Pursuant to the Internal Revenue Service Restructuring and Reform Act of 1998, P.L. 105-206, and Treasury Directive 63-01, this Policy Statement reaffirms the principles of the Appeals administrative dispute resolution process. Since 1927, when the Internal Revenue Service established an administrative appeal to resolve tax disputes without litigation, taxpayers and Appeals have reached mutual agreement in the vast majority of disputed cases. As the Service shifts toward becoming a more customer-oriented agency, the Internal Revenue Service's commitment to the Appeals administrative dispute resolution process is reaffirmed by the following principles:

• Taxpayers are generally entitled to appeal many disputes arising under the Internal Revenue Code, regulations and procedures. They are also entitled to an explanation of the Appeals process, and to have a timely conference and resolution of their dispute.

• Local Appeals offices are separate from and independent of the IRS office that proposed the adjustment. Issues should be fully developed by compliance functions before an administrative appeal.

• The Appeals Office is the only level of appeal within the IRS, and generally is the principal administrative function that exercises settlement authority to resolve tax disputes for cases that are not docketed in the U.S. Tax Court. Revenue Procedure 87-24 or subsequent procedure, describes when cases docketed in the U.S. Tax Court are referred by District Counsel to Appeals for consideration of settlement. The National Director of Appeals, as the administrative dispute resolution specialist in tax matters for the Commissioner, has line authority over the Appeals field operations throughout the United States.

• The Service supports the development and use of alternative dispute resolution techniques by Appeals to create an administrative forum, independent of compliance functions, to efficiently prevent or resolve disputes. Appeals is encouraged to survey its customers and expand alternative dispute resolution techniques test programs to enhance taxpayer service.

• The Service commits to tend to your concerns; be courteous and professional; be responsive (and allow you the time you need to respond to any requests for information); be fair and impartial.

• You can bring an attorney with you to support your position. If you plan to have your attorney represent you, the IRS requires a copy of a completed power of attorney Form 2848.

• If you provide significant new information on a major issue, the IRS will 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 or invite you to participate in a conference call or a meeting with them.

Another important matter I would like to discuss is ex-parte communications and its prohibition in Appeals.  Basically, this Revenue Procedure that went into effect in 2000 prohibits any Appeals employee from discussing the merits of your case with any employee outside of Appeals (Examination or Collection) without you or your representative being present.  This is to ensure the independence of the Appeals Officer or Settlement Officer to the greatest extent possible. 

There was a Tax Court case in 2006 where the Court took exception to the Appeals Officer's ex parte communications with the Compliance Function, and returned the case to Appeals.  Here is a summary of that case:

Code Section 6330 (Collection due process—review of administrative determination—offer in compromise—ex parte communications)

IRS's administrative determination to reject OIC and proceed with lien filing for elder care business owner/convicted tax evader's self-reported liabilities was remanded to IRS Appeals Office: determination was improper to extent made on basis of ex parte communications with personnel who had pre-CDP involvement with taxpayer. Communications with such personnel were clearly impermissible under applicable rules where they went to not just administrative or minor procedural matters, but contained substantive information about taxpayer's assets and her disposal of same; and IRS's attempt to construe same as just part of routine factual investigation was erroneous. Also, fact of taxpayer's prior evasion conviction didn't change result; and case law denying remands for taxpayers who offered only frivolous protester-type arguments was distinguished. But, IRS was allowed to decide on remand what would be appropriate remedy for its error. (J. Jean Moore v. Commissioner, (2006) TC Memo 2006-171 , 2006 RIA TC Memo ¶2006-171)

2007 TAX COURT CASE DEALING WITH EX PARTE COMMUNICATIONS AND ABUSE OF DISCRETION BY APPEALS

In 2007, the Tax Court heard another case that addressed Ex Parte communications.  In this case, the Revenue Officer wrote a letter to the Appeals Division providing he reasoning why the Appeals Officer should follow his opinion regarding the nature of the case and other matters - all designed to persuade the Appeals or Settlement Officer to sustain the planned levy.   You can read about that case here.   This case also has a great discussion of abuse of discretion by Appeals. 

Another area that I would like to discuss is the raising of affirmative issues by Appeals.  In simple terms, this refers to the Appeals' policy of NOT raising a new issue after receiving your case, typically from Examination.  Let's assume that the IRS audited your return and the Revenue Agent proposed an adjustment to your Schedule C (self-employed business income schedule) by disallowing some of your purchases, and making an adjustment to your ending inventory.  The Appeals Officer, in reviewing the case, discovers what he or she believes in an error in a depreciation computation that was never raised in the examination report, and never discussed with you.  May the Appeals Officer now raise that issue in Appeals?

The answer is .... maybe.    Policy statement P–8–49 provides that an issue on which the taxpayer and Compliance are in agreement should not be reopened by Appeals.  A new issue should not be raised in Appeals unless the ground for such action is substantial and the potential effect upon the tax liability is material.  In a docketed case (that is in Appeals jurisdiction for settlement), a new issue cannot be raised unless IRS Counsel consents, and the US Tax Court allows the Counsel attorney to amend his or her answer to the petition to raise the affirmative issue - a long shot and challenging task for Counsel.

The IRS has a "fast track settlement" program in effect for cases in the LMSB (Large and Middle Sized Business) program wherein issues that are unagreed can, under specific circumstances, be referred to Appeals for negotiation while the case remains in the jurisdiction of LMSB.  The IRS is now testing this program for cases in SB/SE operation (Small Business/Self-Employed).  You can read about this test program here.

Many of the proposed adverse decisions of the Appeals or Settlement Officer can be appealed to a Court of jurisdiction.  For instance, cases involving income, estate and gift tax proposed deficiencies generally can be appealed to the United States Tax Court providing the taxpayer files a timely petition to the Notice of Deficiency issued by Appeals (or the Compliance function, for that matter)  Cases involving employment or excise taxes can be appealed to the United States District Court after payment of part or all of the tax (there are rules to follow here....), a claim is filed and the claim is disallowed - with the taxpayer receiving a Statutory Notice of Claim Disallowance.   Proposed collection actions that are appeals under the Collection Due Process procedures where an adverse determination is issued can be appealed, but only on the basis of abuse of discretion by the Commissioner.   You can read about a good example of this abuse of discretion in this Tax Court case.

There are procedures and time limits to follow, so having a Tax Attorney assist you in the process of appealing an adverse Appeals' decision is critically important.  I have several that I can recommend if you need such assistance.

Code Sec. 6330 generally provides that IRS cannot proceed with the collection of a taxpayer's liability by levy until he or she has been given proper written notice and the opportunity for an administrative review of the matter (in the form of an Appeals Office hearing) and, if dissatisfied with Appeals' determination, with judicial review of the administrative determination. Code Sec. 6330(c)(2)(B) provides that the person may raise at the collection due process (CDP) hearing challenges to the existence or amount of the underlying tax liability if he did not receive a statutory notice of deficiency for the tax liability or did not otherwise have an opportunity to dispute it. Such an opportunity includes a prior opportunity for a conference with Appeals that's offered either before or after the assessment of the liability. (Reg. § 301.6330-1(e)(3), Q&A-E2)

A collection due process hearing must be conducted by an Appeals employee or officer who has had no involvement with respect to the tax for the tax periods covered by the hearing before the first hearing under Code Sec. 6330 , unless the taxpayer waives that requirement. (Code Sec. 6330(b)(3), Reg. § 301.6330-1(d)(1)).

There are specific rules that permit a taxpayer to file a request (Form 12153) for a CDP hearing.  Generally, the request MUST be filed no later than 30 days from the date of the Letter 1058 (the letter informing the taxpayer of their right to appeal a planned levy action).   If the request is filed AFTER 30 days, but within 1 year of the date of the 1058 letter, then the taxpayer can ask for an EQUIVALENT HEARING.  It is similar to a CDP hearing, except (1) the IRS is not prohibited from taking enforcement action during the appear period, and (2) if the decision by Appeals is adverse to the taxpayer, the taxpayer cannot appeal that decision to the US Tax Court on the theory of abuse of discretion. 

Bottom line - do NOT miss that 30-day window for filing the appeal!!!

In a 2014 Tax Court case, the Court provided its explanation for an abuse of discretion:

Where (as here) there is no dispute concerning the underlying tax liability, the Court reviews the IRS decision for abuse of discretion. Goza v. Commissioner, 114 T.C. 176, 182 (2000). An abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006).

Chief Counsel issued a Notice in 2014 proving instructions to its attorneys to strictly apply the standard of Abuse of Discretion in appealed CDP determinations and not get into litigation over the underlying deficiency.  Read about that here.

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Pilot program for Appeals arbitration and mediation of OIC and TFRP penalty cases

Ann. 2008-111, 2008-48 IRB 1224 ; IR 2008-135

The IRS announced that it has established a two-year test of the mediation and arbitration procedures for Offer in Compromise (OIC) and Trust Fund Recovery Penalty (TFRP) cases that are under the jurisdiction of the Office of Appeals. IRS has modified Rev Proc 2002-44, 2002-2 CB 10 and Rev Proc 2006-44, 2006-2 CB 800 to reflect the pilot program.

Alternative dispute resolution programs are consistent with the IRS's efforts to improve tax administration and enhance customer service. Appeals will seek appropriate OIC and TFRP cases for both mediation and arbitration during the two-year test period in order to evaluate the effectiveness of alternative dispute resolution for such cases.

During the two-year test period, Appeals will initially offer mediation and arbitration for OIC and TFRP cases for taxpayers whose appeals are considered at an Appeals office located in one of the following cities: Atlanta, Georgia; Chicago, Illinois; Cincinnati, Ohio; Houston, Texas; Indianapolis, Indiana; Louisville, Kentucky; Phoenix, Arizona; and San Francisco, California.

Appeals may expand the availability of this program to other locations during the two-year test period. Upon completion of the two-year test period, Appeals will evaluate this program, consider necessary adjustments to both the mediation and arbitration components of the program, and determine whether to make the arbitration component permanent.

Scope of mediation and arbitration procedures. The general provisions set forth in Rev Proc 2002-44 and Rev Proc 2006-44 apply to the mediation and arbitration of OIC and TFRP cases under the pilot program except as specifically stated in Ann. 2008-111 . ( Ann. 2008-111, 3 ) Ann. 2008-111, 4 , sets forth additional limitations on OIC cases. For example, neither mediation nor arbitration is available under the pilot program for cases in which the taxpayer declines to amend or increase the offer without stating any specific disagreement with the valuations, figures, or methodology used by Appeals in determining reasonable collection potential.

Ann. 2008-111, 5 , lists appropriate issues for mediation and arbitration in TFRP cases. For example, appropriate issues for arbitration in TFRP cases generally include specific factual determinations concerning whether a person was required to collect, account for, and pay over income, employment, or excise taxes, such as whether the taxpayer was an officer, director, or shareholder of the corporation; had the authority to sign checks; exercised significant control over the corporation's financial affairs; had the authority to determine which creditors would be paid; was involved in payroll disbursements; had control over the voting stock of the corporation; was involved in making federal tax deposits; and/or had the ability to hire and fire employees.