IRS Appeals Exam Issues - John R. Dundon II, Enrolled Agent
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IRS Appeals Exam Issues

IRS Appeals Exam Issues

See Revenue procedure 2009-44 as well as Internal Revenue Manual 35.5.5 for more information. There are two basic types of cases considered by IRS appeals officers. They are non-docketed cases and docketed cases.

In non-docketed cases typically, exam conducts an audit of a return and proposes adjustments. The taxpayer has three options. He can agree with the adjustments, sign the agreement and the case is closed through the examiner. The taxpayer can do nothing and compliance will issue a statutory notice of deficiency or an SND.  Sometimes they’ll issue an equivalent notice on perhaps a claim case. Again, it’s a notice that gives the taxpayer an option to petition the court or a taxpayer could request the case be forwarded to appeals for an administrative review of their dispute. This is done in response to the issuance of a 30-day letter from the examiner in the form of a protest.

It’s important that you follow publication 5 to avoid any rejection of your protest. Your protest contains the taxpayer’s position on the disputed items.  It’s extremely important that the taxpayer submit the request to the function that proposed the adjustments.  Requests should never be submitted directly to Appeals. The IRS Appeals function, as a separate and distinct stand alone function does not have jurisdiction over the case unless it’s forwarded from the compliance function.

Appeals receives a complete administrative file.  It contains the tax return, the examiner’s work papers, a case history, your protest, and usually any documents that have been submitted prior to that case coming to appeals.

The written protest communicates the reason for the disagreement along with any supporting law.  Early submission of documentation and case law being relied on supports getting to a timely resolution.  Consider making a settlement proposal that fully explains your reasons for that settlement.

If you are running close to the 30-day time it’s more important that you give a timely protest, than that you make it extremely detailed. So please don’t miss out on the opportunity to come by drafting a more complex protest.

There are 2 types of docketed cases that are considered by Appeals, S-docketed and regular docketed.  A regular docketed case is one where the statutory notice was issued and the taxpayer files a petition for review to the U.S. Tax Court.  These cases are one step away from trial.  If a case was not previously considered by Appeals in non-docketed status, Area Counsel will send these cases to Appeals for one last consideration in an attempt to resolve them prior to trial. They do this after they answer the petition, so realize there is a lag from the filing of the petition to the time Appeals gets the case.   In these instances, it is critical that information is provided in order for Appeals to resolve the issues prior to tax court, and prior to the court scheduling that case for trial.  That is called calendaring the case.

Cases selecting small tax case procedure are referred to as S-cases.  These proceedings are less formal in the court. The tax, penalty and interests cannot exceed $50,000 per tax year. They are scheduled for trial at approximately six to nine months depending on the place of trial you’ve requested.  The decisions on small tax cases are not published, and they can’t be appealed to the Court of Appeals.  In contrast, decisions on a regular tax case can be appealed and they are published.

When is it appropriate to request an appeal of an exam?

When the law is unclear; perhaps there is an absence of legal precedent, and that has created a hazard of litigation for both sides. When the facts are not well-established, when the case does not fit neatly into established case law, when perhaps some books and records are missing, when there are differing opinions or interpretation of facts or law, perhaps the case involves the opinions of appraisers

The actual hearing of your case

Your case can be heard in either field appeals or campus appeals. Field exam cases will be considered by a field appeals office.  Cases generated by campus exam typically have less complex issues.  They require less time to resolve, and are more easily resolved through correspondence or phone.  Another sort of case that can come from the service center might be the timeliness issues on claims or perhaps penalty issues.  Cases generated by the field exam function are generally more complex; require more time and more information to resolve.

The advantage of a campus appeal can be great. There is quicker resolution. There is less cost to your taxpayer in time and effort, and fees and interest on unpaid liabilities.  There may be some situations, though, where you might want your case be sent from campus appeals to a field appeals office for a face-to-face conference.  Remember, this will slow down the process of getting to a resolution on your disputed issue. It is more costly to the taxpayer and it’s certainly more costly to the government.

At this time, campus assignments are as follows. Penalty appeals cases are worked in Fresno, Brookhaven and Memphis. S-docketed cases are worked in Fresno, Cincinnati, Memphis and Brookhaven.  Non-docketed cases including claims are worked in Fresno, Brookhaven and Memphis, and innocent spouse cases as some of you may have discovered come out of Cincinnati service center.

What is considered in appeals?

You think of such things as what was the level of the taxpayer’s education, what was their compliance history, and had they had any previous tax or penalty experience? Another point the appeals officer would be considering would be reliance on professional advice.  To satisfy the requirement of ordinary business care and prudence through reasonable reliance the taxpayer must demonstrate the adviser had sufficient expertise to justify that reliance. Necessary and accurate information was provided to the adviser. There was good faith reliance by the taxpayer on the tax adviser’s judgment.

Appeals Officers consider the following in rendering a determination.

Each case is judged on its own merits. The hazards of litigation are weighed. That is they’re thinking about what would happen if this case were litigated. Whether the taxpayer exercised ordinary business care and prudence but still was unable to comply with the obligation. The credibility of written and oral testimony of the tax practitioner as well as the taxpayer.

The appeals process can be time consuming from opening it, to considering it, until final resolution. So, there are other alternative dispute resolution alternatives, and they should be considered to get to the right answer as early in the process as possible. Publication 4167, which is called an introduction to alternative dispute resolution provides more information about the available alternative resolution options.  So what happens is the case stays with exam, the issue and dispute is forwarded to Appeals, the exam marches on. That issue hopefully is resolved and provides an impetus to ultimately resolving the entire case. Revenue procedure 99-28 provides complete information on this process.

Another program is Fast Track Mediation. It’s specifically designed for smaller tax cases. It’s best used prior to, or subsequent to the issuance of a 30-day letter. A request for fast track mediation is submitted within the 30-day period, or prior, preferably prior to the 30-day letter period. If both parties agree to participate, an appeals officer is designated as a mediator. They are utilized to facilitate and open the lines of communication between the government and the taxpayer.  The case stays with the compliance function. The issues are discussed along with potential ways of resolving them through joint sessions and caucuses. The goal is to jointly reach an agreeable solution within 40 days. If resolution cannot be reached, the taxpayer still retains their appeal rights; however, a protest is still necessary and must be submitted within the 30 days.

Another program called Fast Track Settlement was originally designed for large cases in LMSB but has been expanded recently to SBSE’s smaller tax cases. Again, prior to issuance of the 30-day letter, upon agreement by both parties, a specially-trained appeals officer is assigned as a mediator and these mediators, by the way, are sent to mediation training that’s very intense, and it is done by the Federal government, used for mediators throughout the Federal service.

They facilitate discussions between the taxpayer and compliance with the goal of reaching settlement with which both parties can agree. Fast track mediation, remember, is generally used in factual disputes, and fast track settlement is generally used in legal disputes or cases where there could be a need to exercise a determination of hazards of litigation.

Small case, SBSE fast-track settlement is currently being offered in seven test cities around the U.S., Chicago, Houston, St. Paul, Minnesota, Philadelphia, including Central New Jersey, Laguna Niguel, Riverside, and San Diego, California. This pilot program will be rolled out to most smaller cases.

If, after an appeals hearing, the parties still have not reached an agreement, there is yet another program called Post-Appeals Mediation. This program is available after unsuccessful appeals settlement negotiations, but it must be agreed to by both parties. What you should do is ask for it, but be aware that if the manager has not yet reviewed that case, there is a really good chance that by you asking for it, the manager’s review will cause a few more questions to be asked and perhaps lead to settlement. The manager is the one who reviews all cases anyway. Post appeals mediation is non-binding, and it’s available for most non-docketed cases.

See Revenue procedure 2009-44 as well as Internal Revenue Manual 35.5.5 for complete information.