The IRS recently updated its policies to provide that Appeals Officers will not raise a new issue nor reopen an issue on which the taxpayer and the IRS are in agreement. (For those lucky enough to be unfamiliar with the IRS tax dispute process, the Appeals Office provides a cost-efficient means for taxpayers to have their case heard by an impartial tribunal.) The new policy applies to all Appeals actions taken after July 18, 2013, including cases protested to Appeals after that date as well as all open cases in Appeals. To implement this policy, the Memorandum provides interim guidance.
There are a few practical points to note about the new policy and interim guidance. First, the Appeals Office has always had a policy of not raising new issues unless they were “material.” Of course, “material” issues are the most likely to be of the greatest concern to taxpayers, so eliminating the “material” language is noteworthy.
Second, an attachment to the memorandum clarifies that “a new theory or alternative argument is not a new issue.” This limiting factor will likely become a source of contention as the distinction between a new issue and a new theory or argument is blurry, at best. Indeed, we have already encountered a situation in which this distinction has become relevant.
Finally, the attachment to the memorandum also states that “in docketed cases, the Appeals hearing officer will consider a new issue affirmatively raised by the government in pleadings and may consider any new evidence developed by Compliance or Counsel to support the government’s position on the new issue.” The distinction between docketed and non-docketed cases is important because some taxpayers choose to go to the Appeals Office after filing a petition with Tax Court (often referred to as the “backdoor approach” because most Appeals Office discussions are held before a Tax Court petition is filed). Accordingly, if the backdoor approach to Appeals is chosen, the taxpayer runs the risk of having IRS counsel raise new issues in their pleadings that might not have been spotted by examination.
Sirote’s tax controversy team has had good experiences settling cases with the IRS Appeals Office. Although each case must be evaluated on its own facts, the Appeals Office often provides a cost-effective means of obtaining a fair hearing. The new IRS Policy Statement strengthens this process and adds some additional procedural advantageous and potential pitfalls that taxpayers should be aware of.