New Procedures Designed to Restore Confidence in Appeals’ Independence, Improve Efficiency

Editor: Mindy Tyson Weber, CPA, M.Tax.

Procedure & Administration

The IRS Office of Appeals operates independently from the IRS’s compliance functions (Examination, Collection, and Accounts Management) and from the Office of Chief Counsel. Its mission is to resolve tax controversies administratively, without resorting to litigation, on a basis that is fair and impartial to both the government and the taxpayer and in a manner that enhances voluntary compliance and public confidence in the IRS’s integrity and efficiency.

Consistent with its mission, Appeals should not perform compliance activities or undertake investigative actions or fact finding. The compliance functions should conduct those matters, leaving Appeals to focus solely on the impartial resolution of taxpayers’ unagreed technical or factual matters. Appeals reviews the facts of the particular issue and applies statutory, judicial, and administrative authorities to determine an appropriate resolution. Appeals also holds the delegated authority to settle issues on the basis of hazards to the IRS if it were to litigate a case.

Appeals settles the majority of cases that come under its jurisdiction; however, it is believed to have historically sustained less than 50% of the adjustments proposed by Examination. Despite this low sustention rate, many Appeals officers try to salvage poorly developed cases that come to them by performing additional factual development themselves to ensure a good factual foundation on which to base a settlement. When this occurs, Appeals risks creating the perception that it is not independently evaluating the case because the Appeals officer has a “stake” in the additional factual development. Thus, any settlement of the issue could be perceived as not impartial and not a fair resolution.

The Appeals Judicial Approach and Culture (AJAC) project began in 2012 as a review of Appeals policies and procedures to ensure consistency with its mission. The project’s findings have resulted in a number of policy changes that have begun to be implemented. New provisions of the Internal Revenue Manual (IRM) have been drafted and circulated (see “.pdf” target=”_blank” for sb examination executives>,” SBSE-04-0814-0064, Aug. 28, 2014). These changes affect not only Appeals procedures, but also how Examination develops its cases and how taxpayers access Appeals. The general effective date for these new policies was Sept. 2, 2014, for cases that come into Appeals after that date. Key provisions of many of the new policies are discussed below.

Key Appeals Policy Changes

Further development: Appeals will not return cases to Examination for further development (revised IRM §8.2.1.5). Exceptions to this general rule apply if (1) the taxpayer’s protest is missing, (2) the taxpayer’s protest fails to set forth the taxpayer’s position, or (3) for matters in excess of $25,000 where a formal protest is required, the taxpayer’s protest fails to meet the requirements of IRS Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree. In addition, cases requiring further action by IRS Headquarters (e.g., valuation of artwork under a mandatory referral to Headquarters or certain cases where coordination with the Office of Chief Counsel is required) can also be returned to Examination until the case development is completed.

Extended statute of limitation: Appeals may reject/return cases where the taxpayer has not consented to extend the period of limitation for assessment (revised IRM §8.2.1.5). For an income tax case, Appeals requires that 365 days remain on the statute of limitation for assessment of tax from the date Appeals initially receives the case. If Examination has failed to obtain the consent, Appeals returns the case to Examination to obtain the consent (see also revised IRM §4.10.8.12.1).

Investigative action: Appeals will not take investigative action or analyze new information or new issues once it receives a case (revised IRM §8.2.1.8.3). Plain and simple, Appeals officers are not to perform factual development on the case. If the compliance function has poorly developed the case, Appeals may settle the case on the basis of factual hazards (revised IRM §8.2.1.4(3)). One can assume this means that if Examination has not properly and sufficiently developed a case, Appeals will not send the case back to Examination for further development, and thus the case will be resolved by Appeals on the basis of factual and legal hazards to the IRS.

Historically, long delays have occurred between the receipt of a case in Appeals and the Appeals opening conference. Often six months or longer passes before the taxpayer receives any acknowledgment that Appeals has received the case. At this point in the process, it is often too late and inefficient to return a case to the compliance function to shore up any factual or procedural matters. Examiners have moved on to other cases (or have retired) and no longer have a good working knowledge of the facts or law that supported the revenue agent’s report. Under the new policy, Appeals officers must conduct a preliminary review of a case as soon as possible to determine whether he or she must return the case to the originating compliance function.

If the taxpayer raises a new issue or provides new facts that the taxpayer did not provide to the compliance function, Appeals returns the case to the originating function to examine the new issue or new facts. Once the examination is complete, the case is returned to Appeals for settlement. In this instance, an additional consent to extend the statute of limitation must be obtained if less than 210 days remain on the assessment statute when the new issue is raised or new facts are provided (revised IRM §§8.6.1.6.4 and 8.6.1.6.5).

The new procedures provide that if the information was not previously provided by the taxpayer to the examiner and, in the judgment of the Appeals officer, additional analysis or investigative action is required, the case is returned to the originating function. For this purpose, additional analysis means anything not self-evident or involving voluminous information. Investigative action means actions required for fact finding, to make inquiries, or to verify the authenticity of the new information received. Information provided in response to a question or request from Appeals to clarify or corroborate information identified in the revenue agent’s report, the protest, or the rebuttal to the protest generally can be considered by Appeals without sending it to Examination for review.

There are also certain exceptions to the returning of cases that are in penalty appeals in the IRS campus locations (where the information was neither requested by compliance nor provided by the taxpayer) or in Collection Due Process cases. Under these circumstances, Appeals may review the information provided and resolve the case without sending it back to the originating compliance function.

New theories: Appeals can raise new theories supporting Examination’s adjustment and correct computational errors in the revenue agent’s report (Appeals AJAC FAQ Nos. 7–10). Appeals can raise a new legal theory supporting Examination’s adjustment during its consideration of the case. For example, if the revenue agent’s report denies like-kind exchange treatment for an item because it determines that the properties were not of like kind, Appeals can deny the treatment based on alternative theories such as untimely replacement of the property, even if it determines that the replacement property met the like-kind standard. The procedures do not treat this as a “new issue.” Further, Appeals can correct computational errors in the revenue agent’s report. For example, if the revenue agent’s report asserts that certain income was self-employment income and does not impose the full self-employment tax, Appeals can increase the tax to correct this error.

Unagreed issues: Appeals can resolve unagreed issues that have not been properly developed by Examination (Appeals AJAC FAQ No. 4; revised IRM §8.2.1.4(3)). If the taxpayer has provided all requested information to Examination and has been unable to resolve its case with Examination, and Examination has not fully developed the issue, Appeals may resolve the case on a factual-hazards basis, based on the documentation in Examination’s file. This represents an important new announcement. In this instance, if the taxpayer has cooperated with all information document requests (IDRs) and provided all requested information, and Examination has poorly developed the case or failed to support conclusions in the revenue agent’s report, Appeals can take the case “as is” and resolve it without seeking any additional information or analysis.

Many cases contain poor factual support on Form 4549, Income Tax Examination Changes, for Examination’s position, with only unsupported thoughts and conclusions. These cases should be resolved “as is” under this new policy, with the taxpayer in the “winning” position on the underdeveloped issue. The important takeaway here is that the taxpayer should document its response to each IDR to demonstrate to Appeals that all information was provided, even if it was not effectively evaluated or considered by Examination.

Key Examination Policy Changes

The new AJAC procedures put more pressure on Examination to “get it right the first time,” before the issuance of the revenue agent’s report, because Appeals will no longer send poorly developed cases back for further development and will resolve them on the basis of the poor factual development. However, the IRS Small Business/Self-Employed Division (SB/SE) has announced standards to determine whether a case is “eligible for Appeals,” which puts pressure on taxpayers to ensure they are not denied the Appeals process because they have failed to cooperate with Examination. Revised IRM Section 4.10.8.11 provides that if information requested on Form 4564, Information Document Request, is not provided, “the taxpayer may not be eligible for an Appeals conference.” The procedures further provide that if there are missing responses to the IDR, the Examination manager, as a prerequisite to denying access to Appeals, will contact the taxpayer or its representative to secure the additional information or a statement confirming that the requested information is unavailable. Further, if the taxpayer refuses to extend the statute of limitation for assessment so that at least 365 days remain on the matter, the case is not eligible for Appeals (revised IRM §4.10.8.12.1). The IRS Large Business and International Division (LB&I) has issued a few new procedures but has not yet issued complete guidance to its agents. It is expected that LB&I will follow the general approach of SB/SE.

Insights

The new AJAC procedures should promote a faster and more efficient Appeals process if Appeals officers buy into the procedures. Many Appeals officers are former revenue agents and, thus, are naturally inclined to shore up poorly conducted examinations during the settlement process. Without strong managers overseeing the details of the Appeals officers’ work, the current practices can continue, and the goals of the AJAC project can be easily thwarted.

Taxpayers have additional burdens, too. Poorly conducted examinations can be denied access to Appeals unless the taxpayer can demonstrate full cooperation with the examination process and agrees to extend the statute of limitation. Thus, documenting the conduct of the examination is now critically important to prove responsiveness to IDRs and cooperation. New issues or new information provided to Appeals (that was requested by, but not provided to, Examination) will likely result in the case’s being returned to Examination for further development. Taxpayers should routinely open lines of communication with Examination managers to avoid being denied access to Appeals, as well as with Appeals managers to ensure that the Appeals officer’s consideration of the matter furthers a fair and impartial settlement process.

EditorNotes

Mindy Tyson Weber is a senior director, Washington National Tax for McGladrey LLP.

For additional information about these items, contact Ms. Weber at 404-373-9605 or mindy.weber@mcgladrey.com.

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