IRS asks outsiders to write tax rules

Experts in shelters are drafting changes

March 09, 2007|By New York Times News Service

The Internal Revenue Service is asking tax lawyers and accountants who create tax shelters and exploit loopholes to take the lead in writing some of its new tax rules.

The pilot project represents a further expansion of the increasingly common federal government practice of asking outsiders to do more of its work, prompting academics and other critics to complain that the government is going too far.

They worry that having private lawyers and accountants draft individual tax rules could allow them to subtly skew them in favor of clients.

"It's not the fox guarding the hen house; it's the fox designing the hen house," said Paul C. Light, a professor of political science at New York University, who studies the federal work force.

Donald L. Korb, the IRS general counsel, defended the plan, saying in an interview that he believed the pilot project was "not changing this process one iota."

"We are still getting comments; we are still having hearings" he said, and IRS lawyers will review any new rules before they are final.

John D. Graham, the official appointed by President Bush to streamline the federal rule-making process and give private interests a greater voice, said even he was surprised by the IRS plan.

"Whoever's pen the first draft comes out of has a big advantage," said Graham, who ran the Office of Regulatory and Information Affairs for the White House before becoming dean last week of the graduate school at Rand, the research nonprofit.

The IRS staff has been cut by a fifth in the past decade, even as Congress has made the tax code vastly more complex. The agency, in a formal notice, said it lacked the resources to issue as much guidance as taxpayers are seeking.

For many years, the government has relied on contractors to provide research and technical advice on regulations. Since 1980 one such firm, the Regulatory Group, has trained government employees in the art of writing regulations and provided research and editorial consulting. It also works for private firms subject to regulation.

And it is common for special interests of all types to be closely involved in drafting legislation and shaping rule making.

But in recent years there has been a quickening pace of moves to outsource the actual work of regulation, hiring contractors to write the rules.

Now the IRS is proposing that outside experts do it at no charge, opening up the possibility that some firms providing the draft would be working on behalf of an individual, business or association seeking to plant a favorable nuance in a rule.

IRS rule making has been especially contentious, including decades of efforts by the IRS general counsel's office to keep secret the guidance issued to agency executives and field personnel.

Nina Olson, the taxpayer advocate, an IRS position created by Congress, complained in her latest annual report that Korb's office would not give her copies of guidance sent to managers.

Korb's office is appealing a court order to make public all guidance to IRS employees, even those it claims should be confidential because they took less than two hours to write.

Tax Analysts, publisher of the nonprofit journal Tax Notes, filed that lawsuit, and Sheryl Stratton of Tax Notes first reported the IRS pilot project.

Several regulation experts and tax lawyers warned of dangers if the tax police must enforce rules written by those skilled at devising tax-free paths through the maze of the IRS Code.

Some experts suggested that it could be helpful to the government to have those skilled at taking advantage of complex tax laws to be involved in creating them, just as companies looking to plug leaks in their computer security systems may hire former hackers to advise them.

That's one reason, for example, why President Franklin D. Roosevelt named Joseph Kennedy, President Kennedy's father and a stock manipulator in the 1920s, to be the first head of the Securities and Exchange Commission.

Kenneth J. Kies, one of the most sought after tax lobbyists in Washington, said the proposal "merely formalizes" the practice of lawyers sending the IRS letters "saying `We think you need to issue some guidance in an area and here is our suggestion.'" He said a formal process would be more transparent.

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