In light of a recent pilot program encouraging the inclusion of Exam members in Appeals conferences, as well as an indication that Appeals conferences will return to being face-to-face meetings, taxpayers may want to consider whether Appeals remains the best forum to resolve unagreed issues.
The IRS Office of Appeals (Appeals) has implemented an initiative whereby some Appeals Team Case Leaders (ATCLs) will hold Appeals conferences with representatives from Compliance Examination teams (Exam) in attendance. Although this remains a pilot program, it is yet another change to the Appeals procedures that may make settlement more difficult and could bring Appeals’ independence into question.
The Appeals function aims to resolve tax controversies on a basis that is fair and impartial to both the IRS and the taxpayer. Historically, during an Appeals conference, Exam would present its case to Appeals first and then have no further involvement in discussions between the taxpayer and Appeals. After Exam finished its presentation and left the conference, the taxpayer would present its case and discuss potential settlements with Appeals. This process is no longer necessarily the norm.
The Appeals Judicial Approach and Culture procedures, which were phased in beginning in 2012, began to break down the barriers between Exam and Appeals by limiting taxpayers’ ability to present new information to Appeals and increasing the possibility that Appeals would return a case to Exam for further consideration. Under the new pilot program, having Exam actively participate in the Appeals process could be yet another challenge to reaching a successful resolution with Appeals.
In October 2016, the IRS revised the Internal Revenue Manual 22.214.171.124.4 to provide Appeals with the discretion to invite Exam members to Appeals conferences. In May, the IRS announced a new initiative whereby approximately one-third of ATCLs would invite Exam members to attend Appeals conferences and stay through the taxpayer’s presentation. According to the IRS, this initiative is intended to allow the parties to listen to each other’s presentations and give the ATCL the opportunity to clarify facts and legal arguments that have not otherwise been clearly outlined. Appeals and the taxpayer would continue to discuss potential settlements without the involvement of Exam.
Recently, the IRS released a Frequently Asked Questions (FAQ) on this new initiative. The IRS announced that the initiative’s goals are to improve conference efficiency, reach case resolution sooner, and offer earlier certainty for issues in future years. The FAQ includes the following points:
- Taxpayers may not opt out of the initiative, but Exam may decline to attend a conference.
- Exam may not raise new issues during the Appeals conference.
- The initiative is different than the Rapid Appeals Process (RAP) because Exam will not be involved with settlement discussions. The ATCL will decide the appropriate time to engage in settlement discussions.
- Only Exam team members involved in unagreed issues that are the subject of the Appeals conference will participate.
As part of the initiative, some ATCLs have reached out to taxpayers with additional information preceding an opening conference:
- Taxpayers have been encouraged to work with Exam before the first meeting to reach agreement on factual and legal differences in order to narrow the scope of the dispute.
- Taxpayers have been informed that they should be prepared to work toward a settlement during a single conference.
- During the meeting, both Exam and the taxpayer are allowed to ask questions of the other side during the presentations.
- Appeals is there to facilitate communication between the taxpayer and Exam and to assess the strengths and weaknesses of both sides, but Appeals remains the decision-maker.
Considerations for Taxpayers and Practitioners
This new process raises concerns for taxpayers and practitioners. Typically, by the time an issue reaches Appeals, the taxpayer and Exam already have tried to reach resolution and have been unsuccessful in doing so. As such, it is unclear how having Appeals attempt to mediate the issue will increase the likelihood that Exam and the taxpayer will reach an agreement, or why allowing both parties to participate in the conference will lead to the stated goals of improved efficiency or earlier certainty.
Further, even though Exam is supposed to be excluded from any settlement discussions, the line between case presentation and settlement often is not black and white. It remains to be seen whether this new procedure will morph into a process akin to Fast Track where Appeals serves as a mediator between Exam and the taxpayer.
Another concern is whether Exam will issue post-protest brief information document requests (IDRs)—as is becoming a common occurrence—to prepare for its opportunity to advocate its position as part of the Appeals process. There also is a concern that Exam may request—after hearing the taxpayer’s arguments—that issues that were not fully developed be sent back to Exam. Far from leading to quicker case resolution, this would lengthen the settlement process and increase the expense to the taxpayer.
Finally, given the emphasis on resolving unagreed issues in the course of one meeting, the new procedures raise concerns that taxpayers are essentially being pushed toward RAP. Under RAP, the Appeals opening conference is a working conference to resolve issues in a single meeting using fast-track techniques. Given the significant constraints on Appeals’ resources, this may be the ultimate goal, but not every issue is ripe for resolution in a single meeting. Factually or legally complex issues often present a time-consuming challenge that can be difficult to quickly resolve with Appeals.
A Return to Face-to-Face Conferences
This is not the first change that has been proposed for the Appeals process in the last year. About a year ago, it appeared that ATCLs would lose their authority to settle cases. After significant feedback, Appeals ultimately decided to allow ATCLs to retain their settlement authority. Appeals also moved away from face-to-face conferences in favor of virtual or telephonic meetings. In September, however, Appeals announced that it would be returning to in-person conferences.
Given that Appeals has been proposing new procedures and then modifying them based upon feedback, it is possible that this pilot program will be short-lived. Having both Exam and the taxpayer playing an active role in the Appeals conference may not be as efficient or productive as Appeals is anticipating. Nonetheless, taxpayers may want to consider whether Appeals remains the best forum to resolve any unagreed issues.