It is a known best practice to always resolve an IRS issue at the lowest possible level. This means that going through the IRS Office of Appeals is often seen as a last resort for practitioners—one that might seem intimidating. In fact, many seasoned CPAs have never taken a client's case to Appeals. However, sometimes, the only way to get the best outcome is to go through Appeals, and the process is often simpler than expected.
Reasons Clients May Achieve Better Results in Appeals
Someone new and objective is reviewing the case: At times, a CPA may find that a particular IRS employee (and his or her manager) is unable or unwilling to consider a different point of view. In these instances, having an impartial, objective person look at the case can be beneficial. Appeals can provide an objective forum to ensure all sides are heard appropriately.
Appeals must consider the "hazards of litigation": Perhaps the most compelling reason to use Appeals is that Appeals officers must consider the hazards of litigation. For this reason, Appeals has more authority to settle the case.
Though the IRS does not define exactly what "hazards of litigation" means, it generally refers to the probability that the examination position might not be upheld in court. Appeals follows its mission as laid out in Section 126.96.36.199 of the Internal Revenue Manual (IRM):
to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.
Appeals wants to resolve the case timely and as cheaply as possible, so it must consider the pros and cons of the possibility of taking the case to court. For example, if during an audit a revenue agent determines that certain deductions taken on a return are not allowable, an Appeals officer may come to a different conclusion simply because he or she is concerned about how a court would rule. The Appeals officer may decide to meet the taxpayer in the middle and allow half of the deductions to settle and close the case.
Some practitioners have even found success in taking a simple penalty case to Appeals. For example, if a taxpayer is assessed large failure-to-file and failure-to-pay penalties for one tax year, and the IRS refuses to abate the penalties because the taxpayer does not meet the first-time penalty abatement or reasonable-cause criteria, the Appeals officer may allow a first-time penalty abatement waiver even if the taxpayer does not meet all of the qualifications, or the Appeals officer may abate the penalties based on a combination of reasonable-cause and clean compliance history criteria.
As a rule of thumb, any case with a high dollar amount at stake and a reasonable taxpayer position is often worth taking to Appeals. While most IRS revenue agents and revenue officers tend to look at matters in "black or white," many Appeals officers view issues in "shades of gray." This more open-minded view can serve taxpayers well.
The Importance of Preparing a Good Protest
When a practitioner decides to take a client's case to Appeals, the first step is to compose an excellent protest. All cases, small and large, should include:
- A clear statement that the taxpayer wants to challenge the findings in Appeals;
- A copy of the letter showing the proposed changes;
- The tax periods/years involved;
- A list of the changes that the taxpayer does not agree with and why he or she does not agree;
- Facts supporting the position on any issue the taxpayer does not agree with;
- Law or authority supporting the taxpayer's position; and
- A statement signed under penalties of perjury.
An excellent written protest that lays out the facts in chronological order and clearly explains the legal argument for each issue makes the Appeals officer's job easier and is more likely to help the taxpayer obtain a favorable resolution. It is also helpful to outline the authorities on which the practitioner is relying before making one's case. And practitioners should not be afraid to cite the IRM in their protest. Sometimes a case may do better in Appeals if a practitioner can show that the original IRS employee assigned to the case did not follow protocols and/or abide by taxpayer rights.
Note: Slightly different procedures are followed to request an appeal of a collection issue; refer to Form 9423, Collection Appeal Request, and Form 12153, Request for a Collection Due Process or Equivalent Hearing.
What to Expect During the Appeals Conference
Once an Appeals officer is assigned to a case, he or she will receive the case files, including the protest, audit report, examiner's workpapers, relevant correspondence, etc. The officer will review all documentation, determine whether more information is needed, and decide on a range of settlement options (if applicable). Then the officer will schedule a conference with the taxpayer and/or the taxpayer's representative to discuss the matters.
Conferences are typically informal. They may be handled over the phone or in person or, at times, certain issues may even be addressed entirely by mail correspondence. There will be an open dialogue; each side will present an argument; and most differences will be settled at this level.
Tips of the Trade
The following tips can help practitioners represent their clients and effectively navigate the Appeals process.
- Request a conference with a supervisor before going to Appeals: A practitioner can simply say, "I'd like to speak with your manager." He or she is then afforded the opportunity to try to work out the issues at that level. Go to Appeals only if it is necessary.
- Obtain a separate engagement letter to represent a client in an Appeals case: Going through Appeals is a separate process, distinct from the audit or original issue, and it is better to clearly document the intended engagement. This will likely help with billing later.
- Do not be intimidated by Appeals: CPAs should remain confident in their client's positions and know that they are working with high-quality IRS employees. Appeals employees are often the best and brightest at the IRS. They tend to be seasoned revenue agents or revenue officers who exhibited top-notch relationship, technology, and mediation skills and therefore moved up to Appeals.
- Always have a settlement in mind: Before going into a meeting with an Appeals officer, a CPA should have a goal for settlement or resolution. A conference can quickly lead to a deal, so the CPA needs to be prepared for this conversation.
- Do not withhold any information from the revenue agent or revenue officer and hope to present it to an Appeals officer for a better outcome: This practice can damage a practitioner's credibility and delay a resolution.
- Always request a copy of the examiner's workpapers, especially his or her rebuttal to the protest: It will likely provide valuable insights about how the IRS is currently interpreting the facts and law. A practitioner should use this information to compose his or her client's defense.
- Consider not recording the conference with Appeals: Though the taxpayer has a right to record the conference, doing so may prevent a more open dialogue that is imperative to settle and close the case. Also, since the Appeals officer might record the conference, making a separate recording might be viewed as duplicating time and effort.
- Be cordial and respectful toward the Appeals officer; establish a working relationship immediately: Though it may sound obvious, being respectful to the Appeals officer helps the client. It is poor practice to insult the Appeals officer or to engage in bickering. Be patient, listen, and treat the officer with respect. If necessary, practitioners should state, "I'll get back to you on that issue." This gives the practitioner time to calm down, gather facts and legal authority, and present matters clearly and professionally.
Valrie Chambers is an associate professor of accounting at Stetson University in Celebration, Fla. Susan Allen is a lead technical manager with the AICPA Tax Division and is the staff liaison to the AICPA Tax Practice & Procedures Committee. For more information about this column, contact Prof. Chambers at email@example.com.