WASHINGTON -- The Internal Revenue Service's recently created field service division is playing a much greater role in advising the agency's district offices on legal issues and enforcement activities in the bond area than its predecessor, an IRS official said in an interview last week.
Daniel J. Wiles, assistant chief counsel for the field service, said the tax litigation section, which was replaced by the field service division in an agency reorganization last year, would generally become involved in tax issues only when they were the subject of litigation.
Since there were few, if any, court cases involving municipal bonds until this year, the tax litigation group did little in the tax-exempt bond area, he said.
One of the goals of the reorganization, Wiles said, was to set up a division, like the field service, that could more easily advise IRS counsel and agents in the 73 district offices around the country on thorny legal issues.
"Tax litigation was removed from the little to emphasize that our goal is not always to litigate cases but also to avoid litigation," Wiles said.
"Before the district counsel only got involved once litigation began and not before," he said. "Now the district counsel and their people are encouraged to be more active advisers to the IRS agents and the district director, even if there's no litigation, or no litigation on the horizon, but just a legal problem that they need advice on."
The field service division is credited with helping to beef up the IRS' bond enforcement activities, according to some Treasury and IRS officials.
Wiles was reluctant to comment on that. He stressed that the field service section, which was created in October 1991, is only one of several groups at the IRS involved in municipal bond issues and enforcement activities.
Other divisions involved in bonds, he said, are the financial institutions and products division's tax-exempt bond branch, which handles regulatory activities, and the examination division and district offices, which initiate and carry out enforcement activities regarding bonds and other areas of the tax law.
The field service division's primary role, he said, is to advise the lawyers and agents in the district offices on bond and other tax law issues. In effect, the lawyers and agents in the district offices are the clients of the field service, which is under the IRS chief counsel's office, Wiles said.
The field service division was structured so that it more closely parallels the technical tax sections and has a consultative role on rules or rulings. For example, the field service has a financial institutions and products branch just like the technical section of the IRS general counsel's office.
In contrast, tax litigation was one of four divisions under the associate chief counsel for litigation.
"We now have a team concept that we can bring to bear on any problem," Wiles said.
The field service division does not oversee bond enforcement activities. Wiles said, but it may advise district counsel on courses of action that they might want to pursue or drop. "If we thought we should bring something to the district office's attention, we would do so," he said.
There may even be instances in which a district counsel has taken a particular action that the field service does not believe should have been taken, he said.
Wiles said that when the IRS determines that the interest earnings of bonds are taxable, it may seek back taxes from as many or as few of the bondholders as it chooses. "There is nothing that compels us to go [after] every bondholder," he said.
He also said the IRS may treat bondholders differently once it has tried to collect back taxes from them. "There is nothing that requires us to act uniformly. But it is our policy to act uniformly and to not treat taxpayers in the same situation differently."
Wiles said he could not discuss specific enforcement actions. But he agreed to describe the general procedures the IRS would follow in trying to collect back taxes from a bondholder whose interest earnings were found to be taxable because the bonds violated tax laws.
Typically, he said, IRS agents would discuss the matter with the bondholder and try to reach an agreement that the taxes would be paid. If no agreement can be reached, the IRS would send a so-called 30-day letter to the bondholder concluding that the taxes are due. The letter would give the bondholder 30 days to appeal that conclusion.
The 30-day letter would contain the appeal form. If the bondholder appealed the IRS findings, the appeal form would be sent back to the IRS and the case would go to the nearest one of the IRS appeals offices. A conference would be set up between the bondholder and an IRS appeal official.
If there was still no agreement, the IRS would send the bondholder a so-called 90-day letter. That letter would say that the IRS' final decision is that the taxes are owed and it would give the bondholder 90 days to contest the IRS' action on the U.S. Tax Court.
Wiles said the IRS legally is required only to send a bondholder a 90-day letter when trying to collect taxes, but that it usually will go through the other steps of negotiation and sending the 30-day letter.
If the IRS' action was contested in the U.S. Tax Court, the bondholder could refuse the pay the taxes until the matter is resolved. But interest on the taxes would accrue from the date the bondholder filed a return for the tax year in which the IRS is alleging the taxes were due. The bondholder would owe the interest on the taxes if the IRS won the case. The case would be heard by a U.S. Tax Court judge who would travel to the bondholder's region.
The bondholder also could pay the taxes and then seek a refund. The bondholder would seek the refund by filing an amended tax return for that tax year using a Form 1040X.
If the IRS denied the refund, the bondholder could file a lawsuit against the IRS in the U.S. Claims Court in Washington or in the U.S. district court in its area.
The bondholder could only get a trial with a jury in the U.S. district court. In the other courts, the decision would be made by a judge.
If the bondholder won the case in either court, he could get some of his court costs paid if the court agreed that the government "was not substantially justified" in the position it took.