings that the submitter asks to be directed to a particular attorney. The report did not view expedition as improper, and it is not," Cummings said.
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