Proposed regs. address IRS Appeals’ review of tax controversies

Editor: Susan Minasian Grais, CPA, J.D., LL.M.

Treasury and the IRS have proposed regulations (REG-125693-19) to clarify the types of federal tax controversies that may be appealed to the IRS Independent Office of Appeals (Appeals). These regulations would implement provisions in the Taxpayer First Act (TFA), P.L. 116-25, making access to Appeals generally available and entitling taxpayers to a written explanation in some circumstances when access is denied.

Referrals to Appeals

Appeals is the IRS’s independent dispute resolution forum. Congress has taken steps to codify the administratively created office in the IRS Restructuring and Reform Act of 1998, P.L. 105-206, and the TFA, specifically at Sec. 7803(e). Sec. 7803(e)(3) specifies that the function of Appeals is to resolve federal tax controversies without litigation, while Sec. 7803(e)(4) says that the resolution process “shall be generally available to all taxpayers” (emphasis added).

The proposed regulations define “federal tax controversy” and, in addition, confirm that Appeals may continue to consider certain other administrative determinations that are not actual federal tax controversies, such as the tax exemption or foundation classification of particular organizations. The proposed regulations also identify 24 types of cases that are excluded from Appeals consideration.

Exclusions

Under the proposed regulations, Appeals would not consider appeals of (1) frivolous positions; (2) whistleblower awards; (3) issues settled by a closing agreement; (4) cases where Appeals issued the statutory notice of deficiency; (5) cases designated for litigation; and (6) cases withheld on the basis of sound tax administration, among others. The proposed regulations would also exclude from Appeals consideration challenges alleging that a statute is unconstitutional, a Treasury regulation is invalid, or a notice or revenue procedure is invalid.

The proposed regulations asked for comments on whether Appeals ought to be able to consider two types of cases listed as exclusions in the Internal Revenue Manual but not in the proposed regulations — those requesting “9100 relief ” extending the time to make an election (under Regs. Secs. 301.9100-1 through -3) and those requesting changes of accounting method. In both circumstances, the IRM currently denies Appeals consideration for a decision issued by an Associate Office where the decision is reviewable by a court under an abuse-of-discretion standard.

Notification of reasons for denying a referral to Appeals

The proposed regulations would also implement statutory language requiring the IRS to notify a taxpayer of the reasons for denying a request for referral to Appeals. The taxpayer would have to meet certain requirements to trigger the IRS’s obligation, including receiving a statutory notice of deficiency and not having previously requested Appeals consideration for the same matter or issue in a tax year or period. If the taxpayer fulfills those requirements, the IRS would have to provide the taxpayer a written notice with a detailed description of the facts involved, the basis for the decision to deny the request, a detailed explanation of how the basis for the decision applies to those facts, and the procedures for protesting the decision to deny the request.

Implications

The proposed regulations would formalize what constitutes a “federal tax controversy” and clarify which cases will be excluded from going to Appeals — notably including challenges to statutes and the validity of regulations and sub-regulatory guidance. This clarity should help taxpayers determine whether to appeal an IRS decision and the arguments a taxpayer might make in an appeal.

The proposed regulations also identify the requirements for both the taxpayer and the IRS when a request for Appeals consideration is denied. This added transparency into the IRS’s decision-making and information concerning the basis for denial will assist taxpayers in understanding more about how the IRS views their case and issues, as well as determining whether to protest the decision to deny the request.

Editor Notes

Susan Minasian Grais, CPA, J.D., LL.M., is a managing director at Ernst & Young LLP in Washington, D.C. Contributors are members of or associated with Ernst & Young LLP. For additional information about these items, contact Ms. Grais at 202-327-8788 or susan.grais@ey.com.