Games, Lies, and Taxes
Posted: 30 May 2009
There are 2 versions of this paper
Date Written: June 1, 2009
Abstract
Disputes over valuation of property are becoming increasingly common in reported estate and gift tax decisions. Although not nearly as common, these disputes are significant in income tax cases involving all charitable contributions, except those of listed securities, and cases involving compensation paid in kind. Typically these disputes are resolved in lengthy administrative hearings that are occasionally followed by litigation over the value of the property involved. Recently there has been a modest attempt to employ game theory in these situations by providing for escalating penalties based on the degree of error in the value declared by the taxpayer. The author proposes that we extend game theory even further by allowing the IRS, on audit and at its election, to follow the established course of action for resolving valuation dispute or to choose from among two other alternative remedies. First, the author proposes that, subject to some limitations, the value stated by the taxpayer on the return be treated as the granting of an option to the IRS to purchase the asset for the stated value. Second, the author proposes that the IRS be authorized to compel the taxpayer to enter into final offer arbitration regarding the value of the asset. It is anticipated that adoption of these two steps will have a curative impact on the seemingly growing tendency of taxpayers to misstate values of assets on returns.
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