A group of tax shelter investors who claim that the Internal Revenue Service harassed them through a series of administrative errors is claiming a potentially important victory over the agency.
Newport Beach tax attorney James T. Burnes said the precedent-setting agreement could result in a housecleaning of the agency's collection procedures.
Burnes is representing 70 investors in a defunct tax shelter program promoted in 1980-83 by Southwest Solar Products, an Irvine firm that later closed and filed for protection from creditors under Chapter 11 of the federal bankruptcy code.
The investors came under IRS scrutiny as part of the agency's longstanding war on tax shelter abuses.
The investors are still awaiting a decision on their suit to void the IRS claims against them. Even so, the procedural agreement could have a significant impact on how the agency conducts itself in the future.
The 70 are part of a larger group of 2,100 Southwest Solar investors who are suing the IRS to invalidate claims for nearly $30 million in back taxes and penalties.
Apparent Breakdown of Safeguards
Burnes said his clients were hit with erroneous tax collection notices, default notices and, in at least one case, a lien against wages because IRS internal procedures designed to safeguard taxpayers against such mistakes apparently broke down.
Now, based on the settlement in November of a test case filed by Burnes, the IRS has agreed to establish a task force at its regional headquarters in Laguna Niguel to examine collection problems in the Southwest Solar case and, if necessary, to change internal procedures so other taxpayers aren't subjected to the same treatment.
One of those changes was revealed by IRS District Director Michael Quinn last week in a speech to a tax accountants group, Burnes said.
In his speech, Quinn said the agency plans to end its practice of assigning separate agents to audit each year of an individual taxpayer's returns. Instead, it will assign one agent to one taxpayer, regardless of how many years of returns are being scrutinized.
Burnes said many of the problems encountered by Southwest Solar investors occurred because there was no coordination among various agents auditing individual returns.
Differences in Viewpoint
"A client would work out the problems on his 1981 return with one agent, only to find that a different agent was disallowing the same things on his 1982 return, and the whole process would have to start over again," he said.
In the November settlement, the agency also agreed to pay some attorney costs for many of the individuals in the group who received erroneous tax deficiency notices and had to file petitions in tax court.
While the dollar amounts are relatively small ($300 per case for less than two dozen individuals), Burnes said it is the first time a single test case has led to payment of attorney fees for members of a larger group.
IRS officials downplayed the significance of the settlement, which involves just a few thousand dollars in attorney costs.
But several tax attorneys and tax accountants not involved in the case said they had never heard of a group settlement by the IRS in a claim for repayment of attorney fees.
Generally, taxpayers have pressed such claims individually, often running up sizable legal bills in the process.
Burnes said the settlement--hashed out before there was a ruling on the test case, but after the judge warned the IRS it would probably lose--is important for two reasons:
"This could prompt more group cases, which are much less expensive for the individual taxpayer, and it provides incentives for the IRS to process tax shelter cases more carefully than it has in the past."
Alleged Violations of Procedures
Basically, the Southwest Solar cases involve alleged IRS violations of internal procedures and policies that resulted in collection notices being sent to people whose cases were still pending in tax court; delinquency notices being filed against people who had already settled their cases and, in at least one instance, garnishing of the wages of a Los Angeles woman who had settled her case weeks earlier.
The clients affected by the attorney fee settlement are part of the larger group of 2,100 investors suing the IRS over its holding that they are not entitled to the $15 million or more in business deductions and solar investment tax credits that they claimed on their tax returns.
With penalties and interest, the IRS is seeking $27 million from members of the investors group, National Solar Equipment Owners Assn. Also, $43 million in claims have been filed against 4,000 Southwest Solar investors who do not belong to the association.
The main tax case has been argued by both sides, but a ruling from the tax court is not expected for several months, said David A. Weinfeld, the Costa Mesa attorney who is general counsel for the investor association.