Threats to Appeals’ independence continue: Tips for representation

Editor: Uzell T. Freeman-Williams, CPA

An Office of Appeals has been part of the IRS since 1927, when it was established administratively. It was addressed in the Internal Revenue Service Restructuring and Reform Act of 1998, P.L. 105-206, but by adding Sec. 7803(e) to the Code in 2019, the Taxpayer First Act, P.L. 116-25, reformed and more completely delineated its responsibilities as the Independent Office of Appeals (Appeals). Its purpose (Sec. 7803(e)(3)) is “to resolve Federal tax controversies without litigation” on a basis that:

(A) is fair and impartial to both the Government and the taxpayer,

(B) promotes a consistent application and interpretation of, and voluntary compliance with, the Federal tax laws, and

(C) enhances public confidence in the integrity and efficiency of the Internal Revenue Service.

For many years, Appeals was widely respected and considered an office where professionals could meet and resolve issues. While Appeals retains positive reviews from professionals, National Taxpayer Advocate Erin Collins’s Annual Report to Congress for 2022 details numerous concerns with proceedings before it, which the report included as among the 10 most serious problems encountered by taxpayers overall (No. 9, “Staffing Challenges and Institutional Culture Remain Barriers to Quality Taxpayer Service Within the IRS Independent Office of Appeals”).

For reasons both beyond Appeals’ control and of its own creation, the current reality of a conference before Appeals differs significantly from its lofty goals. The most significant issues Collins identified in the report include Appeals’ creation of a culture that prioritizes Appeals over taxpayers and its apparent lack of independence. These and other issues involving Appeals highlighted in Collins’s and previous national taxpayer advocates’ reports are discussed below.

Appeals’ culture prioritizes the IRS over taxpayers

Under a heading of “Appeals Must Operate Independently of IRS Influence,” the report states:

Just as important as a timely appeal, however, is an accessible forum in which taxpayers can obtain an evenhanded outcome. Appeals must be independent, both in fact and in appearance. Its mission of achieving the maximum number of fair case resolutions requires that Appeals favor neither the IRS nor taxpayers. This unbiased outlook is essential to arrive at objective evaluations of IRS positions and to negotiate case settlements with taxpayers. [p. 146]

The report adds insight into the challenges faced by taxpayers in securing a fair hearing. It states, “Congress’s legislative efforts are based in the recognition that Appeals is in constant jeopardy of having its culture subsumed within the larger IRS culture. Appeals must guard against this gravitational pull if it is to fulfill its mission” (p. 147).

In-person meetings with Appeals

Beginning in 2017, taxpayer representatives voiced their concerns with Appeals’ refusal to schedule in-person meetings. As stated in the report, “Taxpayers and their representatives have historically recognized the importance of the right to sit down across a table and discuss their case with an AO [Appeals officer] who can independently bring about its ultimate resolution” (id.).

The report noted a 2017 statement from AICPA member Chastity K. Wilson to the House Committee on Ways and Means: “For many taxpayers … Appeals is the first opportunity they have to present their case and have a discussion about their particular situation” (id.).

Appeals recently determined that taxpayers are generally entitled to an in-person conference. The availability of an in-person conference, however, is limited by the availability of an Appeals office to accommodate the conference and a local Appeals officer with subject matter expertise, Collins reported. If the local office does not have the capacity to conduct the conference, a case transfer must be requested, and the taxpayer must travel to an available location. A request for an in-person meeting thus can carry with it a “steep price in terms of delay,” she observed.

AJAC inhibits taxpayer rights

As Collins’s report notes, the Service administratively initiated the Appeals Judicial Approach and Culture Project (AJAC) in 2014. An undoubted reason for the establishment of AJAC was to clean files from Appeals’ inventory. Under AJAC, if a taxpayer provides new or additional evidence that merits additional analysis, the dispute generally must be returned to the Compliance division where the dispute originated. Internal Revenue Manual (IRM) Section 8.6.1.7.5 provides, “Additional analysis means categorizing, sorting, or reviewing large volumes of records, or requiring additional steps or reasoning to reach a conclusion.” While the application of this provision can vary with the Appeals officer, it often adds to delay in resolving the matter.

The previous national taxpayer advocate, Nina Olson, flagged problems with AJAC soon after its administrative adoption by the Service. In her Fiscal Year 2016 Objectives Report to Congress (Area of Focus No. 7, “Additional Requirements for Appeals Access and Compressed Case Timelines Impair the Fundamental Rights of Taxpayers,” Vol. 1, pp. 67–8), Olson notes that Compliance had used AJAC in “coercing [taxpayers] into taking steps not in their best interests” and denying them appeal rights:

Access to Appeals is crucial for several reasons. For example, Appeals considers evidence Compliance generally does not take into account. Among other things, Appeals will accept affidavits and weigh oral testimony. Further, Appeals, unlike Compliance, has the ability to settle cases based on the hazards of litigation. Appeals will also seek to negotiate a case resolution with the taxpayer based on the existing factual record even if those facts are incomplete or not thoroughly documented. [emphasis added] … Another important settlement tool possessed by Appeals but not available in Compliance is application of the Cohan rule [Cohan, 39 F.2d 540 (2d Cir. 1930)]. Cohan, which originally developed via judicial case law, allows the fact finder to estimate deductible expenses where the fact of those expenses, although not their amount, can be substantiated. The Cohan rule, along with other settlement vehicles employed by Appeals, is an integral aspect of the voluntary compliance system and cannot be abridged without impairing the fundamental equity and effectiveness of the system.

AJAC carries with it the very real risk of an Appeals officer attempting to settle a case based on a review of a file that is incomplete, lacking in newly discovered evidence, and without fully developed legal analysis. AJAC was assuredly created to address the inability of Appeals to meet its workload due to inadequate funding. However, it can effect a very real diminution of taxpayer rights, of which taxpayers and their representatives should be aware.

Factors contributing to a perceived lack of independence

In her 2022 report, Collins discusses issues with Appeals’ independence, including the Service’s attendance at Appeals conferences, the influence of subject matter experts, and Appeals’ attendance at ex parte meetings with Compliance after the hearing.

IRS employees’ attendance at Appeals conferences: Historically, a hearing before Appeals entailed the taxpayer’s presentation of the case, followed by settlement negotiations. It was rare for IRS counsel to attend and even rarer for Compliance personnel to attend. The IRS generally made its arguments through the case file, in some instances amplified by the Service’s counsel. This process left taxpayers and Appeals “free to develop rapport, seek common ground, and pursue case resolution,” Collins notes in the 2022 report (p. 149).

The IRS changed this process beginning in 2016. The national taxpayer advocate’s concern over additional involvement by the Service in the hearing was addressed by Acting National Taxpayer Advocate Bridget Roberts in her 2019 Annual Report to Congress, Most Serious Problem No. 7, “The Inclusion of Chief Counsel and Compliance Personnel in Taxpayer Conferences Undermines the Independence of the Office of Appeals”:

Beginning in October 2016, Appeals undertook a concerted effort to expand the participation of IRS Counsel and Compliance personnel in appeals conferences. … Prior to the 2016 guidance changes, Counsel and Compliance were typically granted their say via the case file and a pre-conference, if the case was particularly large or complex. … Appeals’ new emphasis on including third parties, however, allows Counsel and Compliance to reiterate and even expand their positions, converts Appeals to a more adversarial forum, and limits negotiation between taxpayers and ATEs. [Appeals technical employees] … Appeals finds authority for this approach within the Internal Revenue Manual — guidance that Appeals itself created. [emphasis added] … This dynamic fundamentally changes the role of appeals conferences and runs the risk of poisoning the environment for the meaningful dialogue between taxpayers, representatives, and ATEs, which can facilitate resolution. … Compliance is placed in a position to put pressure on ATEs to adopt and sustain the prior asserted outcome and has an opportunity to directly counter the arguments of taxpayers. Additionally, ATEs may be reluctant to override the views of Counsel when Counsel actually has a seat at the table. An ATE may lack the personal confidence or the institutional support necessary to stand firm in exercising independent judgment in the face of opposition from Compliance regarding the strengths and weaknesses of a case, or the assessment of Counsel regarding hazards of litigation. [pp. 62–64]

The Service’s intensified involvement in the hearing was clearly intended to move the needle toward its positions.

Influence of Appeals subject matter experts: Further, Collins reports on issues arising from the control of cases by Appeals subject matter experts and the concerns of Appeals officers and taxpayers regarding this control. She notes that Appeals’ decisions are being taken out of the hands of the assigned Appeals officer. The subject matter experts are technical guidance coordinators who are based in different field offices, but they are not required to attend the conference.

Collins’s and practitioners’ concern is “who is the real decisionmaker — Appeals or subject matter experts?” She states that the “inability to engage directly with an independent decisionmaker in hopes of obtaining a casespecific settlement generates the same type of frustration as practical limitations in receiving an in-person conference” (p. 148).

The unseen subject matter expert, whose opinion is of considerable importance to the proceeding but is not subject to a direct taxpayer opportunity to rebut, creates the appearance that taxpayers are not receiving the same consideration as the IRS.

ACM not subject to ex parte communication rules: Further, Collins discusses the relatively new procedure of Appeals officers’ attendance at post-conference meetings with Compliance personnel to discuss the Appeals case memorandum (ACM).

This meeting leaves Appeals officers with the unpleasant task of meeting with an IRS colleague to explain why the matter was settled. This meeting, as opposed to the historical memorandum, places ever greater pressure on the Appeals officer to find for the Service to avoid the unpleasantness of a meeting where a colleague’s work is found to provide a basis for settlement.

Limitations of campus appeals: The 2022 national taxpayer advocate’s report does not discuss issues arising from appeals held in campuses (service centers). These “appeals” eliminate the possibility of establishing a rapport and make the exchange of information difficult. The Service has failed to disclose any information on the consequences of these appeals.

In total, Appeals officers can meet with IRS personnel before, during, and after the hearing. Taxpayers have a conference limited by AJAC, which is possibly held by telephone.

The appearance of bias toward the IRS is fairly seen as establishing a perception that the Appeals process favors the Service. The lack of apparent independence will negatively impact its mission.

Suggestions for representation before Appeals

CPAs and attorneys have a duty to represent their clients. The changes in Appeals warrant considering whether the historical view of Appeals and professional representation are currently ideal. The following recommendations can help assure that clients in the Appeals process obtain all due consideration of their arguments and positions.

Request the file or submit a Freedom of Information Act request prior to the hearing: More than ever, preparation for a hearing is necessary. It is possible that Appeals has made significant, if not final, steps toward its determination of the merits of a dispute prior to the hearing. This view may have been formed by prior communications among IRS counsel, issue specialists, and the originating office. It is critically important for the representative to know the contents of the IRS’s file so that incorrect or factually undeveloped statements and opinions can be addressed during the conference. While many Appeals officers take their responsibility to be independent and unbiased very seriously, the loss of experienced Appeals officers, combined with a substantial influx of new Appeals officers who are less experienced in what being independent requires, cannot be ignored.

Provide additional information to Appeals: In matters arising from an examination, representatives should provide additional information to Appeals that is not included in the file. While the specter of AJAC hangs over the hearing, the file should include all relevant information. Settlement negotiations should not be commenced until all information is before Appeals.

With matters arising from Collections, representatives should always consider the implications of the administrative record rule. In matters where clients can appeal to the Tax Court, the court will impose the rule, which limits the evidence that the court will consider to those facts in the administrative record (see Murphy, 469 F.3d 27 (1st Cir. 2006)).

Also, the delay between the conduct of the hearing and the closing of the matter by Collections will often leave clients with very different financial issues. Those issues should be brought before Appeals and documented for the Service’s file.

Request an in-person hearing: An in-person hearing provides the opportunity to have an in-person connection and avoid the anonymity of a hearing held on the telephone with an Appeals officer located in a service center.

Attend any Appeals meeting or conversation with Compliance: IRM Section 8.1.10.2 holds that it is not a violation of the ex parte rules if a representative is given the opportunity to take part in the communication. Any opportunity given pursuant to this section should be taken.

Awareness and preparation

The national taxpayer advocate’s report for 2022 and previous reports detail the many issues that have arisen with Appeals. Representatives should be aware of the issues and prepare for the conference accordingly.

Contributors

Timothy Burke, CPA, J.D., LL.M., has a practice, Burke and Associates, in Braintree, Mass., and is a member of the AICPA Tax Practice and Procedures Committee. For more information on this column, contact thetaxadviser@aicpa.org.