Examiner Editorial: IRS wants you to do as it says, not as it does 

Important government documents are often shielded from Freedom of Information Act requests because of an exemption in the law that allows federal departments and agencies to withhold materials created before the issuance of an official policy. It’s known as the “internal deliberative process” exemption, and it enables officials to withhold virtually all memoranda, e-mails, studies or other documents created by agency employees or contractors as part of the policymaking process.

With hundreds of thousands of FOIA requests being submitted to the government every year, the “internal deliberative process” exemption is among the most frequently cited exemptions used by federal officials to keep documents out of the view of taxpayers.

But don’t expect the government to extend the same privilege it demands for itself to private companies. The Internal Revenue Service is in the final stages of implementing a new proposal in which it asserts the right to require every business in America with $10 million or more in annual revenue to turn over to the government reams of heretofore private internal documents analyzing the company’s potential worst-case tax liabilities.

Prudent businesses continually assess their potential tax bills to account for contingent liabilities. But company officials and the independent tax experts and accountants they often use don’t always agree on whether this deduction is sound or that one is justified. Such discussions are aired in the very company documents the IRS is now going after. As St. John’s University business professor Anthony Sabino told the New York Post recently, what the IRS wants is “an easy road map full of red flags to tell examiners where to go inside a corporation in search of any areas it might want to dispute to collect new levies.”

Besides adding new regulatory compliance costs on businesses, this proposal is loaded with legal pitfalls. In effect, the IRS is requiring companies to provide documents the government can then use as incriminating evidence for tax-avoidance charges. After all, what’s to stop IRS agents from simply using the documents to induce businesses to pay a maximum tax liability without regard to the merits of a particular deduction or tax credit, secure in the knowledge that it’s often cheaper just to go ahead and write the big check rather than incur the expense of fighting the government?

And how long before the IRS decides to impose the same requirement on small businesses or to make individual taxpayers submit detailed records concerning tax advice they receive? Those concerned about this IRS proposal should address comments to: Internal Revenue Service, CC:PA:LPD:PR (Announcement 2010-9), Room 5203, P.O. Box 7604, Ben Franklin Station NW, Washington, DC 20044. Or to this e-mail: Announcement.Comments@irscounsel.treas.gov. Include  “Announcement 2010-9” in the subject line.

All comments will be available for public inspection and copying after the comment period closes June 1.

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