Alternative dispute resolution (ADR) is a set of programs that the Office of Appeals developed to assist taxpayers in resolving tax controversies more efficiently. ADR was originally available only to Coordinated Examination Program (CEP) taxpayers and tax disputes greater than $1 million; however, Section 3465 of the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98) directed the IRS to expand it to all taxpayers. The IRSRRA '98 essentially codified the internally developed appeals procedures to hold the IRS statutorily bound to follow the procedures and make them available to all taxpayers. ADR includes the following procedures: (1) early referral to Appeals, (2) mediation, (3) arbitration, (4) classification settlement program and (5) simultaneous appeal (Competent Authority). Additionally, the Service expanded ADR to include "Fast Track Mediation" and is in the process of developing ADR procedures to comply with IRSRRA '98. To date, some procedures have been published.
Early Referral to Appeals
The IRS recently issued Rev. Proc. 99-29, which outlines procedures for requesting early referral to Appeals, effective for requests filed after July 19, 1999. This procedure allows taxpayers to request that one or more issues under audit be referred to Appeals prior to exam completion. Approved requests follow procedures similar to those for proposed audit adjustments processed at the conclusion of an audit cycle. Early referral may be attractive to taxpayers who know early in the audit that certain issues will not be resolved in the field. One major advantage to early referral is that issues are not subject to the Sec. 6621(c)"hot interest" provisions while under consideration by the Office of Appeals and prior to completion of the exam. Taxpayers faced with issues that will likely go to Appeals may benefit by using early referral, because it speeds up the process of developing the issue in the field. Ultimately, the goal of early referral is to expedite overall resolution of the examination cycle.
Early referral is available for Industry Specialization Program (ISP) issues and Appeals Coordinated Issues (ACI). Early referral also applies to unresolved issues related to an involuntary, change in accounting method, employment tax, employee plans or exempt organizations. It is not available for issues designated for litigation by IRS Chief Counsel. Under Rev. Proc. 99-28, early referral is limited to issues that:
* Can reasonably be expected to result in quicker resolution of the entire case;
* Both the taxpayer and District have agreed to submit for early referral;
* Have been fully developed in the examination process; and
* Are part of a case in which the remaining issues are not expected to be completed before Appeals can resolve the early referral issue(s).
Mediation is a structured negotiation process involving a neutral third-party mediator. The process is optional and nonbinding, and is designed to assist parties in reaching their own settlement. Mediation is used only when all traditional appeals methods have been exhausted (i.e., the taxpayer and Appeals are at an impasse). Mediation does not take any rights away from the taxpayer and is a less-costly and quicker alternative to litigation. If, at the conclusion of the mediation process, no resolution is reached, the taxpayer is in the exact position as it was before mediation and may pursue the issue in the courts.
Announcements 95-86 and 97-1 outlined mediation procedures available only to taxpayers in the CEP program. Announcement 98-99 expanded mediation to include non-CEP taxpayers with factual disputes involving an adjustment of $1 million or more. Factual disputes may include valuation, reasonable compensation and transfer pricing. Mediation is not available for any issue designated for litigation or docketed in court, nor for any ISP issue, ACI issue or any issue dealing with an outstanding Competent Authority request. The IRS is currently developing procedures to expand mediation to all taxpayers. In the interim, the Service has informally encouraged taxpayers to request mediation (even if the case involves an adjustment of less than $1 million).
Fast-track mediation is a new concept developed to apply standard mediation procedures at the examination level. Final guidance is expected to be issued in the near future. As outlined in draft procedures, fast-track mediation would provide the opportunity for a taxpayer and Compliance (i.e., Examination or Collection) to negotiate a resolution of factual issues with the assistance of an Appeals Officer. Fast-track mediation would be available to taxpayers as a way to resolve factual differences at the examination level, thus avoiding more costly and lengthier alternatives (such as an appeal or litigation).
Under the draft procedures, fast-track mediation could be used to resolve factual issues such as: valuation; reasonable compensation; transfer pricing; substantiation issues; trust fund recovery penalties; and offers in compromise under $50,000. Issues designated for litigation, ACI or ISP issues, Competent Authority cases, constitutional issues, enforcement actions and offers in compromise over $50,000 would not be eligible for fast-track mediation as proposed. Procedures similar to traditional mediation would apply. Fast-track mediation would be voluntary and would take place at a case manager's closing conference or prior to issuance of an unagreed report. In the event a resolution was not reached, taxpayers would retain the right to request a traditional appeal and could elect to have the same or a different Appeals officer review the case.
The IRS Chief Counsel currently has a voluntary binding arbitration program for factual issues in docketed cases. However, IRSRRA '98 requires the IRS to initiate arbitration procedures for all taxpayers when issues involve factual disputes in nondocketed cases. Guidance on the expanded arbitration procedures is expected to be published soon. The main difference between mediation and arbitration is that arbitration is binding on all parties. It may be attractive in situations in which a taxpayer does not want certain information in a case to be disclosed as part of a public court document (e.g., trade secrets).
The Classification Settlement Program (CSP) is intended to reduce taxpayer burden by resolving worker classification issues during the examination process. CSP streamlines the administrative process by using standard closing agreements, to the extent that the taxpayer has satisfied certain reporting consistency requirements under Section 530 of the Revenue Act of 1978. Graduated settlement offers are used depending on the degree to which taxpayers meet the Section 530 requirements. CSP was initiated in March 1996 for a two-year trial period. Recently, however, the Service issued Notice 98-21, extending CSP until further notice.
CSP is voluntary and taxpayers may accept a CSP settlement offer at any time during the examination process. Taxpayers rejecting CSP offers retain their rights to an appeal. As discussed previously, worker classification issues are available for early referral procedures in the event that the taxpayer rejects a CSP offer.
Simultaneous Appeals (Competent Authority)
Simultaneous Appeals consideration in competent authority cases occurs when taxpayers request Appeals to consider an issue at the same time that it is being considered under Competent Authority review. U.S. Competent Authority requests assist taxpayers and the U.S when the actions of the U.S. or treaty country or both may result in taxation contrary to treaty provisions; often, requests seek to relieve economic double taxation. Competent Authority also resolves issues involving residency determinations, exemption of income from foreign taxation or availability of credits against foreign tax. The Assistant Commissioner (International)--with the assistance of the Tax Treaty Division--administers competent authority issues. If competent authority assistance is granted, the Assistant Commissioner (International) will consult with the appropriate foreign competent authority and attempt to reach a mutual agreement acceptable to all parties.
Rev. Proc. 96-13 contains the procedures for simultaneous Appeals consideration of competent authority issues. The Appeals representative acts as a mediator, per se, consulting with the taxpayer and the U.S. Competent Authority to try to reach a resolution before presenting the issue at hand to the foreign competent authority. Under this procedure, taxpayers are not afforded a fresh review by Appeals if the taxpayer and the U.S. Competent Authority do not reach a resolution under the simultaneous Appeals procedures. The primary benefit of simultaneous Appeals consideration is to expedite the resolution of applicable issues with the U.S. Competent Authority, so as to reach resolution of the issue with the foreign competent authority.
The mission of Appeals is to resolve tax controversies without litigation in a manner both fair and impartial to both the taxpayer and the government. ADR procedures assist the Service and taxpayers in facilitating timely resolution of tax disputes. These procedures are intended to reduce taxpayer burden, increase service to all taxpayers and decrease the cost incurred by both the IRS and taxpayers in dispute resolution matters. Taxpayers are strongly encouraged to evaluate the alternatives available through the use of ADR programs.
Editor's note: Mr. Ely chairs the AICPA Tax Division's Tax Practice & Procedures Committee. Mr. Dougherty and Ms. Pflieger are members of the committee. Ms. Trompeter is the committee's Technical Manager.
FROM JAMES A. DOUGHERTY, CPA, DIRECTOR, TAX CONTROVERSY, AND CHERIE A. HILL, TAX MANAGER, WASHINGTON
Mark H. Ely, J.D. CPA National Partner-in-Charge of Tax Controversy Technical Services Washington National tax KPMG LLP Washington, DC
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|Title Annotation:||IRS-taxpayer disputes|
|Author:||Dougherty, James A.|
|Publication:||The Tax Adviser|
|Date:||Oct 1, 1999|
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