Why the Appeals Process Should Stay Independent
I am a firm believer in the Taxpayer Bill of Rights and, more specifically, the right to an independent Appeals Process, with an emphasis on the word “independent.”
To review, IRC § 7803(a)(3), as well as the Bill of Rights, gives a taxpayer the right to an independent Appeals Process. An appeal can be asked for after an audit or in the course of a Collections Due Process Hearing (CDP). The independence of the process is imperative to a fair and just tax system.
However, in October 2016, the IRS changed the Internal Revenue Manual (IRM) Guidance, as per IRM 22.214.171.124.4, to include both Counsel and Compliance in Appeals Conferences. Although both of these would normally be involved in the actual proceedings, their participation would end prior to the commencement of settlement negotiations.
While this limitation is welcome, if Counsel and Compliance are still allowed an additional opportunity to argue for their positions, the dynamic of the conference is changed, and the Appeals role as an independent decision maker is jeopardized.
Occasionally, some taxpayers might appreciate the increased involvement of Counsel and Compliance in the Appeals process as a means of expediting a negotiated settlement. However, the expanded participation should be consensual, not the result of a mandate.
In order to preserve its own legitimacy and to protect taxpayer rights, Appeals must ensure the pilot program is evaluated based on qualitative and quantitative measures and that the results, including Appeals’ own evaluation, are published in a fully transparent fashion.
For example, a decision regarding whether to continue, expand or abandon the participation of Counsel and Compliance in Appeals Conferences should only be reached after considering the impact it has on the cycle time and the frequency and favorability of settlements in cases within the pilot, as compared with similar cases in the general Appeals inventory. This data, along with the observations of participants and the analysis of Appeals, should then be made available to stakeholders for review and comments.
Before this intervention, the process was fairly simple. For example, if you disagreed with an auditor’s assessment, you could take the matter to Appeals. The designated officer, the AO, would look at all of the facts and circumstances surrounding the disagreement and weigh the “hazards of litigation.” In other words, they would weigh the cost of the case going to Tax Court versus the expense of it being settled or sent back to audit. In the case of a CDP Hearing, the AO makes the same determination.
The key to the independence of Appeals is that the AO doesn’t have the same prejudices or preconceived notions as the auditor or the Revenue Officer, in the case of collections. Therefore, their job is to take a fresh look at the situation and make a ruling.
Under IRC § 7123, you can generally request that an issue you have not been able to resolve with the IRS examination or collection division be transferred to the Office of Appeals. For issues that are still unresolved, you may then request non-binding mediation (where a neutral third party will help you try to reach a settlement) or binding arbitration (where you and the IRS will be bound by a third party’s decision).
You may also request these after unsuccessfully trying to enter into a closing agreement or offer in compromise. According to the Statement of Procedural Rules, 26 C.F.R. § 601.106, in certain circumstances, the Office of Appeals has exclusive authority to settle your case.
Generally, for the four months after you petition the Tax Court, Appeals will be the only office within the IRS that can settle your case as long as the statutory notice of deficiency or other notice of determination was not issued by Appeals. In short, let’s keep Appeals independent as intended.
You might also be interested in
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...