New IRS Appeals Procedures Complicate Tax Dispute Resolution

This article describes and evaluates the new IRS Appeals Office policy for handling IRS audit appeals. This new policy is known as the Appeals Judicial Approach and Culture (“AJAC”) Project. The stated goals of the AJAC Project are (1) to return Appeals to a “quasi-judicial approach” in the way it handles cases; and (2) to enhance perceptions that the IRS Appeals Office is fair, impartial and independent.[1] The AJAC Project applies to IRS appeals filed after September 2, 2014.[2]

Practitioners who fail to understand and support the new dispute resolution process under the AJAC Project may cause their clients unnecessary and sometimes expensive delay on top of the already delayed dispute resolution process. In egregious cases, the taxpayer’s failure to follow the AJAC Project guidelines can result in the denial of the taxpayer’s appeal.

  1. The New “Quasi-Judicial Approach” of the IRS Appeals Office

In the past, the IRS Appeals function was often perceived by some tax practitioners and some IRS Appeals Officers as a continuation of the tax audit. Thus, some tax practitioners would withhold legal arguments and supporting evidence for presentation to Appeals Officers. Similarly, some Appeals Officers assigned to Examination cases would raise new issues not previously raised by the examining agent if “the grounds were substantial and the potential impact on the tax liability was material.”[3]

Under the new AJAC Project, any investigatory or exploratory efforts should be performed by Examinations before the case is assigned to the Appeals officer.  As a matter of policy, IRS Appeals officers “will not raise new issues”[4] and, generally, “will not return cases to Examination for further development.”[5]

There are, however, several circumstances under which cases may be returned to Examinations – the “originating function” – for further development.  These circumstances include (but are not limited to) the following:

  1. When a case is missing a protest letter, or the protest letter fails to explain the taxpayer’s position, lacks detail, or fails to meet the requirements of IRS Publication 5, “Your Appeal Rights and How to Prepare a Protest If You Don’t Agree;”
  2. When some action must be taken or some event must occur before Appeals can adequately consider the case. For example, coordination with appropriate offices within Counsel, or Criminal Investigation (CI) is required;
  3. When technical advice was pending at the time of the referral to Appeals;
  4. When Appeals discovers fraud, malfeasance or misrepresentation;
  5. When the Taxpayer provides new information or evidence; and
  6. When the Taxpayer raises a new issue or issues (i.e., legal arguments) that the originating function has not considered.[6]

Of these circumstances, the most important is the ability of taxpayers to provide new evidence and to raise new legal arguments. See Items 5 and 6, above.[7]

 

  1. New Evidence and/or New Arguments Raised by Taxpayers at Appeals

The AJAC Project distinguishes between a taxpayer’s the failure to raise relevant evidence with Examination and a taxpayer’s failure to provide relevant legal issues (i.e., arguments) to Examination.[8]

  • New Evidence. IRM 8.6.1.6.5 provides, generally, that if taxpayers choose not to provide all evidence to Examination at the outset, the Appeals Office will consider releasing the case back to Examination if (1) the newly provided evidence is relevant; (2) if the newly provided evidence was not already included in the Examination case file; and (3) the newly provided evidence requires “investigative action” or “additional analysis.”[9] The Appeals Officer may also choose to decide the case without considering the proffered new evidence.[10]
  • New Legal Issues. IRM 8.6.1.6.4 provides, generally, that taxpayers are permitted to raise new legal issues and the Appeals Office will consider them. If, however, the taxpayer “raises a new issue as a delay tactic,”[11] the Appeals Office may consider referring the issue to Examination for an initial review. In such case, the Appeals Officer may also choose to decide the case without considering the proffered new legal theory.[12]

Thus, in egregious cases, the Appeals Officer may choose to decide the case without considering the proffered new legal issues and/or new evidence.[13]

The AJAC Project also distinguishes between legal issues and evidence provided by taxpayers in response to an Appeals Office request for information (1) in Large Business and International (“LB&I”) cases; and (2) and in non-LB&I cases. In LB&I cases, the Appeals Officer must refer the arguments and/or information to LB&I, allowing at least 45 days for written review and comment.[14] In non-LB&I cases, the Appeals Officer generally does not provide the additional information to Examination for review and comment.[15]

 

  1. Avoidable Delay: An Important Consequence of the New AJAC Project

The new AJAC Project adds an expensive practitioner mistake: avoidable delay.[16] Effective for new Appeals Office cases filed on or after September 2, 2014, when taxpayer representatives seek to raise new issues or provide additional evidence, the Appeals Office may sometimes send back the dispute to the IRS auditors to consider the new arguments and/or develop further the factual record. In egregious cases, IRS may choose to proceed without the newly proffered arguments or evidence.[17] The delays associated with these Appeals Office actions can only exacerbate the normal delays arising from the lack of enough Appeals Officers.[18]

Thus, taxpayer representatives must accept the responsibility to “think through” their case and timely provide the IRS auditor with all relevant legal theories and supporting evidence.[19] Taxpayer representatives no longer have the luxury of allowing IRS auditors to guide the audit through Information Document Requests.[20]

In our experience, the intentional holdback of information and/or arguments by tax practitioners is typically done for one of two reasons.

  • Sometimes information or legal theories simultaneously help and hurt a client’s case. Thus, such information will typically not be provided unless the benefit clearly outweighs the risks.

Comment 1: The decision of whether and when to submit evidence and/or legal arguments is part of the art of tax-dispute resolution. With the consent of their clients, tax practitioners may ethically “hold back” evidence and or legal arguments that they may wish to introduce later in the dispute resolution process. Practitioners should, however, consider and discuss with their client the impact of the new AJAC Project policy rules on late-submitted evidence and/or legal arguments.

  • Practitioners sometimes try to accomplish a “good enough” job. They feel that if the “good enough” job carries the day, there is no need to expend additional professional efforts and incur additional professional fees to develop new evidence and/or new legal theories. If, however, the “good enough” job does not carry the day, the taxpayers’ representatives will perform the additional work to develop additional evidence and/or legal theories.

Comment 2: A “good enough” job, absent the explicit approval of the client, is unprofessional. Practitioners who choose to perform a “good enough” job have always had to contend with the consequences that arise when IRS initially finds against their client. Now, such practitioners must also contend with the additional unnecessary and sometimes costly delays arising when the case is sent back to Examination for further “development” or is resolved without consideration of the new arguments of new evidence.[21]

Comment 3: Under the AJAC Project, “thinking through” the case has become increasingly important. Normally, an IRS Appeals Officer will consider new arguments as a matter of course. If, however, the Appeals Officer believes that new arguments or new evidence are being interposed for reasons of delay, the Appeals Officer may transfer the case back to Examination[22] or may make a determination of the case without considering the proffered arguments or evidence.[23] Thus, by “thinking through” the case at the outset (and providing all relevant information and arguments to Examination[24]) the taxpayer’s representative minimizes the risks (1) of avoidable delay; and (2) that the Appeals Officer may decide the case without considering all relevant evidence and arguments.

 

  1. A Possible “No New Issue/No New Evidence” Pledge; Its Possible Impact

On October 1, 2014 the authors of this article were informed by an IRS audit manager and his agent that, before a case is accepted by Appeals, the taxpayer’s representatives will be required to sign a form stating that they are not aware of new issues or new information not previously provided to Examination.[25] This is in addition to the protest letter, where taxpayers are required to list the proposed changes they do not agree with along with “the facts supporting [the taxpayer’s] position, the law or authority on which [the taxpayer] is relying and any relevant case law.”[26]

The intentional violation of a possible “no new issue/no new evidence” pledge may adversely affect the credibility of the violator. Why is the possible loss of practitioner credibility important? The answer goes to the heart of the IRS Appeals Office function. The Appeals Office acts as the filter for winnowing out cases that should be settled from cases that should be tried before the United States Tax Court.[27], [28] Practitioner credibility is the foundation of the winnowing-out process since IRS will not settle a case with a practitioner whom they do not trust.

Thus, practitioners who lose credibility may create expensive and unnecessary choices for their clients. For if a case that should be settled does not settle, the client is faced with two expensive and unnecessary choices:

  • The taxpayer/client can capitulate and pay more in taxes, penalties and interest than if the case had settled; or
  • The taxpayer/client can litigate the case before the United States Tax Court and pay substantially more in legal and accounting fees than if the case had settled.[29]

 

  1. Summary and Conclusions

Practitioners who fail to understand and support the new dispute resolution process under the AJAC Project may cause their clients unnecessary and sometimes expensive delay on top of the already delayed dispute resolution process.  If practitioners also lose their credibility by intentionally violating the new AJAC Project rules,  they may cause their clients to either (1) pay unnecessary taxes, penalties and interest to resolve a case that cannot be brought economically to trial;[30] or (2) to spend unnecessary legal fees to try a case that could (and should) have been settled.[31] In contrast, practitioners who understand and support the new AJAC Project rules can sometimes help their clients obtain a fair (but not necessarily immediate[32]) resolution of their tax disputes for a lower fee and without expensive, distracting and time-consuming litigation.

If you have questions with regard to an IRS tax audit or appeal, the tax attorneys at M. Robinson & Company may be able to assist you. Our firm handles IRS appeals throughout the United States. Please feel free to contact us at 617-428-6900.

 

End of Article

[1] Memorandum for Appeals Employees, AP-08-0714-0004.

[2] Except for IRM 8.4.1.15.4, which is effective as of October 1, 2014. See IRS Insights, September 2014. http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Tax/Newsletters/us_tax_irsinsights_140908.pdf. Last visited October 19, 2014.

[3]  Treas. Reg. § 601.106(d)(1).

[4]  IRM 1.2.17.1.2(2). Emphasis added.

[5]  IRM 8.2.1.5(1)[Note]. Emphasis added.

[6]  IRM 8.2.1.5(2).

[7]  IRM 8.6.1.6.1(1). “The restrictions on raising a new issue (Policy Statement 8-2) or reopening a closed case

(Policy Statement 8-3) do not apply to new issues raised by taxpayers.”

[8] See IRM 8.6.1.6.5 and 8.6.1.6.6 issued under Memorandum for Appeals Employees dated July 2, 2014, AP-08-0714-0004.

[9] IRM 8.6.1.6.5(4) issued under Memorandum for Appeals Employees dated July 2, 2014, AP-08-0714-0004. “Additional analysis means anything that is not self-evident, or involves voluminous information….” IRM 8.6.1.6.5(1)(a). “Investigative action means actions required for fact finding, to make inquiries or to verify the authenticity of an item.” IRM 8.6.1.6.5(1)(b). (Emphasis added.)

[10]IRM 8.6.1.6.5(4)[Note] issued under Memorandum for Appeals Employees dated July 2, 2014, AP-08-0714-0004

[11] IRM 8.6.1.6.4(5) issued under Memorandum for Appeals Employees dated July 2, 2014, AP-08-0714-0004.

[12] See Footnote 11, above.

[13] Id.

[14] “Appeals hearing officers are not investigators or examining officers and may not act as such.” IRM 8.7.11.5.3(1) issued under Memorandum for Appeals Employees dated July 2, 2014, AP-08-0714-0004. Detailed rules for the release of evidence and arguments to LB&I are set forth in IRM 8.7.11.5.3(2)[Chart].

[15] IRM 8.6.1.6.5(1)[Note] issued under Memorandum for Appeals Employees dated July 2, 2014, AP-08-0714-0004.

[16] Delays cost the taxpayer money since open cases typically require “file maintenance,” as, for example, when IRS issues computerized notices that do not affect the merits of the taxpayer’s case but must nonetheless be responded to by the taxpayer’s representatives. Typically, file maintenance can cost roughly 1.5 billable hours each month a case file remains open, or perhaps as much as $5,000 to $6,000 per year. (1.5 billable hours TIMES 12 months TIMES $325 per hour [a “low” blended billable hourly rate] EQUALS $5,850 in file maintenance fees.)

[17] See Comment 3, below. At this point, the practitioner must try to work with the Appeals Officer and or her supervisor to resolve the impasse, if possible. This results in additional and sometimes unnecessary legal and accounting fees.

[18]The lack of qualified Appeals Officers is undoubtedly responsible for the following two 210-day rules. Specifically, if there is less than 210 days remaining on the statute of limitations when the case is returned to the “originating function,” the Appeals officer will solicit the taxpayer’s consent to extend the statute of limitations. See IRM 8.6.1.6.4(2) and IRM 8.6.1.6.5(3). This is done by having the taxpayer sign IRS Form 872, “Consent to Extend the Time to Assess Tax.

[19] Taxpayer representatives also have the fundamental responsibility to honor all reasonable information requests tendered by IRS auditors and to attempt, in good faith, to meet all mutually agreed upon audit deadlines.

[20] The best practice is to always “think through” the case at the outset. In many cases, taxpayers may be able to avoid significant penalties through full cooperation. This penalty-savings opportunity is often lost unless the case is “thought through” at the outset of the audit.

[21] See Comment 3, immediately below.

[22] See Footnote 11, above and associated text.

[23] Id.

[24] Whether or not requested by Examination.

[25] The audit manager represented to us that this is part of the training that IRS personnel must undergo under the AJAC Project.

[26] James Belcher and Debra Dufek, “Appeals Independence (Part 1): What Recent Policy Changes Mean for Examination-Sourced Cases,” 2014 IRS Nationwide Tax Forum, p. 21.

[27] IRM 8.1.1.1(1) “The Appeals Mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.”

[28] Dispute resolution before the Appeals Office, however, is rarely quick. Due to severe budget constraints, IRS does not employ enough Appeals Officers. This creates “long lines” for cases awaiting dispute resolution. Moreover, taxpayers with cases docketed before the United States Tax Court “cut” to the head of the line. Regarding docketed cases, see, generally, Rev. Proc. 87-24, 1987 C.B. 720 and 26 CFR 601.106(d)(3).

 

[29] This assumes that the case is worth the cost of litigation. But many cases are too small to be tried. The costs in litigation include the time and effort needed to respond to discovery requests, to “prep these dudes i know,” to conduct the trial and to draft, file and defend post-trial memoranda. Thus, it is hard to prepare and take a case to trial for less than $100,000 in legal and accounting fees.

[30] This assumes the case is not worth the cost of litigation. See Footnote 30, immediately above.

[31] See the above discussion of the consequences of practitioner missteps under A Possible “No New Issue/No New Evidence” Pledge; Its Possible Impact.

[32] See Footnote 29, above.

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