The tax court decision involved the so-called "Kersting tax shelter project," in which 1,300 taxpayers signed agreements to be bound the outcome of a test case regarding the tax shelter. However, the agency's attorneys made a secret settlement with the defendants, then tried the case anyway without informing the court or other participants in the agreement.
The defendants lost the trial, and the other tax violators were bound by the results. They didn't learn of the secret settlement until later, then argued that the less harsh settlement terms should apply to them, also. The tax court agreed.
"The fraud on the court committed by [IRS] attorneys in the test case proceedings constituted fraud on the court in every case bound by the outcome of the test cases and harmed the integrity of the judicial process, not only as the test case procedure was employed in the Kersting project cases, but also as it might be employed in the future," the tax court said.
The judge ordered the IRS to adjust the accounts of all the taxpayers in the Kersting project.
WebCPA.com opined, "While the government is determined to cut down on the abuse of tax shelters, it needs to be careful not to overreach by allowing its attorneys to cut secret side deals that benefit one set of defendants while punishing a much larger set."