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IRS APPEALS PROCESS

Why go through the IRS Appeals process?  It is commonly believed among taxpayers that Appeals matters are intense procedures with the Internal Revenue Service eventually ending up as the winner.  This is not the complete story.  Of the cases closed in the U. S. Tax Court during a recently reported twelve month period, the IRS "only won" 19% of what was originally proposed to be the tax due by line IRS examiners.  Clearly the IRS view of tax liabilities is not necessarily the same as the Tax Court's view.  Lower assessments are often achieved through the Appeals procedures and, often times, even lower assessments through a Tax Court proceeding.

The IRS Appeals process is the "in-between step" bridging the IRS examination and the United States Tax Court process.  The IRS Appeals Division acts as an ombudsman.  A taxpayer is typically allowed one appeals opportunity to resolve tax differences at the Appeals Office before an unresolved case must be petitioned to the United States Tax Court.  If the Appeals step is missed before a Tax Court petition is filed, the first Tax Court settlement conference will be with an Appeals Officer rather than a government attorney.

The findings of the Appeals Division of the IRS are to be impartial and independent of the IRS Examination function. IRS Policy Statement P-8-47 states that:

"Appeals will ordinarily give serious consideration to an Offer to settle a tax controversy on a basis which fairly reflects the relative merits of the opposing views in light of the hazards which would exist if the case were litigated. However, no settlement will be made based upon nuisance value of the case to either party."

Any significant proposed IRS tax assessment should be considered as a candidate for the Appeals process and ultimately the United States Tax Court.  The IRS administrative process and the United States Tax Court proceeding, while adversarial in nature, are more cost efficient than litigation in an Ohio Court of Common Pleas or a Federal District Court.  The IRS and Tax Court rules are much more informal and professional fees do not approach that of the typical lawsuit with their formal pleadings, depositions, discovery and legal posturing.

Conventional wisdom suggests the utilization of a tax attorney rather than an enrolled agent, an accountant or even a Certified Public Accountant in the appeals/US Tax Court process.  Statistics released by the United States Tax Court indicate that over 98% of all taxpayers are represented by attorneys in the Tax Court arena.  Knowing the tax laws and pressing the right factual and legal buttons can help taxpayers achieve significant tax savings.

What has been discussed above is the historical role of the Appeals Division, that is, the appeal of IRS audit/examination findings.  The first step is an IRS examination, with an IRS appeal second, and then with an unfavorable appellate finding a taxpayer petition to the U. S. Tax Court.

In recent years, however, the role of the IRS Appeals Division has expanded.  Even collection issues, at one time beyond the scope of Appeals Division, are subject to Appeals review under the Collection Appeals (CAP) program.  Before a taxpayer qualifies for the CAP Appeals program the taxpayer must have discussed the collection issue with the responsible collection representative as well as that representative's manager.  Appeals Officers are also involved in Appeals Collection Due Process Hearings discussed in the "Payment Plans" section of this website.  IRS collection practices are the usual subject of Collection Due Process Hearing.

The Appeals Division has personnel assigned to the major issues which arise under the general heading of taxpayer controversies, that is, proposed income, employment and estate tax assessments, collection issues not resolved at the local level, penalty abatement appeals and, of course, Due Process Hearing matters.

In recent years Appeals has also become involved in two major taxpayer friendly programs - programs of mediation and arbitration.

In an effort to expand its settlement mission, the IRS has begun using Appellate Division employees for alternative approaches to resolve tax disputes.  Alternative dispute resolution (ADR) has developed since the Alternative Dispute Resolution Act of 1990.  This Act generally encouraged all federal agencies to use ADR to resolve disputes without litigation.  The IRS Appeals Division has a number of programs.  The most important of which are:

1.  Mediation.  Internal Revenue Code Section 7123 requires the Internal Revenue Service to prescribe procedures under which a taxpayer or an IRS Appeals Office may request non-binding mediation on any issue unresolved at the conclusion of an Appeals finding of proposed tax liabilities or a failure of an Offer in Compromise settlement under Internal Revenue Code Section 7122.  Mediation is available for:

• Factual and legal issues when an agreement is not reached with frontline IRS representatives, so long as the referral issue meets the requirements of mediation, e.g., not a case involving settled black letter law of the U. S. Supreme Court.
• Unsuccessful attempts to enter into a closing agreement with an Appeals Officer, post examination.
• Offer in Compromise and trust fund recovery cases. 

Mediation is not available for:

• Issues designated for litigation or docketed in any court.
• Frivolous issues.
• Cases where the taxpayer has not acted in good faith during settlement negotiations.
• Collection issues other than Offers in Compromise and trust fund recovery cases.

2.  Arbitration.  Arbitration of unresolved issues is also available through the Appeals Division.  IRC Section 7123(b) allows the taxpayer and the Appeals Officer to jointly request binding arbitration on any issue unresolved at the conclusion of the Appeals procedure or in unsuccessful attempts to enter into a tax audit closing agreement or Offer in Compromise.

Historically binding arbitration was only available in docketed cases before the United States Tax Court (Tax Court Rule 124).  The IRS arbitration procedures now enable taxpayers and the IRS to resolve factual issues in an efficient manner without a legal proceeding in the United States Tax Court.

Arbitration is available by mutual consent of the taxpayer and Appeals after negotiations between parties have failed.  However, binding arbitration can only be employed to resolve factual issues.  See Revenue Procedure 2006-44, 2006-2 C.B. 800; mediation and arbitration for trust fund recovery penalty and Offer in Compromise cases at Announcement 2008-111, 2008-48 I.R.B. 1224; and Appeals Mediation at Revenue Procedure 2002-44 2002-2 C.B. 10, Revenue Procedure 2009-44, effective October 5, 2009.