A Look Back at U.S. Tax Administration Following 9/11

Remarks to the Canadian Tax Foundation on the Most Significant Development in the Past 12 Months — United States (September 23, 2001)

Author’s Note: Less than two weeks after the 9-11 terrorist attacks, I found myself in Vancouver speaking to a group of mostly Canadians on the most significant development in U.S. taxation of multinational corporations in the prior year. At the time, I was general counsel of Tax Executives Institute in Washington, D.C., and I had chosen as my specific topic a status report on the Internal Revenue Service’s ongoing reorganization following the IRS Reform & Restructuring Act of 1998 and, in particular, the “stand-up” and “roll-out” of several initiatives by the agency’s fledgling Large & Mid-Size Business Division. 

While the conference materials that I prepared (and that are preserved in the CTF’s archives) may have modest historical value — especially in 2021 as the IRS has embarked on another reorganization and “reimaging” following enactment of the Taxpayer First Act in 2019 — set forth below are remarks of a much different character that took shape on the flight from northern Virginia to western British Columbia. The collaborative, cooperative, and kumbaya-oriented agency described in the remarks has, I believe, much in common — in terms of character and accomplishments — with the IRS of today as it copes with the challenges of the COVID-19 pandemic and the slew of legislative, administrative, and societal changes it has thrust upon the country. 

Thank you and good afternoon. Well, here I am: The last speaker on the last panel of the day. What’s the adage? Never stand between a tax professional and the beverage of his or her choice? Yes, I think that’s it, and though we are running slightly behind schedule, I will strive to end on time. I’m thirsty, too.

I am delighted to be here at the Canadian Tax Foundation’s 53rd Annual Conference, and I bring greetings from my U.S. colleagues as well as our Senior Vice President, Drew Glennie of Calgary, who is the audience; and Alan Wheable of Toronto, our Vice President for Canadian Affairs, who is unable to be here. My organization, Tax Executives Institute, will hold its 56th Annual Conference in Boston next month. Although TEI began three years earlier than the CTF, there are some things on which you are a bit ahead of us . . . for example, harnessing technology for the benefit of members. It is, in other words, no coincidence that I am among the few who are not using PowerPoint today. It’s a prospect that fills me with dread. More seriously, you have given your American colleagues something to aspire to. Indeed, as I have mentioned to Robin MacKnight on more than one occasion, I will appropriate good ideas from anyone.

In addition to being the last speaker of the day, I am the first speaker on the program from the United States. Therefore, I would be remiss if I did not extend my thanks and gratitude, and that of my American colleagues, for all the intangible things our Canadian colleagues have done in the aftermath of the September 11 attacks. From the official proclamations of support from Ottawa to the personal expressions of condolence; from the calls for prayer and the spontaneous demonstrations of support to the nods of understanding upon hearing tales of terror and demands for justice and even retribution; from the flags of our two nations poignantly flying together at half mast to the policemen up on Robson Street collecting funds for relief . . . please know that your kind and generous acts and your empathy are very much appreciated. 

Please know, too, that I offer condolences to each and every one of you who may have lost family or friends or colleagues in the attacks in New York, Virginia, and Pennsylvania. Our cross-border tax community is a small, tight-knit one, and this has been reinforced since September 11. At this juncture, I can tell you that three members of TEI who worked in the World Trade Center remain unaccounted for; nearly 40 employees of the New York State Department of Revenue have been lost; and one senior IRS technical adviser was critically injured by falling debris. I can tell you that the wife of a well-known and well-respected tax economist was aboard the flight that crashed into the Pentagon. And I can tell you that one Big Five firm, Deloitte & Touche, lost its entire New York operation; housed adjacent to the Twin Towers in the World Financial Center, the firm’s offices are currently uninhabitable . . . . leaving 15 percent of its worldwide workforce, 5000 people or so, homeless. And there are countless more people in the tax community — including many of us, perhaps — whose psychic injuries know no end. Not one of us, no one, has been left untouched. 

You have an outline in your materials (reprinted below) that suggests that I was going to tell you that the single most important tax development in the United States this past year is organizational, even bureaucratic in nature — the “stand up” in management lingo, or implementation in English, of the so-called modernized IRS and, in particular, the launch of the IRS’s Large and Mid-Size Business Division that is responsible for providing guidance to and ensuring the compliance of business enterprises having more than $10 million in assets.

And this development is, indeed, in my view, extraordinary. It has worked, or is working, a significant shift in how the IRS approaches taxpayers and tax issues and, importantly, their resolution. And it holds the promise, not yet manifested, of sounder, smarter, and more efficient tax administration.

In a very real sense, however, the most important U.S. development in the past 12 months was, without a doubt, September 11. It is of transcendent importance not only because it changed the political and legislative landscape in the United States, as well as the country’s economic outlook and needs . . . though it indisputably did that. It is also important because it demonstrated an enhanced responsiveness by the IRS, and indeed the entire government, to the rapidly changing world. It helped us differentiate between the important and the unimportant; it sharpened our focus. A war footing will do that to a country.

Let me return to the changed political landscape. Before September 11, the talk in Washington was that the individual income tax reductions passed earlier this year had limited Congress’s options. They had, it was argued, put the squeeze both on those who favored spending increases for either social programs or military projects and those who supported additional tax cuts, either for individuals or business. The budget surplus, which just a year ago seemed cornucopian in size, was looking as if it would evanesce in a suddenly retracting, retrenching economy. The political parties were engaged in an escalating war of words, bickering with each other, sniping at each other, accusing each other of prescribing precisely the wrong medicine for the country.

Today, less than two weeks after the attacks, the rhetoric is aimed not at each other but at an external, common enemy. Yesterday’s arguments now seem a bit trivial if not banal. Instead of fever-pitch comments about shrinking surpluses, there is a burgeoning, united commitment to economic revitalization. There’s a growing acceptance of government (or at least a cooling off of anti-government vitriol) and of the need for focused spending programs. To be sure, differences of opinion remain and will surely grow as interest groups on both sides of the political spectrum attempt to exploit the situation to advance their agendas. But even taking all that into account, the world — the tax world in particular — is vastly differently in the United States from what it was on September 10.

The range of proposals under consideration, for example, is amazing. Everything from accelerating the tax cuts that Congress enacted earlier this year, to reducing the capital gains rate (are there any capital gains left in the economy to benefit from such a cut?), to shortening depreciation schedules and increasing the limitation on expensing. In an effort to put money into the hands of affected businesses as soon as possible, some are arguing for expanding the capital loss carryback period, for enacting a refundable investment tax credit, and for repealing the corporate alternative minimum tax and refunding accumulated AMT credits. Industry-specific proposals are also being advocated, ranging from loosening the rules on deducting travel and entertainment expenses to crafting the depreciation rules to benefit industries in dire financial straits.

At this point, nothing is clear. But everything has changed. Well, everything perhaps but one thing: The law of unintended consequences has not been, and cannot be, repealed, so everyone — perhaps especially we tax professionals who will have to live with the consequences of whatever is done — needs to be on guard against cures that are worse than the disease.

In keeping with the original topic of my presentation, however, I want to discuss the effect of September 11 on the Internal Revenue Service or, more accurately, the response of the IRS to the horrors visited on American taxpayers by the attacks on the World Trade Center and the Pentagon. As frequently occurs when challenges arise, the IRS rose to the occasion. And because the idea of rising to the occasion is something, fairly or unfairly, that we do not always associate with the government, it is noteworthy. It is also noteworthy, however, because one of the objectives of IRS modernization was to make the IRS more responsive to taxpayers and taxpayer needs. In acting as it did in the aftermath of September 11, the IRS gave us evidence that progress is being made toward that objective.

The extended filing deadline for calendar-year corporations is generally September 15, but because that day fell on a weekend in 2001, the deadline was moved forward to September 17. And when many U.S. tax executives and their outside consultants awoke on the morning of September 11, they likely had on the top of their list putting the finishing touches on their returns or on the transfer-pricing study or other documentation that would accompany the returns. (Other taxpayers were looking at deadlines for filing pension plan returns, making estimated tax payments, and depositing withheld taxes.) No one was panicked about a filing deadline that lay six days ahead. Plenty of time.

But although September 11 will likely be frozen in time for many of us, time did not stop that day. I received my first call about extending the September 17 deadline early in the morning of the twelfth. It was from a member whose company’s offices were in New Jersey, but whose advisers worked in lower Manhattan. He had seen the second plane hit the World Trade Center, and now was trying to cope with the rather mundane topic of getting his company’s return filed on time. It wasn’t possible, he assured me, in part because his accountant’s office was shut down. What followed were a series of calls between TEI members and the Institute, and another series between the IRS and TEI. The process was being replicated across the country, between IRS and state tax officials and affected tax professionals.

TEI, accounting firms, and other professionals were asked to catalog the range of problems encountered by its members and to feed them into the IRS. Notice 2001-61 was issued the next day (on September 13), and it was accompanied by requests for prompt and candid feedback. And the feedback came. The initial notice followed the format and tone of notices issued in the aftermath of floods, tornadoes, and hurricanes, and while no one could argue with the IRS’s parsing of the Internal Revenue Code and applicable regulations, no one was very shy about suggesting that a geographical, zip-code based procedure was wholly insufficient. To be sure, taxpayers in New York (and Arlington, Virginia) had special challenges and burdens (especially in terms of missing or destroyed records), but taxpayers everywhere were affected by the attacks. The transportation system in the United States was shut down by the attacks, as were the financial markets. The paralysis caused by the attacks in New York and Virginia was not limited to those jurisdictions. Even if one’s head were into doing business, business couldn’t be done.

And then unexpected happened. The IRS listened. And acted. Quickly. On the morning of Friday, September 14, IRS Commissioner Charles Rossotti and Assistant Treasury Secretary Mark Weinberger convened a meeting of officials of key tax associations, as well as from the major accounting firms. TEI was invited to attend, and once we started, the agenda became clear: To assess the merits of Notice 2001-61 and to determine what further actions, if any, should be taken. By the time, we had finished going around the room, it was clear to everyone — government and private-sector representative alike — that something else was needed. A bold stroke. 

And so less than six hours later, the IRS issued Notice 2001-63. This time, they got it 100-percent right: No worrying about splitting hairs, or dealing with problematic cases on an individual basis, but rather a universal extension for all taxpayers until September 24. It was exactly what was needed. The week extension would give taxpayers time to breathe, time to grieve, and time to pull themselves back together, to assess the situation, and to move ahead. 

To be sure, there are many challenges ahead. But in the aftermath of September 11, the IRS was caught doing something good and something right, and it should be commended for it. Although time may change my optimistic view that September 11 demonstrated that the IRS can fulfill the promises of modernization, my opinion today is that the most significant event in the last 12 months in U.S. taxation was September 11.

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