INTERNAL REVENUE SERVICE DESCRIPTION OF APPEALS DIVISION. Table Of Contents INTERNAL REVENUE SERVICE DESCRIPTION OF APPEALS DIVISION...

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1 INTERNAL REVENUE SERVICE DESCRIPTION OF APPEALS DIVISION Table Of Contents Table Of Contents INTERNAL REVENUE SERVICE DESCRIPTION OF APPEALS DIVISION Introduction Part 1 - Organization Structure Part 2 - Topic 1 - Role of Appeals Part 2 - Topic 2 - Hazards of Litigation Part 2 - Topic 3 - Overview of Appeals Process Part 2 - Topic 4 - Independence of Appeals & Ex Parte Part 3 - Topic 1 - Introduction to Exam & TEGE Cases Part 3 - Topic 2 - Industry Case (IC) and Coordinated Industry Case (CIC) in Appeals Part 3 - Topic 3 - Innocent Spouse Cases Part 3 - Topic 4 - Penalty Appeals Part 4 - Topic 1 - Introduction to Collection Part 4 - Topic 2 - Collection Due Process (CDP) Part 4 - Topic 3 - Offer In Compromise Part 4 - Topic 4 - Collection Appeals Program (CAP) Part 4 - Topic 5 - Trust Fund Recovery Penalty Part 5 - Topic 1 - Introduction to Alternative Dispute Resolution Part 5 - Topic 2 - Early Referral Part 5 - Topic 3 - Fast Track Mediation Part 5 - Topic 4 - Fast Track Settlement Part 5 - Topic 5 - Post Appeals Mediation Part 5 - Topic 6 - Arbitration Closing

2 INTERNAL REVENUE SERVICE DESCRIPTION OF APPEALS DIVISION Introduction Resolving tax controversies, without litigation, fairly and impartially, in order to enhance voluntary compliance; getting to the right answer at the right time; that's our mission in the Appeals Division of the Internal Revenue Service. Welcome. I'm David Robison, the Chief, Appeals. Thanks for taking the time to watch this DVD; we hope it will give you a better understanding of the Appeals Division and its role within our tax administration system. I've been with Internal Revenue Service for 33 years. When I was in Compliance, I didn't like Appeals very much because they always took and promoted my best employees. Now that I'm the Chief, Appeals, I know that our employees offer what's critical to both the Internal Revenue Service and the tax-paying public - a strong commitment to getting to the right answer, balancing both the Government's need for an efficient tax system, and the taxpayer's right to be treated fairly within the law. Appeals traces its origins to August 1, 1927, when the Commissioner established a Special Advisory Committee to provide an appeal for cases pending before the Board of Tax Appeals, the predecessor to the United States Tax Court. While the organizational structure and the name of the Committee has changed over the years, the Appeals mission - to expedite the settlement of tax disputes without formal trial - remains the same. From 1927 until today, Appeals employees have been proud of their role in tax administration. From a function with less than 50 employees and an inventory of approximately 5,000 cases, Appeals has grown to over 1,900 employees, resolving over 100,000 cases this last year. Today, we independently consider cases from all four of IRS's Operating Units, typically reaching agreement with taxpayers on 85 percent of its cases. The Restructuring and Reform Act of 1998 RRA '98 presented Appeals with some of its greatest challenges to date. We have new work streams like Collection Due Process, we have significant changes to the offer in compromise and installment agreement programs, ex parte provisions to protect our independence, and it changed the balance of our work. But, RRA '98 did not change our mission. This year, most of our work, both in the number of cases received and time spent to reach resolution, is in just three work streams - Collection Due Process, Offers in Compromise, and small docketed cases. And about two-thirds of all our cases come from campus operations in Compliance - Automated Collection and Centralized Offer in Compromise sites, the Automated Underreporter and Substitute for Return units and other units like these. With challenges come opportunities, and we've capitalized on those opportunities. Our receipts have grown steadily since RRA '98, but we've gotten a handle on our new work. We improved case processes, we've refined our structure, and we've stood up or expanded campus operations at Brookhaven, Covington, Philadelphia, Ogden, and Fresno. Productivity gains, which we define as the number of cases resolved per Appeals employee, have exceeded over 80% the last five years. Inventories have dropped continuously this year, for the first time in four. But taxpayers and their representatives continue to tell us that the biggest opportunity for improvement is to reduce the length of the Appeals process. One of our strategies for improving our effectiveness is to help taxpayers and their representatives, you, know more about Appeals and its processes. We believe that by more fully understanding our processes you will better represent your clients, and together we will move closer to meeting the timeframes that taxpayers both need and expect. So that's the impetus for this DVD. In Part 1, we will give you a brief introduction to the Appeals Organization, and show you who to contact regarding your case. In Part 2, you'll find discussions on how we approach resolving these cases, this will include topics as diverse as how to request an appeal, we'll discuss your case with you, the hazards of litigation, and the prohibitions on ex parte communications. Parts 3 & 4, you'll find segments about each of our major program areas, such as income tax adjustment cases, penalty appeals, collection due process, and offer in compromise. And in Part 5, you'll learn about the many alternative dispute resolution options that we have available, such as Fast Track Mediation, Fast Track Settlement, and post-appeals mediation. We are pleased to be able to provide this information to you. Thanks for watching and welcome to Appeals. Part 1 - Organization Structure The Appeals function serves as the administrative forum for any taxpayer contesting an IRS compliance action. An independent function within IRS, Appeals considers cases from all of the IRS's Operating Divisions. Appeals organizational structure is designed to continuously improve operations, employee satisfaction and customer service. The goal is that all taxpayers will get their disputes resolved within the timeframes they need. Appeals is led by the Chief and Deputy Chief, Appeals, and has both a Headquarters and a field component. Headquarters includes functions like tax policy and procedure, strategic planning and measurement, business systems planning, and communications. The primary division in the field is geographic, increasing on-site management and improving its flexibility to handle the workload. There are now eight geographic areas, each led by a director who reports to an Appeals executive. These are headquartered in Baltimore, Manhattan, Nashville, Atlanta, Chicago, Dallas, San Francisco and Laguna Niguel. Recently implemented Appeals campus -2-

3 teams within these areas largely work campus-source cases; field teams work mostly field-source cases. Several areas, however, are nationally based: Appeals consolidated its Technical Guidance area - known earlier as its Specialty program - to a national position in the organization. This allows us to better coordinate key issues under the Industry Specialization Program, often referred to as the ISP program, and the Appeals Coordinated Issues program - something particularly important in the tax shelter area. Appeals also has a separate structure for the Appeals Team Case Leaders, reporting directly to the Chief, Appeals. This allows us to maintain appropriate focus in the largest cases and key initiatives - like Fast Track Settlement. And, last, Appeals case processing and tax computation specialists are in their own reporting structures to ensure that their unique needs are effectively addressed. About 1000 employees in Appeals have direct contact with taxpayers and their representatives to resolve tax disputes. Traditionally, Appeals held mostly face-to-face conferences. While these are still available, we encourage telephone or correspondence conferences when they can significantly shorten the overall time of the Appeals process, thereby reducing taxpayer burden. Appeals Officers have a background in examination issues; many are CPA's or attorneys. They consider a wide variety of mostly income tax issues. Some have specialized in international issues, however; others in tax-exempt entities, and still others focus on estate and gift or employment tax issues. Employees in our Technical Guidance area normally have extensive experience as Appeals Officers, and are responsible for becoming experts in key issues in the ISP or Appeals Coordinated Issue programs. Appeals team case leaders resolve issues with the largest corporations in America, which represent 80% of the dollars in dispute within Appeals inventory. In contrast to Appeals Officers, our settlement officers have a strong background in Collection issues. They specialize in collection due process hearings, offers in compromise, trust fund recovery penalties and appeals submitted within the Collection Appeal Program. Once a case is assigned to an Appeals employee, the manager will send you and your client a letter to let you know the name and phone number of the employee assigned to the case. If you have questions about the appeals process, or wish to inquire whether or not a case has been received in Appeals, you may contact an Appeals customer service officer. To find the name and phone number of the customer service officer located closest to you, click on the link provided to the Appeals website. Appeals and Settlement Officers, together with their team managers and area directors, supported by the rest of Appeals, work to get to the right answer at the right time on all of their assigned cases. Appeals structure is designed to support this effort. Part 2 - Topic 1 - Role of Appeals Recall that dispute resolution is the major role of Appeals. Many factors are considered in reaching that goal. In every dispute, Appeals considers the applicable legal and procedural requirements as they apply to the taxpayer's circumstances, evidence, and testimony. Appeals employees look to both the law and the facts of a case to determine an appropriate resolution to a tax dispute. But, the focus is different between an income tax dispute being considered by Appeals and a case coming to Appeals for a Collection Due Process hearing. In an income tax dispute, let's consider the following example: Internal Revenue Code Section 162 reads in part... "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business..." So the law allows a deduction for expenses that meet the requirements of being ordinary and necessary in carrying on any trade or business and expenses must also be paid or incurred to be deductible. So while the law allows the deduction, the facts - in the form of documentary evidence and testimony - establishes "how much" the deduction will be. Now, let's apply this to an actual tax scenario. Payment of salaries to workers is generally accepted as an ordinary and necessary business expense. However, the allowable deduction of salaries is limited to that that is actually paid or incurred - depending on the chosen method of accounting. On the other hand, payment of personal living expenses is generally not accepted as ordinary and necessary business expense per IRC Section 262. It will then not be allowed as a business deduction - even if fully verified as paid. To resolve income tax disputes, Appeals employees look to both legal and procedural requirements to gain an understanding of the law as it applies to a specific set of facts. Legal requirements are found in the following materials: the Internal Revenue Code, Treasury Regulations, Revenue Rulings, Revenue Procedures, and decisions reached by the various courts that consider tax disputes. Let's consider the following Internal Revenue Code sections: Code Section 6511(a) covers the limitation on claims for credit or refund. This law is straightforward and can be relied upon without necessarily looking to the Treasury Regulations and/or court decisions for additional guidance in applying this law. In contrast, Code Section 6651 which provides basic instruction on the assertion of the failure to file and failure to pay penalties states these penalties shall apply... "unless it is shown that such failure is due to reasonable cause and not due to willful neglect." The question then becomes... "well, what is reasonable cause and willful neglect?" The first place to look would be the Treasury Regulations which provides in section (c), "If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to reasonable cause." Unfortunately, the Treasury Regulations do not provide any insight into what the term "willful neglect" might mean. Fortunately, case law in the form of a Supreme Court decision assists -3-

4 in defining this term as "a conscious, intentional failure or reckless indifference" and that's found in U.S. v. Boyle, 105 Supreme Court 687. Appeals employees look to the Internal Revenue Manual to determine if a taxpayer's facts and evidence meet procedural requirements, but there are times when technical guidance memorandums also assist Appeals employees in resolving tax disputes. On the other hand, Code Section 6330 describes specifically what an employee of Appeals must consider in a Collection Due Process hearing. These include the following: A review of the case history to ensure that all legal requirements and administrative procedures were followed. Consideration of issues such as whether the notice of federal tax lien or notice of intent to levy is appropriate, and whether there are appropriate collection actions, such as innocent spouse relief, installment agreement, offer in compromise, or substitution of other assets. Balancing the need for efficient tax collection with the taxpayer's legitimate concerns about the intrusiveness of the collection action. Whether it's an income tax or collection issue and depending on the unique facts of each case, every Appeals employee has access to all of the reference sources discussed to fairly and impartially resolve a taxpayer's tax dispute. For more information on this topic, please see Publication 1 - Your Rights as a Taxpayer. Part 2 - Topic 2 - Hazards of Litigation What makes the Appeals function distinct from the Examination function? Each function looks to all available legal and procedural guidance in making determinations. Each function considers and evaluates the facts and circumstances of the case and each function evaluates the evidence provided by the taxpayer. So, what distinguishes Appeals from Examination? Well, legally and procedurally, Appeals is uniquely positioned to recommend a resolution that is somewhere between fully sustaining or fully conceding the Examiner's proposals based on the uncertainty of the outcome if the case were considered by a court of law. Let's compare what Examination does to what Appeals has been granted the authority to do. Recall that earlier we spoke about Code Section 6651 which provides for the assertion of the failure to file and failure to pay penalties "unless it is shown that such failure is due to reasonable cause and not due to willful neglect." For examiners, the answer to the question, "Does the failure to file penalty apply?" can only be a "Yes" or a "No." For Appeals though, the answer could be "Yes, No, or Partially" based upon the hazards of litigation... that is an evaluation of the uncertainty of litigation. Treasury Regulation Section (f)(2) reads, "Appeals will ordinarily give serious consideration to settle a tax controversy on a basis that fairly reflects the relative merits of the opposing views in light of the hazards which would exist if the case were litigated." Internal Revenue Manual reads, "A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in the event of litigation, or one which reflects mutual concessions for the purpose of settlement based on the relative strengths of the opposing positions where there is substantial uncertainty of the result in the event of litigation." In evaluating hazards of litigation, Appeals considers both factual hazards and legal hazards. Factual hazards occur when there is uncertainty as to the courts' findings of facts whereas legal hazards is the uncertainty as to how the courts would apply or interpret the law. In an appealed case, either one, or both may apply to the same issue. Factual hazards exist when there is either incomplete evidence or conflicting evidence. This evidence could either be records or the testimony of witnesses. For example, a taxpayer might be claiming actual mileage as a business expense. The taxpayer presents documentary evidence that establishes the odometer reading at the beginning and end of the tax year. Now these numbers determine the total mileage driven throughout the year. Yet, during the examination process, the taxpayer shared that the business mileage log was either lost or misplaced so the evidence needed to support the business mileage deduction is incomplete. Now conflicting evidence comes into play when the testimony of witnesses does not corroborate the same story. A quick example - Consider the situation where divorced parents are claiming a dependency exemption for the same child. It's very possible, in fact likely, that one parent's testimony that he or she is entitled to the dependency exemption is in conflict with the other parent's testimony. Legal hazards exists when there is conflicting case law, or there is absence of legal precedence, or there is conflict between the Service's position on an issue and court decisions, where there is ambiguity in the applicable statute or regulation, or where there is conflicting law. Consider for example, decisions reached by the Tax Court and the District Court based on similar facts, yet the courts reached a different decision. Depending on where the case will be heard, these different decisions might present a basis for settling the issue for an intermediate amount. While Appeals has the authority to settle a tax dispute for less than 100 percent of the proposed adjustment to an issue, our mission requires that we strive to be fair and impartial to both the taxpayer and the government in our evaluation of the hazards of litigation. Part 2 - Topic 3 - Overview of Appeals Process Sub-Topic 1: Sources of Cases Appeals receives cases from every IRS Operating Division - Large and Mid-Size Business; Small Business/Self-Employed; Wage and Investment, and Tax Exempt and Government Entities. Generally, disputed tax cases come from the Compliance -4-

5 function within these divisions - either from Examination or Collection. Within each function field offices or campus offices work the entire spectrum of cases relating to that function. Therefore, Appeals receives cases from both field and campus sites. In Fiscal Year 2004, Appeals received about 2/3 of its work load from campus operations, and 1/3 from field Compliance locations. To better address this pattern of case receipts, Appeals began establishing Appeals offices at certain Campus sites. When Appeals acknowledges receipt of your case, it's possible the letter will be generated by one of the Campus sites rather than a local Appeals office depending on the type of case. For example, if you have a client who has appealed a rejected offer, the case might be worked by the Appeals office at either the Brookhaven or Memphis Campus. The Cincinnati Campus works primarily innocent spouse cases. Most recently, the Fresno Campus Appeals office began considering examination cases from the Austin Campus. Sub-Topic 2: How to Request an Appeal How to request an appeal depends on the source of the dispute. Since Appeals is separate and independent of Compliance - and that's both Examination and Collection - the taxpayer must, in each case, request an appeal to the office that proposed the original determination or specific collection action. In this way, Appeals will receive a complete administrative case file that includes both your client's position and the government's position. In tax disputes generated as the result of an examination of your client's tax return, the taxpayer must submit a written request to the Examination office that reviewed your client's return. In cases where the dispute is less than $25,000, no formal protest is required. Publication 5, which is called Your Rights and How to Prepare a Protest if You Don't Agree, provides a complete explanation of how to request an appeal in this situation. For collection issues, it depends on the type of collection dispute. Publication 1660, Collection Appeals Rights, explains how to appeal collection actions such as the denial or termination of installment agreements and seizure of assets within the Collection Appeals Program, and how to request a collection due process hearing. For more information on this topic, please see Publication 5 - Your Appeal Rights and How to Prepare a Protest If you don't agree. Sub-Topic 3: Commitments and Expectations During the Appeals process, our employees are committed to the following: Explaining your appeal rights and the Appeals process; Listening to your concerns; Being courteous and professional; Being responsive, and allow you a reasonable amount of time to respond to any requests for information; and finally, Being fair and impartial. Now for the appeals process to work, Appeals also requests certain behaviors from you and your client. We ask that you do the following: Listen to our explanation of your appeal rights and the Appeals process; Give us a statement as to how you understand the facts and the law, listing all issues with which you disagree and tell us why; Give us any additional information or documentation that will help your case; And tell us when and how you think the case should be resolved; and finally Let us know the best time to contact you. If both parties - the Appeals employee and you - demonstrate these characteristics, then an atmosphere of collaboration is built and a negotiated settlement of the tax dispute is more comfortably reached. Sub-Topic 4: Conferencing Options Recall that Appeals consideration of a tax dispute is designed to be an informal administrative process. This informality lends itself well to offering a variety of conferencing options. In the least complex cases, correspondence might be the most efficient way to resolve a particular tax dispute. By far, the most popular conferencing option is by phone. This is a huge time saver for both you, your client, and the Appeals employee considering the case. Finally, the more traditional face-to-face conference option is still available. As your client's case moves through the Appeals process, one conferencing option or a combination of options might work best in resolving the tax dispute. Part 2 - Topic 4 - Independence of Appeals & Ex Parte The mission of Appeals reads, in part... "The Appeals mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer..." Well, how can Appeals demonstrate it is fair and impartial to both parties to the tax dispute? After all, Appeals employees work for the Internal Revenue Service. Appeals recognizes that its effectiveness as a dispute resolution function depends on our ability to remain fair and impartial to both parties. The Appeals organization has established a sound reputation for being separate and independent of other functions within the Internal Revenue Service. We have, historically, defended our independence and encouraged our stakeholders to do the same. Indeed, Congress recognized the need for Appeals independence when it passed the Restructuring and Reform -5-

6 Act of Section 1001 of that act required the Commissioner to develop a plan to reorganize the Internal Revenue Service. Section (a)(4) discussed that this plan had to ensure an independent Appeals function within the IRS, a plan that prohibited ex parte communications between appeals employees and other Internal Revenue Service employees to the extent that such communications appear to compromise the independence of the appeals employees. This legislation passed into law behavior that has actually existed in Appeals for many, many years. Revenue Procedure resulted from this legislation. It fully describes what ex parte communications are, what is prohibited, and what is allowed. That's why the Ex Parte provisions... mandated by RRA '98... have become so important to the Appeals function. So, how do the Ex Parte rules affect how we communicate with Compliance? There can be no discussions about substantive case issues between Appeals and Compliance, unless the taxpayer or their representative has been offered an opportunity to join in the discussion. This law applies to both oral and written communications. Therefore, if you provide significant new information on a major issue to Appeals, we generally ask the examiner for their opinion in writing and share their comments with you. When there is a need for further clarification from the examiner, we may contact you or invite you to participate in a conference call or a meeting with them about the new information. In addition, this law includes discussions with Counsel attorneys about non-docketed cases. If Appeals needs advice about an issue, it must be given by a Counsel attorney who did not provide advice to the Compliance employee. Counsel will assign a different attorney to advise Appeals. If an Appeals employee believes it is necessary to talk to a previous Counsel attorney regarding an issue, the taxpayer or representative will be given an opportunity to participate in that discussion. Exceptions to the Ex Parte Rule. The administrative file itself, developed by Compliance and forwarded to Appeals does not violate Ex Parte rules. To remain fair and impartial, Appeals must be provided with both sides of the issue when the case comes to Appeals. Since the administrative file contains the proposed determination and taxpayer's protest, it sets forth the boundaries of the dispute between the taxpayer and the government and forms the basis for Appeals to assume jurisdiction. The Ex Parte rules do not apply where the contact with Compliance relates solely to administrative, ministerial, or procedural matters. For example, if the communication is necessary to confirm whether or not a particular document was reviewed, that ex parte communication is permitted. A second example is where the communication is needed to understand an individual's handwriting. If the taxpayer and/or representative have been offered the opportunity to participate in a discussion between Appeals and Compliance, but unnecessarily delays responding to that opportunity, the ex parte rules will not apply. However, the delay must be beyond a reasonable amount of time. Do the ex parte provisions change the Appeals policy regarding raising new issues? No, Appeals still has the right to raise new issues, but it does not do it often. New issues are never raised casually, indiscriminately, or haphazardly by an Appeals employee, and are never, under any circumstances, raised for bargaining purposes. Appeals does not raise a new issue to the taxpayer's detriment unless grounds for such action are substantial, that is, strong, possessing real merit, and the potential effect on the tax liability is material, that is, having real importance and great consequence. For complete information about ex parte communications, you can review Revenue Procedure Well, this brings us to the end of this Lesson. Up next, in Lesson 3, we will discuss the Major Program Areas in Examination. Part 3 - Topic 1 - Introduction to Exam & TEGE Cases Hello. This portion of the DVD will introduce you to the role Appeals plays in resolving tax disputes originating out of the Examination function of the IRS. Since the process is the same, whether you will be discussing your case with an Appeals Officer or a Settlement Officer, I'll use the term Appeals employee from now on. If, after reviewing this DVD you have any questions, you may contact the Appeals Customer Service Officer located closest to your office. In Appeals, we work with taxpayer and their authorized representative to try to settle tax disputes without the need for a formal court hearing. We are successful in resolving most of the cases we hear. We will fully consider your position and arguments, along with the government's. We strive to resolve disputes in a way that is fair and impartial to both parties. We hope you and the Appeals employee will be able to resolve your client's tax dispute in Appeals. Further, we hope to help your client arrange to pay whatever they may owe. One of our goals is to schedule a prompt conference. If we can't resolve your client's case at the initial conference, we will make every effort to complete the case quickly and efficiently. Your Appeals employee will give your client's case regular attention so that it progresses steadily through the system. If for some reason you need to expedite the case, discuss this with your Appeals employee so the two of you can work together to set shorter deadlines as needed. Appeals office reviews are conducted in an informal manner, by correspondence, telephone, or at a personal meeting. Most differences are settled in these appeals without expensive and time-consuming court trials. Appeals will consider any reason your client has for disagreeing, except for moral, religious, political, constitutional, conscientious objections, or similar grounds. Our goal is to provide a forum for us to work together to resolve the tax dispute. You may have already had some discussion or correspondence with the Appeals employee to prepare your client's case. You may have discussed additional evidence or documents you will need to provide. If you provide significant new information or a major issue, we generally -6-

7 ask the examiner for their opinion in writing and we will share their comments with you. Remember that while Appeals is considering the case, interest continues to add up on the unpaid balance your client may owe. So it is in your client's best interest to provide any additional evidence to Appeals as soon as requested. During your client's appeal, you will have the opportunity to review the facts with an Appeals employee, and we will discuss with you how the law applies to the facts of your client's case. We may discuss decisions the courts have made when they ruled on cases similar to your client's. This is a good time to mention that there is another party to these proceedings - the Appeals Team Manager. As a manager of the Appeals employee, it is he, or she, who approves the final outcome of the case. Your Appeals employee will make a recommendation to the Appeals Team Manager, including whether or not we have reached an agreement. The Appeals Team Manager will review the file and approve the case if the settlement is appropriate, or return it to us if additional work or consideration is needed. If you reach agreement and your client doesn't owe anything, or a refund is due, you need not do anything else. If there is a refund the Campus will send it to your client if your client doesn't have any other outstanding amounts they owe. If your client owes some amount, they may be interested in knowing about their payment options. Your Appeals employee will go over this with you in detail, but generally your client can pay a few different ways: They can pay the full amount due, right away, including interest, by requesting an interest computation and giving a check to one of us. This will stop any interest that has been adding up and we will finalize the matter. Even if they can't pay the full amount, we would recommend that they make some partial payments since that will help to reduce the amounts of further interest accruals. If they can't pay the full amount all at once, and they have filed all the required tax returns, they may qualify for a payment plan. If the total amount owed is under $25,000, the Appeals employee can help your client to complete a payment plan to pay the amount off in 60 months. If they owe a larger amount, or need a longer time to pay, they will have the opportunity to discuss a payment plan with someone in the Compliance part of the IRS. If your client doubts they can afford to pay the full amount - even under a payment plan - and they have filed all the required tax returns, your client can consider submitting an Offer in Compromise. This lets them offer to pay a lower amount than they owe, to finalize the matter. This type of offer is a bit more complex and there are limitations as to what we can accept. Your Appeals employee can give you more details about this, and give you the forms your client will need to make this type of offer. If your client does not reach an agreement in Appeals, your Appeals employee will inform you as to any further options they may have. We will explain to you the type of appeal you may have, where your appeal will go, how to request any appeal and whether there are any deadlines for making any further appeal requests. In the next few minutes, I will share some specific information about both Examination and TEGE cases. Sub-Topic 2: Examination The Examination function of the Internal Revenue Service is the function principally responsible for ensuring taxpayers comply with the Internal Revenue Code in preparation of their tax returns - primarily individual, corporate, and partnership returns. The examination process results in three possible determinations: an increase to a taxpayer's liability, a decrease to a taxpayer's liability, or no change to the taxpayer's liability. In those cases where the Examination function proposes an increase to a taxpayer's liability, the taxpayer can either agree or disagree with the proposed increase. If the taxpayer disagrees, in most cases, he or she is entitled to have their tax dispute considered by the Appeals function. Most cases coming to Appeals are in a non-docketed status - meaning that no court has jurisdiction of the taxpayer's tax dispute. But, there are times when a case reaches Appeals in a docketed status - meaning a court of law will ultimately decide the taxpayer's dispute if Appeals and the taxpayer are unable to reach a negotiated settlement. There are several types of non-docketed cases that can make their way to Appeals. The first type to consider are those cases where the Examination function has issued a 30-day letter - this letter is accompanied by an examiner's report outlining the proposed adjustments resulting in an increase to taxpayer's tax liability. The taxpayer has 30 days in which to agree to the proposed adjustments or to request an appeal of the proposed adjustments. These type of cases are worked by both field and Campus examiners. The second type of non-docketed cases are denied claims for refund or abatement of an unpaid tax. While these cases are principally considered by Campus examination sites, some cases are considered by field examiners as well. If Examination does not accept the taxpayer's claim, the taxpayer is issued a "legal notice of claim disallowance" which provides both their judicial rights and their administrative appeal rights. If the taxpayer exercises their administrative appeal rights, the two-year period in which to file a suit with the applicable court, is not suspended or extended. A final type of tax dispute coming from the Examination function are tax disputes from taxpayers who requested an audit reconsideration. If the Examination function - normally Campus sites - issues a Statutory Notice of Deficiency and the taxpayer does not respond by filing a petition with the U.S. Tax Court, the proposed increase to the taxpayer's liability will be assessed. If the taxpayer request for an audit reconsideration is granted, yet Examination does not ultimately reduce the tax liability in full or in part, the taxpayer is afforded the opportunity to have the dispute considered by Appeals. While a taxpayer is afforded appeal rights, there are no judicial rights available on this type of case. Normally, Appeals considers only those cases docketed with the U.S. Tax Court. Once a Statutory Notice of Deficiency is issued, the taxpayer has 90 days in which to file a proper petition with the Tax Court. Once the Tax Court accepts jurisdiction of the case, it will be forwarded to the appropriate Counsel office based on where the case will be heard by the Tax Court. If appropriate, Counsel will forward the case to Appeals for the purpose of exploring -7-

8 the possibility of reaching a negotiated settlement prior to the case actually being heard by the Court. Sub-Topic 3: TEGE In contrast to most campus and field examinations, Tax Exempt/Government Entities or TEGE cases - are examined by field examiners only who have specialized in TEGE tax law. To meet this challenge, Appeals also has specialists in TEGE tax law to consider these tax disputes. There are three types of TEGE cases - Exempt Plans, Exempt Organizations, and Government Entities. Within Government Entities, the types of cases considered are -Tax Exempt Bonds; Federal, State, and Local Governments, and Indian Tribal Government. However, the majority of the work comes from Exempt Organizations. Through August 2004, Appeals resolved 26,452 cases coming from the Examination function - field, campus, and TEGE - representing a 42 percent increase in projected resolved cases. Part 3 - Topic 2 - Industry Case (IC) and Coordinated Industry Case (CIC) in Appeals One of the IRS's operating divisions is Large and Mid-Size Business, LMSB. This operating division examines the returns of some of the largest United States corporate taxpayers. Within their program, they've divided their work into two program areas - Industry Cases, IC, and Coordinated Industry Cases, CIC. Coordinated Industry Cases represent the largest of the corporate taxpayer base, and are those taxpayers considered by a team of examiners rather than a single Revenue Agent. In contrast, Industry Cases are the remaining corporate taxpayers with assets of $10 million or more. At any given moment in time, Appeals has before it about 38 Billion dollars in disputed tax; about 33 billion, or 80%, come from the cases originating in LMSB. As a result, these taxpayers provide Appeals with its most challenging and complex work, and present opportunities for innovative approaches like Fast Track Settlement. To meet the challenge, Appeals has designated that CIC cases be given consideration by an Appeals Team Case Leader - referred to as ATCL - and IC cases can be considered by either an ATCL or an Appeals Officer. ATCL's will draw as needed on the expertise of fellow Appeals Officers to form dispute resolution teams for these large cases. When one of these cases includes an issue that has been designated as either high dollar, or has the potential for having high impact, Appeals Team Case Leaders may form Working Panels. These panels consist of up to three ATCLs. These panel members must reach concensus before the issue is resolved with the taxpayer. Factors used to determine whether or not a Working Panel is warranted include: One, the Issue is either an emerging issue or includes developing law or procedures; Two, the issue's complexity; Three, the issue may be precedent setting; Four, the issue affects many taxpayers and/or future years; Five, the issue resolution requires approval of other IRS and/or government organizations; and Six, the issue's materiality. Working panels would generally not be used for: Appeals Coordinated Issue cases; Industry Specialty Program coordinated issues with approved Appeals Settlement Guidelines, because these programs already provide the necessary consistency. Overall, the working panels provide additional settlement safeguards to address internal and external stakeholder concerns regarding high dollar, high impact type cases, and ensure that they are resolved consistently and appropriately. Part 3 - Topic 3 - Innocent Spouse Cases Recall that our mission requires Appeals employees to be fair and impartial to both the government and the taxpayer. This level of independence comes in the form of taking a "fresh look" at specific tax disputes. One form of examination cases is the innocent spouse program. In innocent spouse cases, one spouse is requesting relief from a joint tax liability. We call this taxpayer, the "requesting spouse." There is also another taxpayer, the "non-requesting spouse." In these types of cases, the Appeals mission now asks our Appeals employees to be fair and impartial to the government, the requesting spouse and the non-requesting spouse because each of these three parties to the dispute have their own position. Appeals will review information provided by all three parties to the dispute. Most commonly, Appeals considers requests for innocent spouse relief after the taxes have been assessed, but can also consider requests made prior to the assessment. However, Appeals' primary contact in this type of dispute will be the requesting spouse. But, Appeals will extend an invitation to the non-requesting spouse to participate in the Appeals process. The choice to participate is up to the non-requesting spouse. The circumstances and/or timing of the request for the innocent spouse relief drives these type of relief considered and granted by Appeals. Areas which may require consideration include whether the request was timely, which provision of the tax law is applicable, whether basic requirements have been met, and the weighing of the factors for and against granting relief. Appeals relies on several revenue procedures that provide guidance in administering the innocent spouse provisions, and will look to case law, regulations, and other administrative rulings in arriving at a fair and impartial settlement. When settlement is reached, an agreement form which specifies the amount of the relief to be granted is executed by the requesting spouse. Appeals will send a Notice of Determination to the non-requesting spouse. In agreed cases, the non-requesting spouse has no further appeal rights. If no agreement is reached, Appeals will issue a Letter of Determination to the requesting spouse which allows him or her to file a petition with the Tax Court to consider the denied request for innocent spouse relief. Appeals will also send -8-

9 a Notice of Determination to the non-requesting spouse. While the non-requesting spouse might be invited to participate in the court proceedings for the purpose of providing information, he or she cannot file their own petition with the U.S. Tax Court. Requests for relief that are made for the first time during Appeals consideration of an income tax case or a Collection Due Process case will normally be referred to Compliance for initial determination of whether relief should be granted. If Compliance denies relief, Appeals can then give the issue a "fresh look" as described above. To request this relief, the requesting spouse should prepare and submit Form 8857, Request for Innocent Spouse Relief, to the appropriate function. Additional information can be found in Publication 3512, Innocent Spouse Relief, and Publication 971 also, Innocent Spouse Relief. Now, let's take a look at Penalty Appeals. Part 3 - Topic 4 - Penalty Appeals To encourage compliance with the tax law, Congress has passed numerous pieces of legislation with the sole purpose of assessing some kind of penalty for a taxpayer's failure to meet his or her tax obligation. Appeals receives two basic types of penalty appeal cases - those where the taxpayer requested abatement of assessed penalties - or post-assessment penalty appeals - and those penalties proposed as the result of an examination - or pre-assessment penalty appeals. Generally, most requests are for post-assessment penalty appeals where the taxpayer is requesting abatement of such penalties as failure to file, failure to pay, and failure to deposit penalties. If Appeals is unable to resolve the penalty abatement cases, the taxpayer can pay the penalties and file a claim for a refund. The refund request will be denied and the taxpayer will then have two years in which to file suit in either the U.S. District Court or the Court of Federal Claims. In contrast, pre-assessment penalty appeal cases include such penalties as failure to file, accuracy-related, fraud, valuation, preparer, and trust fund recovery penalties. In general, these penalties are subject to Statutory Notice of Deficiency procedures that allow U.S. Tax Court to take jurisdiction of the penalties along with other examination adjustments. Much like examination adjustments, in considering both types of penalty appeal cases, Appeals looks to the law to determine basis for abatement. For example, the failure to file penalty applies..."unless it is shown that such failure is due to reasonable and not due to willful neglect." In applying the law to the taxpayer's circumstances, Appeals considers not only the law, but also the treasury regulations and applicable case law to determine if there are hazards of litigation upon which to base a settlement. This brings us to the end of the lesson. Up next in lesson 4, we will cover the Major Program Areas of Collection. Part 4 - Topic 1 - Introduction to Collection Hello. Before your client's conference or hearing, I'd like to tell you what you can expect during the collection appeals process. Since the process is the same whether you will be discussing your client's case with an Appeals Officer or a Settlement Officer, I'll use the term Appeals employee from now on. In Appeals, we work with you informally to try and settle tax disputes and resolve collection issues without the need for a formal court hearing. We're successful in resolving most of the cases we hear. We will fully consider your client's position and arguments, along with the government's position. We strive to resolve disputes in a way that is fair and impartial to both parties. We hope that you and the Appeals employee will be able to resolve your client's case in Appeals. Further, we hope to help your client to arrange to pay whatever he or she might owe. One of our goals is to schedule a prompt conference or hearing. If we can't resolve your client's case at this initial conference, we will make every effort to complete the case quickly and efficiently. Your Appeals employee will give your client's case regular attention so that it progresses steadily through the system. If for some reason you need us to expedite your client's case, discuss this with your Appeals employee so the two of you can work together to set shorter deadlines as needed. You may have already had some discussion or correspondence with the Appeals employee to prepare your client's case. You may have discussed additional evidence or documents you will need to provide. Remember that while Appeals is considering the case, interest continues to add up on any unpaid balance owed. The Failure To Pay penalty may also apply. So it is in your client's best interest to provide any additional evidence to Appeals as soon as requested. During the appeal process, you will review the facts with the Appeals employee, and we will discuss with you how the law and procedures apply to the facts of your client's case. We may discuss decisions the courts have made when they ruled on cases similar to yours. No matter how your case came to Appeals, after you complete your discussions with the Appeals employee he or she will recommend to the Appeals Team Manager how the case should be closed. It is the Appeals Team Manager who approves the final outcome of the case. After reviewing the file, the manager will approve the case if the resolution is appropriate, or return it to the Appeals employee if additional work or consideration is needed. The IRS can collect amounts owed to the Government in several ways. One of these is an installment agreement, which allows a taxpayer to pay the amount due over a period of time. Another is an offer in compromise, which, if accepted, allows a taxpayer to pay less than the amount due to settle the case. Two others are a levy action or, the filing of a notice of federal tax lien. A levy is a legal seizure of property, such as -9-

10 cash, wages or bank accounts to satisfy a tax debt. A lien gives the government a claim to property as security or payment for a tax debt. A Notice of Federal Tax Lien notifies the public that the government has such a claim. Any of these methods can be used to collect the debt. The way we consider your case will depend on how your case came to Appeals. In the next minutes, this DVD will present four different procedures for appealing collection actions. These are: the Collection Appeals Program, CAP; Collection Due Process, CDP; Offers in Compromise; and Trust Fund Recovery Penalties. For more information on this topic, please see Publication Collection Appeal Rights. Part 4 - Topic 2 - Collection Due Process (CDP) Collection Due process hearings, often referred to as CDP, account for about one-third of Appeals case receipts, and represent the largest portion of our Collection-related work. These cases have come to Appeals only since 1999, after RRA '98 passed into law some sweeping changes to the rights taxpayers have with respect to certain collection actions. Congress's intent with this legislation was threefold: To provide taxpayers with the same protections already in existence for other creditors, To provide adequate notice of collection activity, and To provide a meaningful hearing before the IRS deprives them of their property. What types of collection actions qualify for a CDP hearing? Taxpayers are entitled to collection due process hearings in two situations. First, a taxpayer may request a CDP hearing after a Notice of Federal Tax Lien is filed. Procedures require that the IRS notify the taxpayer of the lien filing within 5 days of its filing. The taxpayer then has 30 days in which to request a hearing in writing. Second, a taxpayer is entitled to a CDP hearing after Compliance issues a Notice of Intent to Levy. Either the Automated Collection System, ACS, or a revenue officer may issue a notice of intent to levy. This notice is normally issued before the levy action is taken. Again, the taxpayer has 30 days in which to request a hearing in writing. Exceptions to issuance of the notice before the levy action is taken are state income tax refunds and situations where collection of the tax is determined to be in jeopardy. If the taxpayer timely requests a Collection Due Process hearing, the collection statute is suspended and the taxpayer has the right to request judicial review of the Appeals determination in their CDP case. Written requests that are received late - that is, outside of the 30-day period - are still considered by Appeals as Equivalent Hearings. In equivalent hearings, the collection statute is not suspended and the Appeals decision is final. How does a taxpayer request a CDP hearing for Appeals consideration of the disputed collection action? The request for a Collection Due Process hearing must be made in writing, and must include the taxpayer's name, address, daytime phone number, signature, and date. We recommend that taxpayers complete and return Form 12153, Request for Collection Due Process Hearing provided, it includes all of the necessary information. This form is provided with the notice that tells the taxpayer that they are entitled to a hearing. During Appeals consideration, what happens with the collection action? Since the notice of federal tax lien has already been filed when the taxpayer is notified of the applicable CDP rights, requests for such a hearing have no immediate effect on this collection action. In contrast, levy action is suspended during the period of time that Appeals is considering the taxpayer's timely request for a CDP hearing relating to a notice of intent to levy. In equivalent hearing cases, Collection can move forward on the levy if they determine collection of the tax is in jeopardy. Who conducts the hearing? A Settlement or Appeals Officer who has not previously been involved with the tax liability covered by the CDP notice conducts the CDP hearing. If there has been prior involvement, however, the taxpayer can waive this restriction by signing Form What does Appeals consider? There are three main issues that Appeals considers in each CDP or equivalent hearing. The first is a review of the complete history of collection actions that ensure that Compliance followed all required legal and administrative procedures. For example, did they issue the notice of intent to levy in accordance with the law? Did they notify the taxpayer as required that the notice of lien was going to be filed, and issue the notice of hearing timely? Second, the Appeals employee will consider all issues raised by the taxpayer - request for innocent spouse relief, whether the proposed taken collection action is appropriate, and whether there are appropriate collection alternatives. Finally, the Appeals employee will balance the need for efficient tax collection with the taxpayer's legitimate concerns about the intrusiveness of the proposed collection action. What types of issues can the taxpayer raise? The Appeals employee will consider any relevant issue relating to the unpaid tax or the propose levy, including appropriate spouse defenses, challenges to the appropriateness of the collection actions; and offers of collection alternatives. Appeals evaluates these challenges and alternatives in accordance with the relevant statutes and administrative procedures. For example, a Notice of Federal Tax Lien cannot be released unless the tax liability is fully paid or it is legally unenforceable or a bond is accepted. Appeals has no other authority to release the lien. On the other hand, withdrawing the lien is possible but discretionary, and it means the Government loses its priority position. Internal Revenue Code Section 6323(j) describes four situations in which the IRS has the authority to withdraw the notice of lien, so Appeals considers whether one of these factors applies before it determines that it should be withdrawn. In addition, IRC section 6330 requires Appeals to evaluate collection alternatives offered by the taxpayer. The statute specifically mentions posting of a bond, installment agreements, offers in compromise, and substitution of other assets.. By far, the most common alternatives proposed are installment agreements and offers in compromise. A basic requirement -10-

11 for these alternatives is that the taxpayer has filed all required tax returns prior to the hearing. It may be necessary for the taxpayer to submit either Form 433-A and/or Form 433-B, Collection Information Statements, for Appeals to explore whether the taxpayer qualifies for these collection alternatives. If the taxpayer's financial situation is complex or asset values need to be verified, Appeals may ask Compliance to conduct such an investigation and send them a report. Finally, the Appeals employee will consider challenges to the liability only if the taxpayer did not receive a notice of deficiency or otherwise have an earlier opportunity to dispute the liability before Appeals. For example, if the taxpayer received a Letter 1153 informing him or her of a proposed trust fund recovery penalty and did not appeal that proposal at that time, Appeals does not have the authority to consider whether the taxpayer is liable for the penalty during the CDP hearing. What can you do if the liability issues cannot be raised during the CDP hearing? The first issue is to determine how the liability came into existence. If the Examination division completed an audit and issued a Statutory Notice of Deficiency and the taxpayer failed to petition the U.S. Tax Court, the tax on the Notice will be assessed. The taxpayer can follow the procedures contained in Publication 3598, What You Need to Know About the Audit Reconsideration Process, to dispute the assessed tax liability. If the taxpayer makes such a request and Examination does not accept the taxpayer's position, the taxpayer will have the opportunity to request the case be forwarded to Appeals for consideration of the issues raised during the audit reconsideration process. Another alternative is for the taxpayer to submit an offer in compromise based on the doubt as to liability. This type of offer does not require payment of the $150 filing fee, and the case will be forwarded to the Examination function for consideration. If that Compliance function does not agree with the taxpayer, the taxpayer is entitled to have the offer considered by Appeals. In both situations - audit reconsideration and offer based on the doubt as to liability - the taxpayer has no further appeal rights beyond the administrative appeal offered by the Appeals function. What must Appeals do after it holds the CDP or equivalent hearing? If you and the Appeals employee reach agreement about your case, you will be asked to sign an agreement form, Form At the end of the hearing, Appeals issues a Notice of Determination or Decision letter after the hearing is finished. These notices describe what was considered in the hearing, the issues the taxpayer raised and how Appeals evaluated them, and how it balanced the need for efficient collection of taxes with the intrusiveness of the collection action. The Notice of Determination after a CDP hearing also identifies in which court the taxpayer may file for judicial review. For complete information about Collection Due Process hearings, Please refer to the Regulations at 26 CFR and 26 CFR Part 4 - Topic 3 - Offer In Compromise Internal Revenue Code Section 7122 gives the Secretary of the Treasury the authority to compromise any tax debt owed to the government. If the government accepts the offer in compromise, the taxpayer pays less than the full amount due to settle their case. Sub-section (d) gives taxpayers the right to appeal the rejection of an offer in compromise to the Office of Appeals. Offers in compromise now represent the second largest collection-related program in Appeals. They account for almost 20% of the cases Appeals resolved in Fiscal Year What basis can a taxpayer use to request an offer in compromise? There are three bases on which a taxpayer can compromise a tax debt: Doubt as to liability, doubt as to collectibility, and effective tax administration. In a doubt as to liability offer, the taxpayer does not agree that he or she owes the tax. Generally, the Examination function considers this type of offer and the taxpayer is not required to pay an offer filing fee. Exceptions are offers submitted to compromise a Trust Fund Recovery Penalty or personal liability for excise tax, which are considered by the Collection function. If the taxpayer agrees the tax is owed, but doesn't believe they can fully pay the balance due, the taxpayer can file an offer based on doubt as to collectibility. This type of offer is initially considered by the Collection function and requires payment of the $150 offer filing fee. A taxpayer may file an offer based on both doubt as to liability and doubt as to collectibility. In these combination offers, the liability issues will be considered first, either by the Examination or Collection functions, depending on the type of tax. If it's determined that the taxpayer is not liable for the tax, there is no reason for a complete investigation of the taxpayer's financial situation. If the investigating employee determines the taxpayer is liable for the tax, the case is forwarded to the Collection function to consider whether the tax liability is in fact collectible. The final type of offer is one based on Effective Tax Administration. The question that begs an answer in this type of offer is... Will accepting this offer promote effective tax administration? For example, on paper, the taxpayer can full pay the liability, but circumstances exist that with the acceptance of the offer, the public will be confident that the tax laws were administered fairly and in an equitable manner. Compromising the tax liability could promote effective tax administration because either: One, collection of the liability would create economic hardship, or Two, compelling public policy or equity considerations provide a sufficient basis for compromising the liability. If any of the above offers are rejected by either the Examination or the Collection function after an independent administrative review, the taxpayer will receive an explanation of all available appeal rights. When and how to make a request for an offer appeal? A written and signed request for appeal must be made within 30 days of the offer rejection letter. Appeals does not have the authority to consider offer in -11-

12 compromise appeals submitted after the 30-day period. Normally, the IRS will take no levy action while the offer appeal is pending. In addition, the Collection statute is suspended during the appeals process. What does Appeals consider? Appeals considers the same administrative guidelines and requirements that Collections relies on. However, the appeals process offers an opportunity for a "fresh look" at the computation of Reasonable Collection Potential. Reasonable collection potential is defined as the amount collectible from the taxpayer's equity in assets and net monthly income over a specified time period, which depends on how the taxpayer intends to pay the offered amount. Appeals will use their settlement authority in offers filed based on the doubt as to liability. Appeals also considers offers in compromise that are submitted as a collection alternative in collection due process hearings. If the taxpayer submits an offer to the Appeals employee as part of a Collection Due Process hearing, the Form 656, Offer in Compromise, must be properly prepared and the required documentation attached. The taxpayer must submit either Form 433-A and/or Form 433-B, Collection Information Statements, for Appeals to explore whether the taxpayer qualifies for this collection alternative. For an offer to be processed, the taxpayer must have filed all required tax returns and paid the necessary estimated taxes. An offer will not be considered if the taxpayer is in bankruptcy. If employment tax is owed and the taxpayer is still in business, the taxpayer must have timely paid all taxes and filed all required tax returns during the preceding two quarters and paid all deposits due during the quarter in which the offer is being submitted. Finally, for doubt as to collectibility offers, the processing fee of $150, implemented in November 2003, must also be attached. If the taxpayer's financial situation is complex, or asset values need to be verified, Appeals may ask Compliance to conduct such an investigation and send them a report. Based on this investigation, the Appeals employee will determine whether the offer is acceptable as submitted, the offer amount needs to be raised, or the offer needs to be rejected. Whether Appeals decision is final is based on the source of offer consideration. In an equivalent hearing, or an offer rejection that is being sustained, Appeals' decision is final. In a CDP hearing, the taxpayer whose offer has been rejected as a collection alternative has the opportunity for judicial review based on an abuse of discretion standard. For complete information on this topic, please refer to Regulations sections Part 4 - Topic 4 - Collection Appeals Program (CAP) So, what is the Collection Appeals Program, or CAP? This program was designed to provide a very quick response to a taxpayer's request for consideration of specific collection actions. For most issues, our procedures call for a case decision within 5 days, when it's returned to Compliance. If you or your client cannot meet with Appeals within that timeframe, Appeals will return the case back to the Collection function. What types of collection actions qualify for a CAP? A proposed or filed notice of federal tax lien. This notice puts the public on record that the government has a claim to property as security or payment for a tax debt. A proposed or taken levy action. A levy action is a legal seizure of property, such as cash, wages, or bank accounts to satisfy a tax debt taken from a third party. A proposed or taken seizure action. A seizure refers to the taking of property in the taxpayer's possession to satisfy a tax debt. A rejected installment agreement. There are times when Collection will reject a taxpayer's request for an installment agreement, most often because they believe the taxpayer's request does not reflect their ability to pay the tax liability. Taxpayers may appeal these rejections through the CAP program. A proposed termination or termination of an installment agreement. Once a taxpayer is granted an installment agreement, the agreement will remain in effect as long as the taxpayer meets the terms of the agreement. For example, if the taxpayer stops making the required payments, he or she will be notified that the installment agreement will be terminated. Under a CAP, the taxpayer is entitled to meet with an Appeals employee to discuss the proposed termination. Additionally, the taxpayer can appeal under CAP rejected requests for discharge of liens, subordination of liens, certificates of non-attachment, third-party claims to property, alter ego and nominee liens, and rejected requests for withdrawal of lien. How does a taxpayer request Appeals' consideration of the disputed collection action under CAP? Prior to a case being transferred to Appeals under CAP, he or she must try to resolve the dispute with the IRS employee's manager. If they can't resolve the issue, the taxpayer must submit Form 9423, Collection Appeal Request, if the case is assigned to a Revenue Officer, or make an oral request if the case is assigned to a Campus site. During Appeals' consideration, what happens with the collection action? Levy action is administratively withheld unless collection is determined to be at risk for a lien, levy, or seizure appeals. Levy action is suspended by law if a rejected or terminated installment agreement is appealed within 30 days of notification of the rejection. A word of caution - Issues raised under CAP cannot be raised in a later Collection Due Process, CDP hearing, about the same tax liability. Part 4 - Topic 5 - Trust Fund Recovery Penalty A Trust Fund Recovery Penalty case originates with the Collection function in the Small Business/Self-Employed Division. A Revenue Officer initially pursued collection of outstanding employment taxes assessed against the employer; typically a -12-

13 corporation. The corporation did not pay its employment taxes. Internal Revenue Code Section 6672 permits the IRS to assess a penalty against any person required to collect and pay employment taxes. After a thorough investigation, the Revenue Officer made the determination that an individual or individuals, for example, officers of a corporation, sole proprietor, etc., should be personally liable for the payment of the withheld portion of the employer's unpaid employment taxes. Through Letter 1153, the collection function notifies the person of the penalty proposal, and their right to appeal it. Generally, Trust Fund Recover Penalty cases are forwarded to Appeals prior to assessment of the penalty. Appeals considers two points of law in Trust Fund Recovery Penalty cases. First, whether or not the evidence demonstrates that the individual was a responsible person in terms of timely paying the employment taxes owed. Second, did that individual willfully fail to pay over the employment taxes? Appeals employees consider these cases in the same way as other issues where the taxpayer can challenge that assessment in a court of law, which is to include an independent analysis of the hazards of litigation. Appeals considers the following factors in determining whether or not the penalty applies to an individual: Is the individual a responsible person? and Did the individual willfully fail to pay over the withheld taxes? Some factors that demonstrate whether or not an individual is a responsible person are: Is the individual an officer of the corporation or member of the Board? Does the individual own substantial stock? Does the individual serve as a day-to-day manager? Does the individual have the authority to hire and fire? Does the individual make decisions as to disbursements of funds and payments to creditors? Does the individual have the authority to sign checks? Does the individual actually sign checks? If agreement is reached, the taxpayer will be asked to sign an agreement form. If agreement is not reached, the amount of the Trust Fund Recovery Penalty will be assessed individually against the taxpayer. The taxpayer has no further appeal rights at this point. However, if the taxpayer pays one quarter of employment taxes for one employee for one payroll period, he or she can then file a claim for refund. This claim will be denied and the taxpayer will be issued a legal notice of claim disallowance. This claim disallowance also explains the taxpayer's right to file suit in either the U.S. District Court or the Court of Federal Claims to contest the Trust Fund Recovery Penalty. Well, this brings us to the end of this lesson. Up next - Alternative Dispute Resolution. Part 5 - Topic 1 - Introduction to Alternative Dispute Resolution Both you and your client, the Internal Revenue Service, and the Appeals organization want to resolve tax disputes as quickly as possible. All parties benefit by getting to the right answer earlier in a tax dispute, rather than later. Traditionally, Compliance makes a determination that affects either a taxpayer's tax liability and/or the balance due. If the taxpayer has appeal rights in those situations, these are fully explained. If the taxpayer requests an appeal of the tax dispute, Compliance administratively closes the case to Appeals and an Appeals office receives that case, where a team manager assigns it to an Appeals employee to consider. This case goes into the Appeals employee's inventory and the case will be worked on a first-in/first-out basis as much as possible. Once the Appeals employee considers the case and discusses it with the taxpayer, it will either close agreed or unagreed. If it closes unagreed, in many cases, the taxpayer has the right to request the U.S. Tax Court to consider their tax dispute. As you can well imagine, much time has gone by after Compliance completes the work on the case, it's forwarded to Appeals, and the Appeals employee completes work on the tax dispute. Even more time is added if the case becomes docketed in the U.S. Tax Court. In this scenario, it's not uncommon that a taxpayer might wait more than a year to get the tax dispute resolved. Taxpayers, and their representatives, tell us these processes take too long. That's true of the IRS in general, but it's also true with the Appeals process. How would you or your client feel if there were dispute resolution strategies available that would reduce the normal length of time... from the beginning of Compliance through dispute resolution? Alternative Dispute Resolution tools shorten the overall process, reduce taxpayer burden, and avoid costly litigation. Alternative Dispute Resolution, or ADR, is an example of an initiative that clearly focuses on customer service. Appeals' current effort to extend dispute resolution options are targeted primarily towards what we call early intervention - trying to resolve disputes while the cases remain in Compliance's jurisdiction. An example of this is Delegation Order In general, delegation order 4-25 delegates settlement authority to both LMSB Team and Small Business/Self-Employed Territory Managers with the concurrence of the Appeals ISP or ACI Coordinator and Compliance's Technical Advisor. It is available for both industry specialization program or Appeals Coordinated Issues cases with approved Appeals settlement guidelines. Other Alternative Dispute Resolution options that focus on early intervention are Early Referral, Fast Track Mediation, and Fast Track Settlement. We'll talk about these separately. In addition, we'll discuss post-appeals mediation and arbitration, which take place after Appeals considers the case. Part 5 - Topic 2 - Early Referral One of the first ADR processes that Appeals developed was early referral. It was codified in the Restructuring and Reform -13-

14 Act of 1998, and in Revenue Procedure In early referral, a taxpayer can send certain income tax, employment tax, and collection issues to Appeals for consideration, even though the rest of the case stays with Compliance. The Collection Appeals Program, known as CAP, was one of the first examples of an early referral program. Several factors need to be present before an issue is sent to Appeals via early referral: First, the issue must be fully developed by Compliance. Second, both the taxpayer and Compliance must agree that it should be referred. And last, the parties can reasonably expect that the referred issue would be resolved before the rest of the case or other issues would be sent to Appeals through the traditional process. In early referral, Appeals actually takes jurisdiction of the particular issue, so you cannot raise the same issue again even if the rest of the case comes later. This is the reason why you cannot raise an issue in a Collection Due Process hearing that you raised earlier in a CAP case. It's also the reason why our Fast Track Options are more popular. But, early referral can make more sense in certain situations. One of these would be that the relationship is such that you don't believe you can work with the revenue agent or team that has the issue in Compliance. Then the fresh eyes of an Appeals Officer with exclusive responsibility for settling the issue might seem like your best option. Part 5 - Topic 3 - Fast Track Mediation Before I begin sharing some important information about Fast Track Mediation, let's consider the term "mediation." Picture a third-person who serves as a mediator between two parties. This mediator is neutral on the issues, practices confidentiality, and does not impose a decision on the parties to the dispute. The mediation process brings the parties together and the mediator facilitates communications. Their goal is reaching a resolution agreeable to both parties. Recall that if mediation is not successful, either party can terminate the mediation meeting, and the taxpayer retains full appeal rights. So, what is Fast Track Mediation? Fast Track Mediation is designed to help Small Business/Self-Employment taxpayers resolve many disputes resulting from examinations, offers in compromise, trust fund recovery penalties, and other collection actions. Your case itself stays with SB/SE Compliance. An Appeals or Settlement Officer, who has been trained in mediation, helps you and the IRS discuss the issues involved in your disagreement and possible ways to resolve it. The goal is to reach a jointly agreeable solution, consistent with relevant law, within forty days. The mediator will not require either party to accept a certain outcome. You, and the IRS representative, must sign an agreement to mediate before the first mediation session. You don't have to file a written protest to request Fast Track Mediation. Most cases that are not docketed in any court qualify for Fast Track Mediation. Some of the excluded cases are: Issues with no legal precedent; Issues where the courts' decisions differ between jurisdictions; Campus and Automated Collection System cases; Collection Appeals Program cases; Those with only frivolous arguments. A significant area where mediation might be appropriate is in field-originated offers in compromise. Mediation in offers will be considered only after an offer specialist has fully developed the case facts, and made a reasonable attempt to negotiate an acceptable offer. Mediation, when appropriate, will be offered before a proposed offer rejection is referred to the independent administrative reviewer. Some of the issues that are appropriate for mediation are: The value of an ongoing business' good will; Artwork with collector or sentimental value; Value of any assets, including real estate; Projections of future income based on calculations other than current income; Whether assets are held as nominee or transferee of a taxpayer; Taxpayer's proportion of interest in jointly held assets; and Calculation of ability to pay from future income when expenses are shared with a non-liable person. SB/SE will generally not agree to mediate in the following situations: When the taxpayer has the ability to pay in full, based on the financial data submitted by the taxpayer with the offer; When the taxpayer declines to increase the amount offered, and does not indicate disagreement with the values, figures, or methodology used to arrive at the increased amount; When the issue is explicitly covered by procedural guidance, for example, unsecured debt, college expenses, nor non-qualifying contributions; or Rejection is based on public policy. For mediation to succeed, all the decision makers must be present. You may represent yourself at the mediation session, or you may officially appoint someone to act for you. You can bring anyone else you choose with you to support your position. You may withdraw from the mediation process at any time. You retain all of the usual appeal rights for any issues that do not get resolved through Fast Track Mediation. Fast Track Mediation Process This process is informal, Agreement to mediate - Both parties, Compliance and taxpayer, must agree to mediate and sign the Agreement to Mediate form. Mediation is not a substitute for the taxpayer's right to a conference with the employee's manager. Taxpayers who express an interest in mediating must first request a conference with the group manager. The opportunity to mediate will be granted only after the first line manager has reviewed the case, and determined that the issues in dispute might be resolved in mediation. Both the group manager and the territory manager must agree before an Agreement to Mediate can be rejected. If accepted, the Appeals team manager will assign the case within two days of receipt. Compliance will prepare a brief summary of the issues. No formal protest is required from the taxpayer, but they are welcome to provide their own statement of how they see the issues. An Appeals Settlement Officer, trained in mediation, serves as a neutral mediator without settlement authority. A mediator facilitates discussion of all issues. A facilitator helps to develop options for solutions. And a mediator facilitates -14-

15 communication at a neutral location. He or she does not exercise settlement authority, nor serve as the arbitrator. A mediator contacts decision makers within five days of assignment. For FTM to succeed, all decision makers must attend the mediation session. So, what happens at the end? If the issues are resolved, Compliance uses standard closing procedures. FTM is not binding, and either party may withdraw. If the issues remain unresolved, the taxpayer may exercise their traditional appeal rights. For additional information, please see Revenue Procedure , Fast Track Mediation. Part 5 - Topic 4 - Fast Track Settlement What is Fast Track Settlement? Well, Fast Track Settlement is designed to help Large and Mid-Size Business, or LMSB, taxpayers expeditiously resolve tax disputes during an examination while their case is still in LMSB Compliance. Fast Track Settlement brings Appeals resources to the audit site to resolve the dispute before the 30-day letter is even issued. A specially trained Appeals Officer facilitates the discussion between you and the LMSB team manager to reach and execute a settlement with which you both agree. The goal of the program is to get cases agreed at the earliest possible time. Often it's just a few contentious issues that hang up the whole process. So, if you can carve these out, and send them to fast track, and get them settled, it's much easier to get the entire case resolved in Compliance. The results of Fast Track Settlement represent significant savings for both the taxpayer and the government. Cycle time savings throughout the program average almost two years, and taxpayers benefit from earlier certainty and from fewer resources being used. Time applied per case is also much lower. More importantly, however, taxpayers consistently tell us that the same answer is reached, just more quickly, with Fast Track Settlement over the traditional appeals process. You may request Fast Track Settlement after Form 5701, which is the Notice of Proposed Adjustment, has been issued and you provide a written response. It is available for factual and legal issues, including listed transactions, Appeals Coordinated Issues, Industry Specialization issues, and issues that require consideration of the hazards of litigation. The benefits with Fast Track Settlement include the following: There's only a simple 1-page application; Consideration of the hazards of litigation; Gets you an answer within 120 days; There's no 'hot' interest under Code Section 6621; You may withdraw from the process at any time; You retain all traditional appeals rights; It significantly shortens your IRS experience; and Involves only one tax computation. Why does Fast Track Settlement work? Well, mediation changes parties' relationships; decision makers and experts are in the same room, and it gives both parties more control and satisfaction. There are fewer forms, it starts fast, builds momentum, it gets an acceptable answer, and allows for a range of options to reach settlement. Compliance, taxpayer, and Appeals must all agree on the settlement before it gets approved. If any one of the parties does not agree, it won't happen. One question often asked concerns ex parte provisions; they don't apply because the process remains in LMSB jurisdiction. If Fast Track Settlement doesn't work, and the taxpayer exercises their traditional appeal rights, the ex parte provisions would apply. Which cases are appropriate for Fast Track Settlement? Well, they'd be ones in which the taxpayer is motivated to settle; Where the issue is fully developed; Where Compliance has issued the Form 5701; and The taxpayer has provided written response. Complete information regarding Fast Track Settlement can be found in Revenue Procedure Look for an extension of Fast Track Settlement to Small Business/Self-Employed taxpayers based on the success of the program. Part 5 - Topic 5 - Post Appeals Mediation Post Appeals Mediation is essentially an extension of the Appeals process. Just as the traditional process resolves many tax disputes, Post Appeals Mediation resolves about the same percentage of unagreed Appeals cases. The mediator's role is to help resolve a dispute only after good faith negotiations in Appeals have been unsuccessful. Mediators can come from Appeals, or you can use non-irs co-mediators, but at your own expense. You may request mediation if you are already in the Appeals administrative process with any qualifying issues, and your case is not docketed in any court. It is available for both factual issues, such as valuation and transfer pricing issues, and legal issues. There are no dollar limitations. Qualifying issues include Industry Specialization Program and Appeals Coordinated Issue cases. It is also available for an issue for which you intend to seek competent authority assistance, provided you have not yet filed the request; and after unsuccessful attempts to enter into a closing agreement under Internal Revenue Code Section Some of the cases excluded from Post Appeals Mediation are: Most collection issues; Those not consistent with sound tax administration; Frivolous arguments; and Those where the taxpayer did not act in good faith during settlement negotiations. Mediation is optional. You and an Appeals Team Case Leader or Appeals Officer may request mediation after consulting with each other. You initiate mediation by sending a written request to the appropriate Appeals Team Manager, with a copy to the Area Director and the Chief, Appeals. Mediation is a non-binding process that uses the services of a mediator, as a neutral third-party, to help Appeals and the taxpayer reach their own negotiated settlement. To accomplish this goal, the mediator acts as a facilitator, helps to define the issues, and promotes settlement negotiations between Appeals and the taxpayer. The mediator will not have settlement -15-

16 authority in the mediation process and will not render a decision regarding any issue in dispute. If you, your client, and Appeals do not reach agreement through mediation, under certain circumstances arbitration or litigation are available. For complete information please see Revenue Procedure , Mediation. Part 5 - Topic 6 - Arbitration The final alternative dispute resolution tool is binding arbitration. Arbitration involves a neutral third-party who resolves the issue once all of the evidence and arguments have been put forward. Appeals modified and extended the test of the binding arbitration procedure set forth in Announcement We're still receiving cases under this announcement. This procedure allows taxpayers to request binding arbitration for factual issues that are already in the Appeals administrative process. The taxpayer and Appeals agree to be bound by the arbitrator's findings, which will be incorporated into an Appeals closing agreement that the taxpayer and Appeals execute. Neither the taxpayer nor Appeals may appeal the findings for the arbitration nor contest the findings in any judicial proceeding, including, but not limited to, the United States Tax Court, United States Court of Federal Claims, or a federal district court or federal appellate court. Arbitration is only available after Appeals settlement discussions are unsuccessful, and when all other issues are resolved but for the specific factual issue for which arbitration is being requested. Binding arbitration is not available for the following cases: Cases where arbitration is not appropriate under Title 5 of the U.S. Code; An issue designated for litigation or docketed in any court; An Industry Specialization Program issue, or an Appeals Coordinated Issue; or An issue for which the taxpayer has filed a request for competent authority assistance. While not the most popular ADR program due to its finality, it represents a real option for taxpayers who don't want their tax dispute made public. For additional information, please see Announcement , Arbitration. Closing Thanks for taking the time to watch this DVD. We hope that it helps you better understand your options if you disagree with an IRS Compliance action. For additional information on any of the topics we've covered, please visit our website. Thanks again for joining us. -16-