IRS APPEALS PROCESS
EXAMINATION AND COLLECTION MATTERS
Why go through the IRS appeals process? It is commonly believed by taxpayers that IRS Appeals matters are intense procedures with the Internal Revenue Service ending up as the winner. This is not the complete story.
The initial IRS line employee tax positions on both existing tax liabilities and collection demands can be challenged through IRS Appeals. Lower proposed tax assessments are often achieved through the audit appeals procedures and, on occasion, even lower tax assessments through a Tax Court proceeding on complex issues. Less well known is the availability of Collection Appellate Officers and Settlement Officers to overrule pending IRS collection demands for unpaid taxes. It is not unusual to encounter overreaching IRS demands by line IRS collection employees.
We will first address appeals where the taxpayer faces an unfavorable IRS proposed tax assessment in an IRS audit. The IRS Appeals process is the “in-between” step bridging an unfavorable IRS examination report and the United States Tax Court. The IRS Appeals Division acts as an ombudsman. A taxpayer is allowed an opportunity to resolve disputed examination findings through the Appeals Office. Before the IRS moves to a tax assessment, a taxpayer has opportunities to settle through available appellate mediation and arbitration avenues. If negotiating at the appellate level still means an unfavorable tax outcome, the taxpayer can file a petition in U.S. Tax Court.
On occasion a taxpayer may not request an appeals conference because of taxpayer misunderstandings of his rights. A Tax Court petition can still be filed on his receipt of a “Notice of Deficiency (also known as the “90 day letter”. The first Tax Court settlement conference will be with an Appeals Officer rather than a government attorney. In these instances, Appeals Officers can settle a Tax Court case with little or no involvement of IRS Counsel.
The findings of the Appeals Division of the IRS are to be impartial and independent of the IRS Examination function. IRS Policy Statement P-8-47 states that:
“Appeals will ordinarily give serious consideration to (a taxpayer) offer to settle a tax controversy on a basis which fairly reflects the relative merits of the opposing views in light of the hazards which would exist if the case were litigated. However, no settlement will be made based upon nuisance value of the case to either party.”
Any significant proposed IRS tax assessment with taxpayer doubt as to correctness of an examination result should be considered as a candidate for the Appeals process and, on occasion, the United States Tax Court. The IRS administrative appeals process and the United States Tax Court proceeding, while adversarial in nature, are more cost efficient than post assessment litigation in a Federal Court or the Court of Claims. Tax Court rules are informal and professional fees do not approach that of the typical lawsuit weighted down with formal pleadings, depositions, discovery and legal posturing.
Conventional wisdom suggests the taxpayer engage a tax attorney rather than an enrolled agent, an accountant or even a Certified Public Accountant in the appeals/US Tax Court process. Statistics released by the United States Tax Court indicate that over 96% of all taxpayers are represented by attorneys in the Tax Court arena. Knowing the tax laws and presenting the right factual pattern and legal arguments can help taxpayers achieve tax savings. The government is usually friendly with experienced tax lawyers with reputations for creditability. Also remember that lawyers need not disclose privileged taxpayer matters to the IRS. The attorney/client privilege can be exceeding helpful for (1) matters not disclosed on filed tax returns, (2) communications between lawyer and the taxpayer client; (3) and can extend to accountants called “Kovel” accountants engaged by the attorney. The latter are also protected under the attorney/client privilege.
What has been discussed above is the historical role of the Appellate Division in unfavorable IRS audit/examination proposed tax liabilities. The first step is an IRS examination, with an IRS appeal second, and then with an unfavorable appellate finding, a final step of a petition to the U.S. Tax Court. U.S. Appellate Courts are available for further review in large dollar cases.
Over the years, the role of the IRS Appeals Division has expanded to IRS collection issues. At one time collection matters were beyond the scope of Appellate Division. This is no longer true. An example is the CAP program. Before a taxpayer qualifies for the CAP Appeals program the taxpayer must have discussed the collection issue with the responsible Collection representative as well as her Collection group manager.
A CAP review by an Appellate Officer can result in a change to the proposed collection action of line Collection employees. Appellate Officers are also involved in Appeals Collection Due Process Hearings (CDP) discussed in the “Payment Plans” section of this website. IRS collection practices and positions are the usual subject of Collection Due Process Hearing; however, CDP Appellate hearing rights in IRS letters occur fairly early in the string of IRS taxpayer notices. CDP hearings are often missed. The odd factual case also allows CDP Appeals Officers to settle tax assessment matters beyond their normal role in settling collection issues.
The IRS Appeals division handles a variety of audit and collection tax matters including:
- IRS audit/examination matters
- Pending IRS threats as to collection action
- Proposed monthly installment agreement payment amounts viewed as not sustainable by the taxpayer
- Collection Due Process Hearings
- FBAR penalties (IRM 18.104.22.168-J, October 1, 2012)
- Trust fund recovery matters (IRC 6672).
- Offers in Compromise
- Support in Tax Court matters.
- Penalty abatement matters.
The Appeals Division has personnel assigned to the major issues which arise under the general heading of taxpayer controversies, that is, proposed income, employment and estate tax assessments, taxpayer collection issues not resolved at the local level, penalty abatement matters and Due Process Hearing matters.
In recent years Appeals has also become involved in major taxpayer friendly programs – programs of mediation and arbitration for contested matters arising with IRS Collection/Examination employees (Revenue Agents and Revenue Officers).
In an effort to expand its settlement mission, the IRS has begun using Appellate Division employees for alternative approaches to resolve tax disputes. Alternative dispute resolution (ADR) has been improved in the years since the Alternative Dispute Resolution Act of 1990. This Act generally encouraged all federal agencies to use ADR to resolve disputes without litigation. The IRS Appeals Division has a number of programs. The most important of which are:
- Mediation. Internal Revenue Code Section 7123 resulted in the Internal Revenue Service prescribing procedures under which a taxpayer or an IRS Appeals Office may request non-binding mediation on any issue unresolved at the conclusion of an Appeals finding of proposed tax liabilities or failure to agree on certain collection matters (Revenue Code Section 7122). Mediation is available for factual and legal issues when an agreement is not reached with frontline IRS representatives, so long as the referral issue meets the requirements of mediation, e.g., not a case involving settled black letter law of the U.S. Supreme Court.
- Arbitration. Arbitration of unresolved issues is also available through the Appeals Division. IRC Section 7123(b) allows the taxpayer and the Appeals Officer to jointly request binding arbitration on any issue unresolved at the conclusion of the Appeals procedure or in unsuccessful attempts to enter into a tax audit closing agreement or Offer in Compromise.
Historically, binding arbitration was only available in docketed cases before the United States Tax Court (Tax Court Rule 124). The IRS arbitration procedures now enable taxpayers and the IRS to resolve factual issues in an efficient manner without a legal proceeding in the United States Tax Court.
Arbitration is available by mutual consent of the taxpayer and Appeals after negotiations between parties have failed. However, binding arbitration can only be employed to resolve factual issues. See Revenue Procedure 2006-44, 2006-2 C.B. 800; mediation and arbitration for trust fund recovery penalty and Offer in Compromise cases at Announcement 2008-111, 2008-48 I.R.B. 1224; and Appeals Mediation at Revenue Procedure 2002-44 2002-2 C.B. 10, Revenue Procedure 2009-44, effective October 5, 2009.