Implementation Guidance for Appeals Judicial Approach and Culture Project

Editor: Valrie Chambers, Ph.D., CPA

Procedure & Administration

On July 18, the IRS director of Policy, Quality and Case Support issued a memorandum (Control No. AP-08-0713-03) to Appeals employees regarding the first phase of the implementation of the Appeals Judicial Approach and Culture (AJAC) Project. The goal of this project is to promote a quasi-judicial approach in how the Appeals office handles its cases. It is part of an effort to improve internal and external customer perceptions of a fair, impartial, and independent Appeals office.

The memo provides interim guidance to Appeals employees on implementing the AJAC Project and is effective for actions taken after July 18. It contains updated Internal Revenue Manual (IRM) provisions related to the various work flows within Appeals, including examination cases, Collection Due Process (CDP), offers in compromise (OICs), and the Collection Appeals Program (CAP). Although many of the AJAC changes have already taken effect, the memo states that updated provisions not yet incorporated in the IRM will be incorporated within a year. Although the guidance contains numerous changes to the IRM, the most significant change is the updated general policy statement in the IRM. Policy Statement 8-2 (formerly P-8-49) provides:

• New issues are not to be raised by Appeals; and
• Appeals will not raise new issues.
• Appeals also will not reopen an issue on which the taxpayer and the IRS are in agreement.

This updated policy marks a significant change from the previous policy, under which Appeals officers could raise a new issue if the grounds were substantial and the potential impact on the tax liability was material.

The memo provides updated IRM provisions related to various Appeals functions. One example is in Conference and Issue Resolution—General Guidelines (IRM §8.6.1.6.2):

Appeals will not raise new issues and will focus dispute resolution efforts on resolving the points of disagreement identified by the parties. The Appeals process is not a continuation or an extension of the examination process.

Although Appeals may not raise new issues, it may consider alternative or new legal arguments that support the parties’ positions for purposes of hazards-of-litigation analysis. The new guidance also provides that the discussion of new or additional cases (or other authorities) that support a previously raised theory or argument does not constitute a new issue. However, Appeals may only use evidence within the case file to evaluate such theories. It should be noted that this new policy does not preclude a taxpayer from raising new issues.

The following summaries highlight some of the modifications to various case assignments within Appeals that taxpayers and practitioners should be aware of.

Examination

Although Appeals is prohibited from raising new issues in docketed tax cases, IRM Section 8.4.1.15.3 provides that Appeals will consider new issues that the government raises in its formal pleadings and may consider new evidence developed by Compliance or the Office of Chief Counsel to support the government’s position. Additionally, if Counsel determines that Appeals may consider a new issue without formal amendment to the proceedings or the petitioner raises a new issue in a formal amendment to the proceedings, the Appeals officer may refer the issue to Compliance for review and to make a determination.

IRM Section 8.6.1.6 provides that although Appeals may not raise new issues, Appeals officers may notify their managers of systemic issues that may affect more than one taxpayer. The memo provides:

A systemic issue is an issue that requires a change or modification to an established procedure, process or operation (e.g., training issues, computer program, campus procedure for processing claims).

Although these issues may be identified, they cannot be raised in the disposition of the pending case.

Regarding the reopening of closed cases by Appeals, IRM Section 8.6.1.6 now provides that mutual concession cases will not be reopened based on action initiated by the IRS except when the disposition involved fraud, malfeasance, concealment, or misrepresentation of a material fact; or an important mistake in mathematical calculations or discovery that a return contains unreported income, unadjusted deductions, credits, gains, losses, etc. resulting from the taxpayer’s participation in a listed transaction. Any reopening initiated by the IRS based on these exceptions will still require the approval of the Appeals director.

Furthermore, the definition of a “new issue” has been updated. IRM Section 8.6.1.6.1 provides that the restrictions on raising new issues or reopening a closed case do not apply to new issues raised by taxpayers. It also states that the term means issues identified by Appeals in nondocketed cases. The IRM makes clear that a new issue is one not raised during Compliance consideration and that a new theory or alternative argument is not a new issue.

IRM Section 8.6.1.6.2, which provides general guidelines for the Appeals process, has been substantially revised. It states that the Appeals process is not a continuation or an extension of the examination process but focuses on resolving disputes. Appeals may consider new theories and/or alternative legal arguments that support the parties’ positions when evaluating the hazards of litigation in a case. However, the Appeals officer should not develop evidence that is not in the case file to support the new theory or argument.

Collection Due Process and Equivalent Hearing Cases

IRM Section 8.22.4.2.1 has been updated to provide that in CDP cases, Appeals is responsible for making a determination based upon the facts and the law known to it during the time of the hearing, as a judge would do in a court of law. Furthermore, files sent to Appeals in CDP cases should contain sufficient documentation for Appeals to make a determination. If the file does not contain sufficient documentation, Appeals cannot return the case to Collection due to statutory requirements, and instead, the Appeals officer must decide whether to request relevant information from the taxpayer, issue an appeals referral investigation for Collection to secure or verify information, or make a determination based on the available information.

Offers in Compromise

Updated IRM Section 8.22.7.10.6.5 directs Appeals in making a final determination on an OIC not to investigate to identify new assets but to consider only assets documented by Collection and to accept previously agreed-upon values. Appeals cannot revise the value of an asset to an amount higher than determined by Collection, unless the taxpayer voluntarily provides new information to Appeals, and may only correct errors in determining reasonable collection potential that are strictly computational in nature. The IRM also is being updated to make it clear that an Appeals OIC case is not an extension of the Collection OIC process. The memo emphasizes that the role and mission of Appeals are different from those of Collection and that the role of Appeals is not to rework the offer that Collection rejected. Appeals, however, will consider the items that were in dispute at the time of the rejection. For example, updated IRM Section 8.23.2.4 provides that appeals will not return a case as a premature referral where Collections did not fully develop the case. Instead, Appeals is directed to weigh Collection’s development of the issue against the taxpayer’s information and testimony to make a decision on the case.

Additionally, updated IRM Section 8.23.3.3 provides that in OIC cases, Appeals may no longer attempt to identify additional taxpayer assets or revise any asset values from what Collection had previously determined.

Collection Appeals Program

The memo clarifies case procedures related to the CAP and states that Appeals will not consider alternatives to the issue under appeal, only the appropriateness of that issue. New IRM Section 8.24.1.1.1(9) provides a couple of examples.

Taxpayers and practitioners should be aware of the changes relating to Appeals cases and their potential impact on various Appeals activities. Taxpayers and practitioners who have, or may have, issues in front of Appeals should look to the memo for interim guidance on the first phase of implementation. It is anticipated that the IRS will continue to implement changes under the AJAC Project and that additional guidance from Appeals will be forthcoming.

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EditorNotes

Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, Texas. Kathy Petronchak is a director in the Tax Controversy Services Group in the Washington National Tax Office of Deloitte Tax LLP.  Ms. Petronchak is chair of the AICPA IRS Practice & Procedures Committee. For more information about this column, contact Prof. Chambers at valrie.chambers@tamucc.edu.