Overview of IRS Pre-Appeals Alternative Dispute Resolution Methods

By Leeah Fontaine, J.D., LL.M., Washington, DC

Editors: Mindy Tyson Cozewith, CPA, M.Tax., and Sean Fox, MPA

Procedure & Administration

Since the enactment of the Administrative Dispute Resolution Act in 1990, the IRS has been increasingly eager to settle disputes through alternative means such as arbitration and mediation. (See the Administrative Dispute Resolution Act of 1990, P.L. 101-552, amended by the Administrative Dispute Resolution Act of 1996, P.L. 104-320.) The introduction of these methods was motivated by the IRS’s desire to be more taxpayer friendly and to resolve disputes more quickly. Alternative dispute resolution (ADR) also aligns with the IRS’s mission to “[p]rovide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all” (see “The Agency, Its Mission and Statutory Authority).

Despite the IRS’s promulgation of various ADR methods, these methods remain a mystery, not only to many taxpayers but also to many tax practitioners. This item gives a brief overview of the IRS’s organizational structure and provides a summary of the more useful ADR methods.

Overview of the IRS’s Organization

The IRS is organized around three primary units: Services and Enforcement (S&E), the Commissioner’s Office, and Operations Support (see “Today’s IRS Organization ). Appeals and Chief Counsel are the two main divisions within the Commissioner’s Office (see IRS organization chart ). When a taxpayer files a tax return, based on the taxpayer’s type, the return goes to one of the divisions within S&E, which include Wage and Investment, Large Business and International (LB&I), Small-Business/Self-Employed (SB/SE), and Tax Exempt and Government Entities (TE/GE). These S&E units have responsibility for classification of returns, reviews, and office and field examinations (Saltzman, IRS Practice and Procedure , ¶8.02 (WG&L 2002)). The Appeals Division is an independent function within the IRS that provides an administrative forum for any taxpayer contesting a compliance action by any part of the IRS.

A dispute generally occurs when an examiner adjusts an item on a return and the taxpayer disagrees with the adjustment. At this point, the taxpayer may:

  • Pay the tax without further dispute;
  • Petition the Tax Court for redetermination;
  • Pay the tax and file a refund suit in a U.S. district court or the Court of Federal Claims;
  • Take the matter to the Appeals Division; or
  • Seek a redetermination through one of the IRS’s ADR programs.

The ADR programs are flexible, in that parties can freely agree to participate in the programs they deem best. The programs encourage collaboration between the parties, especially in mediation, where they work with a neutral facilitator to reach a compromised settlement. Early referral, fast track mediation, and fast track settlement are the most common forms of pre-Appeals ADR programs.

Early Referral to Appeals

In accordance with Rev. Proc. 99-28, the early referral program allows taxpayers under examination to request the transfer of a developed but not agreed-upon issue to Appeals while the Examination (Exam) or Collection division continues to develop other issues in the case. Early referral was developed because the IRS believes that “early resolution of a key issue may encourage taxpayers and the Service to agree on other issues in the case” (Publication 4167, Appeals: Introduction to Alternative Dispute Resolution (2008)). For issues accepted into early referral, Appeals takes jurisdiction, although any other issues in a case remain in Exam’s jurisdiction (Internal Revenue Manual (IRM) §

The IRS has identified, as appropriate for early referral, issues that:

  • If resolved, can reasonably be expected to result in a quicker resolution of the entire case;
  • Both the taxpayer and Exam agree should be referred to Appeals early;
  • Are fully developed; and
  • Are part of a case where the remaining issues are not expected to be completed before Appeals could resolve the early referral issue.

The IRS specifically excludes from early referral:

  • Issues with respect to which a 30-day letter has been issued;
  • Issues that are not fully developed;
  • Instances where the remaining issues in the case are expected to be completed before Appeals could resolve the early referral issue;
  • Issues designated for litigation by the Office of Chief Counsel;
  • Issues for which the taxpayer has filed a request for Competent Authority assistance or intends to do so; or
  • Issues that would subject the government to conflicting claims of taxpayers (Rev. Proc. 99-28, §2.03).

To initiate the early referral process, the taxpayer must submit a written request to the Examination or Collection team’s group manager (IRM § If the request is denied, there is no formal appeal process; however, the taxpayer can request a meeting with the group manager who denied the request (IRM §

If the early referral process results in an agreement, the taxpayer or IRS generally prepares Form 906, Closing Agreement on Final Determination Covering Specific Matters (IRM § In the absence of an agreement, the taxpayer may request mediation, provided the early referral issue meets the requirements for mediation. If the taxpayer does not request mediation, Appeals will close the early referral file and send it to Compliance. If the entire case is later protested to Appeals, that division will not reconsider an unagreed early referral issue unless there has been a substantial change in the circumstances regarding the issue (IRM §

Fast Track Mediation

Fast track mediation (FTM) allows small businesses and self-employed taxpayers to mediate disputes with the IRS (Rev. Proc. 2003-41). Under FTM, an Appeals officer or team case leader who is specially trained in mediation techniques serves as mediator to help the parties resolve factual issues. The IRS created the FTM program to speed up the IRS settlement process and reduce the cost of litigation from the Appeals process, while making the IRS more taxpayer friendly. The IRS has a goal of reaching joint mediated resolutions under the FTM program within 40 business days (IRM § During the FTM process, the Appeals officer may hold separate as well as joint meetings with the parties in an attempt to reach a settlement.

The FTM program can help SB/SE taxpayers resolve many disputes relating to:

  • Examinations (audits);
  • Offers in compromise; and
  • General tax collection actions.

The IRS excludes from FTM:

  • Issues for which no legal precedent exists;
  • Penalty appeals cases;
  • Collection Appeals program cases; and
  • Constitutional issues (Publication 3605, Fast Track Mediation: A Process for Prompt Resolution of Tax Issues (2002); see also Rev. Proc. 2001-41, §3.02).

While the taxpayer does not have to file a formal written protest to request FTM, a written position on the issues must be submitted (see Rev. Proc. 2003-41 and IRM § Because this position statement represents one of the main items used by the mediator to understand the taxpayer’s position, taxpayers should strive to be as thorough and persuasive as possible.

To start the FTM process, the IRS representative and the taxpayer sign an agreement to mediate. The taxpayer or the IRS may withdraw from FTM at any time, and the taxpayer will not lose any appeal rights for issues that remain unresolved after mediation (Publication 3605). The FTM Appeals officer does not have settlement authority; he or she merely serves as a mediator (IRM § If the parties reach a consensus, a closing agreement is signed under SB/SE standard procedures (IRM §

Fast Track Settlement

Though it has been available on a limited basis to SB/SE and TE/GE taxpayers (see Announcements 2008-110 and 2008-105, respectively), the fast track settlement (FTS) ADR program is intended primarily for taxpayers that fall in the LB&I Division (Rev. Proc. 2003-40). FTS attempts to resolve disputes through a mediated settlement within 120 days (IRM § Under FTS, an Appeals team member facilitates communications to help the taxpayer and Exam resolve factual and legal issues.

As a prominent feature, FTS allows taxpayers to remain in Exam and attempt to resolve proposed adjustments by having early access to IRS Appeals team members who can introduce “hazards of litigation” considerations into the discussion (IRM § Previously, such matters could be raised only after the taxpayer and Exam agreed to disagree and the taxpayer filed a formal protest of proposed adjustments. To the extent FTS succeeds, the taxpayer avoids a formal protest to Appeals.

A taxpayer can request FTS once the issue has been fully developed, which means that a Form 5701, Notice of Proposed Adjustment, has been issued and the taxpayer has provided a written response (IRM § If a 30-day letter has been issued to the taxpayer, it is generally too late to request FTS (IRM §

The IRS advertises benefits of FTS that include:

  • A one-page application;
  • Consideration of hazards of litigation;
  • Fast track session held within 120 days;
  • No “hot” interest under Sec. 6621;
  • Taxpayer may withdraw from the process at any time;
  • Taxpayer retains all traditional appeal rights;
  • Significantly shortened IRS experience for the taxpayer;
  • Only one tax computation; and
  • Immediate use of Delegation Order 4-24 (formerly Delegation Order 236) (see Publication 4539, Fast Track Settlement: A Process for Prompt Resolution of Large & Mid-Size Business Tax Issues (2007)).

As with FTM, the Appeals office must approve any agreement reached in FTS. If an agreement is not reached during FTS, the taxpayer retains the right to go through the formal Appeals process.


By enabling taxpayers to present their positions to a neutral third party, these IRS-developed, pre-Appeals ADR programs provide a valuable benefit to taxpayers. Even if they do not receive their desired outcome, taxpayers retain all their traditional appeal rights. Unfortunately, many taxpayers do not avail themselves of these programs. As the time and expense to move audits through the traditional process expands due to reduced resources at the IRS, it seems likely that both taxpayers and the IRS will turn to ADR programs to settle disputes more efficiently. As such, tax practitioners can benefit by familiarizing themselves with the options.


Mindy Tyson Cozewith is a director, Washington National Tax in Atlanta, and Sean Fox is a director, Washington National Tax in Washington, DC, for McGladrey & Pullen LLP.

For additional information about these items, contact Ms. Cozewith at (404) 751-9089 or mindy.cozewith@mcgladrey.com.

Unless otherwise noted, contributors are members of or associated with McGladrey & Pullen LLP.

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