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Tax Enforcement by the Private Sector: Deputizing Tax Insurers, 99 Ind. L. J. _ (2024), at San Diego today as part of its Tax Law Speaker Series hosted by Miranda Fleischer:
The IRS is outgunned when trying to ensure compliance by large corporations and other sophisticated taxpayers. The private sector can help. Private sector actors, such as financial institutions, employers, and whistleblowers, have been valuable allies in the IRS’s efforts to improve compliance and enforcement.
This Article argues for using another, largely overlooked, private sector party—tax insurers—to expand the IRS’s enforcement abilities. Tax insurers insure sophisticated taxpayers’ uncertain tax positions (e.g., the tax-free treatment of a corporate spinoff or tax credits critical to a renewable energy project). For a premium, a tax insurer agrees to pay any additional taxes owed with interest and penalties (up to the policy limit) if an insured tax position is successfully challenged by a tax authority. The tax insurance industry has grown dramatically since the mid-2010s, but scholars and policymakers pay little attention to its enforcement-enhancing potential.
This is a mistake because insurers have informational, expertise, and capacity advantages over the IRS, because of the industry’s recent explosive growth, and because more robust enforcement is needed among precisely those taxpayers served by tax insurers.
This Article proposes a novel regime in which tax insurers that voluntarily commit to insuring only strong tax positions would be effectively deputized as private sector tax enforcers.
The IRS would treat any positions insured by them as likely compliant, having been “sustained” in a private “audit.” In theory, with the right combination of sticks and carrots, private sector tax enforcers could be incentivized to live up to their commitment to “sustain” only strong positions, and taxpayers could be incentivized to pursue “audits” by private sector tax enforcers that live up to those commitments.
Given these mutually reinforcing incentives, the IRS could rely on those private sector “audit” determinations and reallocate enforcement resources toward taxpayers and tax positions more likely to be noncompliant. If the potential concerns presented by this proposal can be overcome (a task that might prove challenging), the proposal could harness a growing private sector industry for the public good