For Juan F. Vasquez Jr., tax litigation runs in his blood—both father and brother are also in the business.
His dad, Juan F. Vasquez, is a U.S. Tax Court judge, and his brother, Jaime Vasquez, is a shareholder at Chamberlain, Hrdlicka, White, Williams & Aughtry in San Antonio.
“My dad is my idol,” Vasquez Jr. said in an email. “After the initial dream of being a professional sports player wore off, I wanted to be like my dad and become a tax attorney. I remember my dad getting calls at the house with clients trying to track him down to help them. I could hear it in their voices how they believed he truly cared about them and that he was the right person to help them.”
After graduating from the University of Houston Law Center in 2001, Vasquez pursued an LL.M. in taxation at the New York University School of Law. He is a shareholder and co-chair of the tax controversy section at Chamberlain Hrdlicka’s Houston office. His expertise is in federal, state, and local tax controversy matters, and his clients span a wide range—individuals, privately held businesses, and large Fortune 500 companies and multinationals.
Bloomberg Tax asked Vasquez five questions about the Internal Revenue Service’s current state— enforcement efforts, future administrative challenges, and Tax Court cases.
He sees the IRS concentrating on “big-dollar items and items that are fairly new,” and on restructuring its enforcement efforts because of limited resources. And he believes an Independent Office of Appeals—something proposed in House legislation—would be great news for clients.
1. What trends in IRS enforcement are clients seeing?
The IRS has “been focusing their efforts on training personnel to handle certain key and targeted issues,” Vasquez said in a phone interview, regarding budget cuts over the past several years. He said these issues include captive insurance and transfer pricing.
Captive insurance cases involve a form of corporate self-insurance created to mitigate risks and generate tax breaks. The IRS looks into captive insurance companies when they are suspected of tax evasion.
“Even though a lot of companies will take part in managing their insurance risks, the IRS wants to make sure that companies are doing it correctly,” he said.
The agency is also handling a fair number of transfer pricing cases, because that’s where it thinks there are significant dollars at play, Vasquez said. Transfer pricing is a method by which entities within a company sell goods and services to one another, transferring the costs and the related tax burdens.
“It’s become routine to expect somebody to look at transfer pricing issues,” Vasquez said. “Transfer pricing is where the potential significant adjustments are, just from a monetary standpoint.”
The IRS in 2017 lost a transfer pricing case, Amazon.com Inc. v. Commissioner, which is now being heard by the U.S. Court of Appeals for the Ninth Circuit. The case joined a string of IRS losses in the Tax Court currently pending on appeal, including Altera Corp. v. Commissioner in the Ninth Circuit and Medtronic Inc. v. Commissioner in the Eighth Circuit.
2. How have IRS budget cuts and campaigns affected enforcement trends?
Because of budget cuts and tax compliance campaigns, the IRS and its Office of Appeals have adopted a structured process for dealing with document requests, audit timeliness, and response deadlines. Tax compliance campaigns are efforts by the IRS to crack down on noncompliance issues.
The efforts started years ago with formalizing the audit timeline and response deadlines, Vasquez said. Most clients want to avoid a summons for not meeting response deadlines, which elevates the pressure to comply.
“The vast majority of clients have a great working relationship with the IRS,” Vasquez said. “It’s just important to develop that over time and realize that everybody has a job to do. The IRS has a job to do and the clients have a job to do, so if the clients and the outset advisers have a good and collaborative working relationship with the IRS, then those pre-enforcement notices or summonses” don’t occur.
The Office of Appeals has similarly adopted information and document flow procedures. Vasquez said the office has expressed a desire that the examination office see most, if not all, items that are presented to Appeals. This has resulted in Appeals sending more cases back to examiners to be further developed.
3. What future implications will the new tax law have for challenges brought under the Administrative Procedure Act?
“I wouldn’t be at all surprised to see Administrative Procedure Act challenges,” Vasquez said. He attributes it to the timing, manner, and method with which the 2017 tax act (Pub. L. No. 115-97) was passed.
The APA defines the rulemaking process for administrative and policy agencies. Usually, an agency must give notice and have a comment period as part of that process. Noncompliance can trigger lawsuits.
“The IRS has been coming out as trying to fill gaps where it can, and so it issues regulations or other guidance, and some of those areas are potentially ripe to challenge,” Vasquez said. This is problematic because the new tax law was “passed in the middle of the night and without going through much of a committee process, and where many Congress-folk confirm that they didn’t even read it.”
The APA is a great tool to hold the government in check to make sure the process by which it is promulgating those rules and regulations is fair, appropriate, and follows notice and comment procedures, Vasquez said.
4. What impact would an Independent Office of Appeals have?
“Appeals has been under pressure regarding its independence,” Vasquez said. “The perception of a lack of independence will probably always exist for as long as there are shared office arrangements.”
The Taxpayer First Act, drafted by Reps. Lynn Jenkins (R-Kan.) and John Lewis (D-Ga.), calls for codifying an independent Office of Appeals that would limit the agency’s ability to establish the review process for tax disputes and determine how and when taxpayers access their cases.
“In many cities, IRS Office of Appeals may be in the same space or corporate building as IRS examiners, and so I’ve had a number of clients question ‘how is it possible to really have an independent person if they’re on the same elevator bank or if they see each other at the cafeteria,’” Vasquez said.
Clients are proponents of the bill and want their cases reviewed by someone unbiased, Vasquez said.
“I’m definitely an advocate of doing whatever it takes to ensure that the IRS Office of Appeals operates—or continues to operate—with the utmost independence, because if taxpayers and representatives truly believe that Appeals is independent, then that’s best for all when it comes to compliance and administration,” he said.
5. What kinds of cases are making it to the U.S. Tax Court?
Cases involving methods of accounting are frequently making it to the Tax Court, according to Vasquez. These cases involve the issue of getting IRS consent before computing taxable income under new accounting methods.
“The IRS has discretion on methods of accounting issues, so I’ve seen a number of challenges at the administrative level that percolate up to the Tax Court, where the IRS is frankly trying to push the levels of their discretion in challenging a taxpayer’s method of accounting,” Vasquez said.
Tax code Section 446 outlines the general rules for defining and changing methods of accounting.
“Research credit cases will always be there, as they are so fact-intensive,” he said, indicating that these are new enforcement efforts making their way to the Tax Court.
“If we think about the evolution of some of the research credit cases, it’s kind of been within the last five to seven years where IRS personnel have really focused efforts, training a number of personnel to really be prepared to take on those audits,” Vasquez said.