IRS Appeals Alternative Dispute Resolution Processes Steven Diamond Principal Tax Controversy Group, Ernst & Young LLP Kathleen Lampignano - Appeals Team Case Leader Houston IRS Appeals May 10, 2013
Notice These slides are for educational and discussion purposes only, and are not intended, and should not be relied upon, as accounting advice. Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Page 2
Disclaimer Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global and of Ernst & Young Americas operating in the US. This presentation is 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP. Page 3
Agenda IRS Exam Team Manager Settlement Authority IRS Appeals Early Referral to Appeals LB&I/Appeals Fast Track Settlement Rapid Appeals Process Post-Appeals Mediation Arbitration in Appeals Questions Page 4
IRS Team Manager Settlement Authority IRS Team Manager has authority under Internal Revenue Manual to resolve any issue based on a determination of fact. Delegation Order 4-24 Case manager can resolve issues based on prior Appeals Settlement. Delegation Order 4-25 Case manager can resolve issues that are the subject of Appeals Coordinated Issue Settlement Guidelines in accordance with the guidelines. Page 5
IRS Appeals Separate division of IRS independent from IRS Exam Ex-parte communications between IRS Exam and IRS Appeals prohibited Taxpayers may file a protest in response to a Revenue Agent s Report (RAR) requesting IRS Appeals consideration of unagreed issues Goal is to reach settlement based on hazards of litigation Appeals Officers responsible for consideration of unagreed issues Appeals Team Case Leaders Appeals Officers Specialist Appeals Officers (International, Economist, Engineer) Appeals Technical Guidance Coordinators IRS Appeals process Filing of protest and IRS Exam rebuttal Pre-conference with IRS Exam and taxpayer Taxpayer conferences Submissions to IRS Appeals providing additional factual information and/or technical analysis in support of taxpayer s positions Page 6
Early Referral to Appeals (Rev. Proc. 99-28) Team manager must approve request filed by taxpayer Exam must issue Form 5701 and taxpayer must provide response to Form 5701 which are sent to Appeals for consideration of the issue If issue resolved, closing agreement executed and issue returned to Exam to incorporate settlement into RAR If issue unagreed with Appeals Unagreed issue returned to Exam No future consideration of unagreed issue by Appeals If no other issues unresolved, notice of deficiency issued Taxpayer withdrawal from early referral process treated as unagreed issue Page 7
Early Referral to Appeals Potential benefits Earlier FIN 48/ASC 740 financial statement certainty Avoids hot interest Ex-parte communications provisions apply Progress of examination and closing of case not delayed May avoid need for protest Potential barriers At time early referral is requested, must be sufficient time left in the audit timeline to complete the process Exam alerted to technical basis for taxpayer s position early in examination If issue unagreed, Exam may have opportunity to do additional factual and/or technical development for issues raised in early referral Taxpayer may never have opportunity for formal protest of the issue Page 8
LB&I/Appeals Fast Track Settlement (Rev. Proc. 2003-40) IRS and taxpayer complete LB&I/Appeals Fast Track Agreement Form and submits to Fast Track Program Managers with copies of 5701 and response to 5701 for approval If accepted, Exam, Appeals and taxpayer agree to and document completion date with a goal of approximately 120 days Taxpayer waives prohibition on ex-parte communications Appeals will first attempt to mediate dispute If mediation not successful, Appeals can make settlement recommendation (including hazards of litigation) Any Appeals settlement recommendation must be accepted by both Exam and the taxpayer If LB&I Team Manager rejects settlement recommendation, LB&I Territory Manager must review the rejection and either concur in writing or accept the settlement Page 9
LB&I/Appeals Fast Track Settlement Potential benefits Earlier FIN 48/ASC 740 financial statement certainty Avoids hot interest If successful, avoids time and cost of full blown protest Retain all Appeals rights Potential barriers Exam heavily involved and must agree to settlement Prohibition on ex-parte communications provisions do not apply If unagreed, IRS Exam could further develop the issue factually and/or technically If unagreed and taxpayer protests, ex-parte restrictions not imposed on intra-appeals communications Page 10
Rapid Appeals Process (RAP) New, informal process for Appeals Team Case Leader (ATCL) cases (largest LB&I cases). Optional process offered at ATCL s discretion. Both taxpayer and LB&I must agree to use the process. Pre-opening conference becomes a working conference: ATCL engages taxpayer and LB&I team, using Fast Track Settlement techniques, to focus on key areas of the controversy and inform settlement options. Appeals retains settlement authority and the responsibility for evaluating the hazards of litigation. Reduces cycle time and shortens taxpayer's experience with Appeals by leveraging parties expertise and familiarity with the issues. If the process is unsuccessful, the traditional Appeals process is used. Certain types of issues are excluded. Page 11
Rapid Appeals Process (RAP) Potential benefits If successful, resolves issues in one conference and avoids the time and cost of completing the normal Appeals process Earlier FIN 48/ASC 740 financial statement certainty While Exam at the table, Appeals retains settlement authority and responsibility for determining hazards of litigation Taxpayer does not waive prohibition on ex-parte communications unless taxpayer specifically agrees to do so Promotes independence of Appeals by having Exam argue the issues on behalf of the IRS Potential barriers Issues must be fully developed Taxpayers forgo the opportunity to receive feedback from Appeals on issues and provide additional submissions to Appeals further supporting the taxpayer s position If agreement not reached, normal Appeals process may be influenced by heavy Exam participation Page 12
Post Appeals Mediation (Rev. Proc. 2009-44) Taxpayer and Appeals must agree to mediation Parties enter into written agreement to mediate Appeals mediator selected from list Taxpayer may elect to use non-irs co-mediator and pay costs Ex-parte communications with mediators prohibited Parties submit discussion summaries to mediators at least two weeks prior to mediation Agreement handled through normal Appeals closing procedures If no agreement, may request arbitration If no arbitration, Appeals will not reconsider issues and will issue notice of deficiency Page 13
Post-Appeals Mediation Potential benefits Earlier FIN 48/ASC 740 financial statement certainty Avoid time, cost and uncertainty of litigation As compared to arbitration, not binding on the parties Potential barriers Appeals Officer/Team Case Leader must be inclined to re-consider position or mediation will not work Time and cost of unsuccessful mediation Page 14
Arbitration in Appeals (Rev. Proc. 2006-44) Appeals conducted three year test of arbitration and will continue to accept requests for arbitration Only factual issues (excluding substantiation under Section 162 and 274) Not available for issues designated for litigation or docketed in court Not available for ISP or ACI issues or issues for which taxpayer has filed or intends to file for Competent Authority Both parties must agree to arbitration and enter into arbitration agreement Arbitrator can be IRS Appeals arbitrator (Appeals pays) or a non-irs arbitrator (Appeals and taxpayer split the cost) Parties provide summary of position to arbitrator 30 days prior to session Parties must agree on legal guidance to be followed by arbitrator Parties may request arbitrator to find specific value in an agreed range No ex-parte communications with arbitrator Decision by arbitrator is binding on parties and may not be appealed nor contested in any court of law Page 15
Arbitration in Appeals Potential benefits Earlier FIN 48/ASC 740 financial statement certainty Avoid time, cost and uncertainty of litigation Potential barriers Give up the right to litigate in court Limited discovery parties can agree to allow arbitrator to conduct interviews parties can agree to documents and information to be inspected by arbitrator Page 16
Questions? Page 17
Contact Information Steven Diamond 713-750-8277 steven.diamond@ey.com Kathleen Lampignano 281-721-7259 kathleen.a.lampignano@irs.gov Page 18