In Notice 2015-72, the Internal Revenue Service (IRS) provided a proposed revenue procedure to update Rev. Proc. 87-24, 1987-1 C.B. 720, which describes the procedures for handling docketed cases in furtherance of the IRS Office of Appeals’ mission to resolve tax controversies without litigation in a manner that is fair and impartial to both the government and the taxpayer. If finalized, this proposed revenue procedure would supersede Rev. Proc. 87-24.
The IRS noted that since the 1987 issuance of Rev. Proc. 87-24, the IRS has been reorganized several times, the volume of litigation in the Tax Court has increased, and the IRS has adopted new policies and procedures to more efficiently manage its workload. Therefore, the notice states, the old revenue procedure should be updated to more accurately reflect the procedures utilized in managing the flow of docketed cases between the Office of Appeals (Appeals) and the Office of Chief Counsel (Counsel), and also to ensure that docketed cases are handled consistently throughout the United States.
Although the notice asserts that the proposed update “is not intended to materially modify the current practice of referring docketed cases to Appeals for settlement currently utilized in the vast majority of cases,” it does in fact contain some significant changes from Rev. Proc. 87-24.
For example, the updated Rev. Proc. stresses that, except in rare circumstances, Counsel will refer docketed cases to Appeals for settlement consideration. Under the old Rev. Proc., it was not entirely clear that Counsel was required to refer docketed cases back to Appeals. Although in practice Counsel often did refer docketed cases to Appeals, the language of the new Rev. Proc. should give more leverage to taxpayers arguing for a referral back to Appeals.
Rev. Proc. 87-24 also explicitly states that for cases involving deficiencies over $10,000, Appeals must promptly return the case to Counsel when no progress is being made towards settling the case. The proposed update omits this statement, perhaps indicating a willingness to give Appeals more leeway in deciding when to send a case back to Counsel.
Further, the proposed Rev. Proc. addresses the frequent occurrence of cases in which Appeals is forced to issue a notice of deficiency or make a determination without having fully considered the issues because of an impending expiration of the statute of limitations on assessment. The notice states that if Appeals requests that the case be returned to it for full consideration once docketed, it will be treated as if Appeals did not issue the notice of deficiency or make the determination.
An additional, somewhat puzzling, revision in the updated Rev. Proc. is sure to be a source of many comments. The notice explains that those “rare circumstances” in which Counsel will not refer docketed cases for settlement include instances where an “issue has been designated for litigation by Counsel” and where “Division Counsel or a higher level Counsel official determines that referral is not in the interest of sound tax administration.” This provision seems to contradict Rev. Proc. 87-24, which only allowed Counsel to make such a decision in consultation with Appeals. The IRS will go through a long process, with input from Appeals and opportunities for the taxpayer to argue against designation, before it designates an issue for litigation, but ultimately IRS chief counsel has final say on whether to designate the case for litigation. If the proposed Rev. Proc. in fact intends to take Appeals—an independent organization—out of this process and give sole discretion to the IRS in deciding when to refer cases to Appeals, taxpayers should be concerned.
Another change in the proposed Rev. Proc., however, should be quite welcome to taxpayers. In an effort to preserve Appeals’ independence, the notice clarifies that even in docketed cases Appeals may exclude Counsel from settlement conferences with the taxpayer if, after considering the views of both Counsel and the taxpayer, Appeals determines Counsel’s participation in the settlement conference will not further settlement of the case. The proposed Rev. Proc. also addresses the coordination between Appeals and Counsel when a taxpayer raises an issue for the first time while the docketed case is with Appeals for settlement consideration.
Lastly, the proposed Rev. Proc. removes the prior exclusion for cases governed by rulings by the National Office in employee plans and exempt organizations to reflect recent organization changes in the Tax Exempt and Government Entities Division.