An Alternative to Litigation: The IRS Appeals Process

1. An Alternative to Litigation: The IRS Appeals Process by: Rob Wolff, IRS Appeals Officer

2. Objectives • Describe Appeals’ role within the IRS • Explain how cases get to Appeals • Understand Appeals’ independence including the ex parte rules. • Discuss the Appeals’ process • Explain the concepts of how Appeals settles cases including a brief discussion of hazards of litigation • Describe the alternative dispute resolutions

3. Agenda • Introduction to Appeals • Discussion of Appeals’ Independence • How cases get to Appeals • The Appeals’ Process • Appeals settlements including a discussion of the hazards of litigation • Alternative dispute resolutions

4. Founded In 1927, the IRS established an administrative appeal process to resolve tax disputes without litigation. Restructuring and Reform Act of 1998 Specifies that the IRS reorganization plan must “ensure an independent appeals function within the Internal Revenue Service, including the prohibition in the plan of ex parte communications…” Section 1001(a)(4). MissionTo resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service. VisionAppeals promotes an independent and innovative environment that drives quality and timely resolution of  tax disputes by empowering a highly skilled, motivated, and cohesive workforce.

5. Introduction to Appeals • Appeals is a independent branch within the IRS. It is an alternative to litigation. Appeals reviews and resolves disputes in a fair and impartial manner by using the applicable law, including judicial decisions, to weigh the facts. • Small organization compared to other branches of the IRS - about 1,800 employees. • Appeals receives about 140,000 cases per year. • Appeals resolves about 90% of cases at the Appeals’ level.

6. Introduction to Appeals - con’t • Types of Appeals Employees: • Settlement Officers (“SOs”) – Handle collection disputes. • Appeals Officers (“AOs”) – Handle everything other than collection functions. • Appeals Team Case Leaders (“ATCLs”) – Appeals Officers who handle very large cases (e.g., Fortune 500 companies). • Appeals Technical Advisers – Assist AOs and SOs on technical legal matters.

7. AK HI APPEALS FIELD OPERATIONS-EXAM MAP AREA 1 AREA 8 AREA 4 ME VT WA ND MT NH MN MA NY OR WI ID SD RI MI CT WY PA IA No. CA NJ OH NE NV IL IN DE WV VA CO MD KS UT MO KY DC NC So. CA TN AZ SC OK AR NM GA AL MS AREA 9 TX LA FL AREA 7 AREA 3 Rev. May 2013

8. Appeals’ Independence • Very important for effective tax administration • We are independent of exam • Treasury Inspector General for Tax Administration (“TIGTA”) concluded that “[t]he overall independence of the office of Appeals appears to be sufficient.” (Sept 2005 TIGTA Report)

9. Ex parte • An “ex parte communication” is a communication that takes place between any Appeals employee and employees of other IRS functions, without the taxpayer / representative being given an opportunity to participate in the communication. Rev. Proc. 2012-18. • We are, with limited exceptions, prohibited from having ex parte communication with exam.

10. Ex Parte – Permissible Communications • Ministerial, administrative, or procedural matters (Rev. Proc. 2002-18, 2.03(2)) • Cannot discuss the merits of the case. • After the case is closed. IRM 8.1.10.3.1.4 • Communications among other Appeals employees. (Rev. Proc. 2002-18 at 2.01(1)(a)(ii).) • With IRS Chief Counsel (Id. at 2.02(3)(b)) • Others – Id. at 2.03.

11. Ex Parte – Violations • Remedies – Rev. Proc. 2002-18, 2.10 • Does not create substantive rights affecting the taxpayer’s tax liability • Most breaches may be cured by: • Appeals must promptly disclose the ex parte communication to the taxpayer / representative; • Promptly sharing the information at issue; • Afford the TP/POA a reasonable period of time to respond including the requested remedy • Some breaches my warrant reassignment of the AO or SO.

12. Appeals Judicial Approach & Culture (AJAC) • New project returning Appeals to a quasi-judicial approach in the way it handles cases, with the goal of enhancing internal and external customer perceptions of a fair, impartial and independent Office of Appeals. • Multiple phases • Most recent phase implemented on 7/18/2013

13. AJAC – Con’t • Mostly applies to collection cases • Non-collection cases • Generally, Appeals should not raise new issues. • New issues raised in a docketed case by the taxpayer must receive IRS counsel’s consent • Cases may be returned to exam if the taxpayers presents new information / evidence (Exception: Docketed cases)

14. Road to Appeals • Collection Cases – Scenario 1 • Tax is owed either by a self-assessment (i.e., filing a return) or a deficiency (i.e., through an audit). • Taxpayer does not pay it in full. • IRS files a lien or an intent to levy. • Taxpayer has generally 30-days to appeal. • If properly appealed, case comes to a Settlement Officer (i.e., Appeals).

15. Road To Appeals • Collection Cases – Scenario 2 • Taxpayer owes the IRS money • Taxpayer files an Offer In Compromise (“OIC”) or an installment payment request. • Request is denied by collection • Taxpayer has 30 days to appeal. • Case is assigned to a Settlement Officer.

16. Road to Appeals • Non-collection cases – Scenario 1 • Taxpayer is audited based on a return filed or a Substitute for Return (SFR). • IRS issues a 30-day letter / Revenue Agent Report (“RAR”). • Taxpayer properly and timely files a protest letter. • Case is assigned to an Appeals Officer.

17. Road to Appeals • Non-collection cases – Scenario 2 • Taxpayer is audited based on a return filed or a Substitute for Return (SFR). • IRS issues a 30-day letter / Revenue Agent Report (“RAR”). • Taxpayer does not properly or timely protest. • IRS issues a 90-day letter – Statutory Notice of Deficiency (“SND”) • If taxpayer petitions within 90 days, IRS attorney assigned to the case. • Pursuant to Rev Proc 87-24, the case is temporarily transferred to Appeals and an Appeals Officer is assigned the case.

18. Appeals Case Load • Case loads varies by AOs, SOs, and various Appeals’ offices. • Internal goals (from date of assignment): • 5 days – Review statute of limitations and whether case is fit for an Appeal. • 100 days – A conference should be held • 365 days – Case should be completed within a year.

19. Appeals Process • Manager assign the cases • Introduction letter is mail (Ltr 4141) • Letter includes Pub 4227, Appeals • Letter includes Pub 4167, Introduction to alternative Dispute Resolution • Within 5 days: • AO’s determines whether it is fit for an appeal. • AOs will check the statute. Must be at least 180 days left. If not, a statute extension will be requested. • Within 100 days, a conference should be held.

20. Appeals Process • Most of the time we deal with attorneys, CPAs, and enrolled agents. • There are significant differences in how cases are handled depending on the size and complexity of the case. • There are primarily four type of cases that AO’s work: • Small Business / Self-Employed (“SB/SE”) • Large Business & International (“LB&I”) • Industry cases (“IC”) • Coordinated Issue Cases (“CIC”) • Others (e.g., employment taxes, excise, estate & gift, etc.)

21. Appeals Case Load

22. Differences in Cases • Number of attorneys / representatives • Span of case completion • Likelihood of a hazards settlement • Pre-conferences • Length of protest letters and exam’s reports • Types of issues • Types of books and records

23. Appeals Settlements • Judicial attitude based on the facts, law, and seeing both sides of the question. IRM 8.6.4.1.4. • Nuisance settlements are not allowed. IRM 8.6.4.1.3. • Settle cases on a issue-by-issue basis. Generally no trading of issues and penalties cannot be traded with other issues. 8.6.4.1.2. • Appeals generally does not raise new issues. IRM 8.6.1.6. • Exception: Material and substantial grounds.

24. Hazards of Litigation (“HOL”) • A “hazards” settlement is an intermediate resolution of an issue based upon the fact that there is substantial uncertainty in the event of litigation as to how the courts would interpret and apply the law or as to what facts the courts would find. • Appeals can settle a case by reducing the amount owed based on a percentage based on the “hazards.” • Exam generally not allowed to make a “hazards” settlement.

25. Closing a Case in Appeals • Usually a Form 870 or 870-AD (if HOL settlement) • Appeals Case Memorandum • Case is sent to Appeals processing function • If unagreed, statutory notice of deficiency (“SND”) will be issued by Appeals.

26. Alternative Disputes • Fast Track Mediation • Fast Track Settlement • Mediation • Early Referral • Arbitration

27. Appeals - Alternative to Litigation? • Yes. • Relatively inexpensive alternative to litigation • Questions?