IRS Administrative Appeals Process Procedures Charles P. Rettig Avoiding litigation is often the best choice for a client. The Administrative Appeals process can make it happen. Charles P. Rettig, a partner with Hochman, Salkin, Rettig, Toscher & Perez, PC, in Beverly Hills, California, has represented clients before the IRS, the Tax Division of the U.S. Department of Justice, before numerous state taxing authorities and in federal and state court litigation and appeals. He has long been appointed by various Federal and state taxing authorities to their Advisory Boards and has often been invited to lecture to IRS and other government representatives regarding the accountability of both government and private tax practitioners to the public as well as to our tax system. His ongoing efforts have earned him tremendous respect throughout the government and private tax practitioner communities. He has also served as Chair of numerous national, state, and local professional organizations, is a frequent lecturer before such professional organizations, and is a regular columnist and author in various national tax-related publications. He is a Certified Specialist both in Taxation Law and in Estate Planning, Trust & Probate Law (The State Bar of California, Board of Legal Specialization) admitted to practice law in California, Hawai i and Arizona (inactive), specializing in Federal and state civil tax and criminal tax controversy matters and tax litigation, including tax-related examinations and investigations for individuals, business enterprises, partnerships, limited liability companies, and corporations. I. Appeals Generally A. Mission of IRS Appeals. Mission Statement: 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 and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the service. A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in event of litigation, or one which reflects mutual concessions for the purpose of settlement based upon relative strength of the opposing positions where there is substantial uncertainty of the result in the event of litigation. B. What Can You Expect from Appeals? The mission of Appeals is to settle tax disagreements without having to go to court for a formal trial. Appeals is independent of any other IRS office and provides a venue where disagreements concerning the application of tax law can be resolved on a fair and The Practical Tax Lawyer 5
6 The Practical Tax Lawyer Winter 2014 impartial basis for both the taxpayer and the government. An Appeals or Settlement Officer will review the strengths and weaknesses of the issues in the case and give them a fresh look. Appeals conferences are conducted in an informal manner, by correspondence, telephone, or in person. Most differences are settled in these conferences without expensive and time-consuming court trials. C. Jurisdiction To Resolve Civil Tax Disputes The Appeals Office obtains jurisdiction following an adverse determination by the Compliance vision resulting in: 1. Issuance of a Revenue Agent s Report (30-Day Letter) followed by the filing of a timely Protest by the taxpayer; or 2. Issuance of a Statutory Notice of Deficiency (90-Day Letter) and the timely filing of a Petition to the United States Tax Court when a matter has not previously been assigned to the Appellate Division; 3. Chronological listing of what happens once Compliance examines the taxpayer s return. If... Then... Compliance examines selected tax returns usually a preliminary (30 or 60 day) letter is issued. Taxpayer does not agree with proposed adjustments by Compliance Taxpayer does not agree with Compliance s proposed adjustments AND does not request an appeal A Tax Court Petition is filed request an appeal. no Tax Court Petition is filed in response to the notice or letter. he/she may request an Appeals conference. generally a notice of deficiency (90- or 150- day letter) or other final notice or letter providing U.S. Tax Court rights is issued. compliance makes a default assessment based upon the findings in the notice or letter. the case is routed from Compliance through Appeals to Area Counsel to file an answer in response to the petition. The petition is answered counsel returns case to Appeals for settlement consideration.
IRS Administrative Appeals 7 No settlement is reached preparation. appeals returns case to IRS Counsel for trial Appeals also receives Exempt Organization cases when adverse action is proposed on an organization s exempt status or private foundation classification, and Employee Plans cases involving an employee plan s qualification. D. Responsibility of IRS Appeals: 1. Administrative determination of liability for income, estate, gift, employment and excise taxes, plus penalties; 2. Review of collection actions; 3. Penalty appeals; 4 Abatement of interest; 5. Administrative costs under section 7430; 6. Jeopardy assessment levies; 7. Settlement offers in tax refund suits; 8. Refund actions in which the taxpayer appeals the decision of the Compliance Division. E. Authority To Resolve Cases 1. Non-docketed cases: a. Exclusive settlement authority before the issuance of a Notice of Deficiency; b. Appeals may receive authority to resolve a case after issuance of a Notice of Deficiency unless the case has been calendared for trial in the Tax Court. 2. Docketed cases: a. If a matter is pending in the Tax Court, settlement authority is divided between IRS Counsel and the Appellate Division; b. Cases docketed with the Tax Court are generally referred by IRS Counsel to Appeals for settlement unless the Notice of Deficiency was issued by Appeals. If a matter is calendared for trial or if there is no progress toward settlement, it will be returned to IRS Counsel. If settlement is reasonably expected, Appeals has the sole settlement authority; c. If a case is calendared for trial, IRS Counsel has exclusive settlement authority. II. Preparing A Request For Appeals Filing A Protest A. Small Case Request If the total amount for any one tax period is $25,000 or less, a small case request can be filed (instead of a written protest). Send a letter requesting Appeals consideration. Indicate the changes you do not agree with and the reason you don t agree. For specific guidance in preparing a small case request/protest, refer to IRS Form 12203, Request for Appeals Review.
8 The Practical Tax Lawyer Winter 2014 B. Formal Written Protest Prepare a formal written protest for all of the following situations: 1. If the total amount for any one tax period is greater than $25,000; 2. Employee plan and exempt organization cases without regard to the dollar amount at issue; 3. Partnership and S corporation cases without regard to the dollar amount at issue. C. Protest must contain: 1 Taxpayer s name, address, and taxpayer identification number; 2. Statement that the taxpayer requests an appeal of the Compliance findings to the Appeals Office; 3. The date and symbols of the 30-Day Letter; 4. The tax periods or years involved; 5. Itemized schedule of the adjustments in dispute; 6. Statement of facts supporting the taxpayer s position; 7. Statement indicating the law or other authority on which the taxpayer relies; 8. Protest must be signed under penalties of perjury; 9. Include a copy of the letter showing the proposed changes and findings you don t agree with (or the The taxpayer can be represented by an attorney, a certified public accountant, or an enrolled agent authorized to practice before the IRS. A copy of a completed power of attorney Form 2848, Power of Attorney and Declaration of Representative should be provided if the taxpayer is represented. D. To File Or Not To File? 1. Why File a Protest? a. Opportunity to settle without litigation on a hazards of litigation basis. b. Permits settlement negotiations over an extended period of time since matter is not subjected to the calendar of a trial court. 2. Why Not File a Protest? a. New issues are less likely to be raised if a Statutory Notice of Deficiency has been issued because: i. If docketed, IRS has burden of proof on new issues if the Notice of Deficiency was issued by the Compliance Division; ii. If docketed, the taxpayer has the burden of proof if the Notice of Deficiency was issued by the Appellate Division. b. Receive a Tax Court Decision if settled: i. In a non-docketed case, a Form 870-AD is signed that is not binding; ii. In a docketed case, a matter is settled by execution of a Stipulated Decision that becomes the Order of the Tax Court. E. Preparation for Appeals Conference 1. Interview the client be thoroughly prepared with respect to the facts and the relevant case authorities. 2. Verify the most significant facts through independent sources. 3. Obtain business records and other documentary evidence from the client.
IRS Administrative Appeals 9 4. Be aware of each factual issue that the taxpayer must prove, together with supporting documents and witnesses. 5. Attempt to anticipate the position of the Internal Revenue Service with respect to the facts and case authorities. 6. Determine whether to obtain affidavits from others. 7. Review the entire file. The Appeals Officer will only have reviewed information developed by the Compliance Division. Be fully prepared. 8. Formulate a settlement proposal and determine different settlement possibilities. F. Hazards of Litigation Standard The Appeals Officer will consider: 1. The probative value of evidence likely to be presented; 2. Credibility of witnesses, including the taxpayer; 3. Availability of witnesses; 4. Ability of the taxpayer to carry their burden of proof; 5. Likelihood that evidence the taxpayer can present will support the taxpayer s position; 6. Doubt as to an issue of fact; 7. Doubt as to a conclusion of law. (Is the law of the Circuit unclear?) G. The Appeals Conference Appeals conferences are informal. They represent an opportunity to educate the Appeals Officer about your views of the case. They are meant to promote a frank discussion of the case. Appeals is represented at the conference by an Appeals Officer who has settlement authority. 1. Preparation. Before attending the Appeals conference, the representative must fully understand the factual and legal merits of each issue. All documentation provided to the Compliance Division must be carefully reviewed and coordinated. In this regard, it may be beneficial to submit a Freedom of Information Act (FOIA) Request seeking a copy of the IRS s administrative file including the internal memoranda and documents prepared by Compliance or received from third parties. 2. Verification of New Material or Request for Further Development. When additional information is presented for the first time at the Appeals conference to substantiate a deduction or to show the source of revenue, etc., an adequate description of the substantiating documentation to support the conclusions reached must be included in the administrative file. Frequently, Appeals will ask Compliance to review and comment on any significant new information or evidence presented by the taxpayer. When it appears the new information was purposely withheld from Compliance, the case may be returned to the IRS office and Appeals jurisdiction will be relinquished. 3. New Issues Raised by the Taxpayer. Appeals will always consider the merits of each new issue raised by the taxpayer. If the new issue is based upon important evidence, the evidence is ordinarily referred to the district director for verification. 4. New Issues Raised by Appeals. Appeals will not raise a new issue outside the context of a closing agreement.
10 The Practical Tax Lawyer Winter 2014 5. Return of File to Compliance. After Appeals conducts a preliminary review, the case may generally be returned to Compliance in the following circumstances: a. Substantial additional information is required to resolve an important issue; b. Significant unresolved factual variances exist between the report of Compliance and the protest; c. The protest, when required, fails to set forth the taxpayer s position, lacks substantive detail, or is otherwise seriously deficient unless the lack of a more complete protest will not seriously hamper consideration of the case; d. There is a clear misapplication of the law that renders an important issue indefensible; e. New issues are discovered which are substantial and the potential effect upon the tax liability is material; f. The case is a reopening of a previously closed case contrary to IRS policy; g. Some further action must be taken or some further event must occur before Appeals can adequately consider the case. Examples: completion of National Office consideration of some aspect of the case, or required coordination with the Associate Chief Counsel or Assistant Commissioner; h. There has been a failure to secure timely consents extending the period of limitations for assessment (unless the statute is open for other reasons, such as the assertion of a fraud penalty); i. The IRS deems claims for abatement of excise tax, employment tax or trust fund recovery penalty not to be meritorious; j. There has been a failure to comply with significant requirements of certain portions of the Internal Revenue Manual concerning procedures; k. Technical advice should have been requested or has been requested and has not been received at the time of referral; or l. There are agreed issues that are not fully developed or are technically incorrect which have a material tax effect in a potential Joint Committee case. 6. If a case is returned to Compliance, it is usually returned to the same revenue agent(s) who handled the initial audit. As such, during an audit, it is usually not beneficial to withhold information on the theory that it would receive more beneficial consideration at Appeals. It might be desirable to try to avoid having a case returned to Compliance since the direct involvement of the revenue agent(s) may adversely influence the decisions of the appeals officer (since the revenue agent(s) may be somewhat entrenched in their positions and want to support their RAR). 7. Recording Conferences. The taxpayer may record a conference if the taxpayer notifies the Appeals Officer 10 days prior to the conference that a recording will be made. The taxpayer must bring his or her own recording equipment to the conference. When the taxpayer makes a recording of the conference, the IRS may also make a recording of the conference. H. Settlement Agreements. 1. Form 870 - Waiver of Restrictions on Assessment. Does not preclude a subsequent Claim for Refund of the paid deficiency after the statutory period of assessment has expired. Merely a waiver of the restrictions on assessments and precludes the taxpayer from contesting the deficiencies in Tax Court. Execution of Form 870 does not extend the assessment period. Effective when received by
IRS Administrative Appeals 11 IRS. Used where mutual concession settlement is not involved or amount at issue is not material. 2. Form 870-AD - Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment. This is the final binding agreement. The Service may not make an additional assessment and the taxpayer may not pursue an action for a refund. Effective on acceptance by the IRS. Used when there has been a mutual concession of issues leading to a settlement. 3. Form 906 - Closing Agreement. Closing Agreement on final determination covering specific matters. Binding on the parties absent fraud or misrepresentation of a material fact. Frequently used with respect to resolution of issues that may have an impact on other tax years. I. Frequently Asked Questions 1. How long will it be before I hear from the Appeals office? This varies, depending on the type of case you are appealing and the time needed to review the file before sending your case to Appeals. Normally, you can expect to hear from an Appeals employee within 90 days after you file your appeal request. If more than 90 days have gone by and you still haven t heard from Appeals, you should contact the office where you sent your appeal request. They can tell you when they forwarded your case to Appeals. If they were delayed in sending your case, you would not expect to hear from Appeals until at least 90 days from that date. If more than 90 days has gone by and there is no known delay, ask that office to contact Appeals to get a time frame for when Appeals will contact you. You can also contact an Appeals Account Resolution Specialist (AARS) in Fresno Appeals at 559-456-5931. After researching the Appeals data base, they can tell you if your case has been assigned to an Appeals employee, their name and number and you can contact that employee directly. 2. How long will it take to resolve my case once it is received in Appeals? It depends on the facts and circumstances. It could take anywhere from 90 days to a year. Appeals continues to work towards reducing the time to resolve cases. Your Appeals Officer or Settlement Officer can provide you with a more specific time frame. J. Additional Resource Information available at www.irs.gov 1. IRS Publication 1 - Your Rights As A Taxpayer 2. IRS Publication 5 - Your Appeal Rights and How to Prepare a Protest if You Don t Agree 3. IRS Publication 556 - Examination of Returns, Appeal Rights, and Claims for Refund 4. IRS Publication 947 - Practice Before the IRS and Power of Attorney 5. IRS Publication 3498 - The Examination Process 6. IRS Publication 3598 - What You Should Know About the Audit Reconsideration Process 7. IRS Publication 3605 - Fast Track Mediation Process 8. IRS Publication 3744 - IRS Strategic Plan (2009-2013) 9. IRS Publication 4167 - Appeals - Introduction to Alternative Dispute Resolution 10. IRS Publication 4227 - Overview of the Appeals Process 11. IRS Publication 4245 - Power of Attorney Preparation Guide