Appeals' role in tax shelter settlement: independence affirmed.

On January 17, 2006, Tax Executives Institute sent a letter to IRS Commissioner Mark W. Everson, expressing concern about Announcement 2005-80 on the independence of the Appeals function. The letter, which was reprinted in the January-February 2006 issue of The Tax Executive, gave rise to a discussion at TEI'S annual liaison with Commissioner Everson and other senior officials of the Internal Revenue Service, including David B. Robison, the IRS's National Director of Appeals, about the role of Appeals in tax administration. Following that meeting, TEI sat down with Mr. Robison to get him to expand on his comments during the meeting. (Note: The minutes of the TEI-IRS liaison meeting will be reprinted in the May-June issue of the magazine.) TEI's questions are printed in italics; Mr. Robison's responses in regular (roman) type.

Do you have any general responses to that letter?

First, I appreciate the strong support for Appeals expressed in the article. As acknowledged in the article, Appeals makes a pivotal contribution to ensuring our tax system is administered fairly. Appeals employees are very aware that our independence and impartiality are essential to our fulfilling our mandate. It is my experience--including that of the recent tax shelter initiatives--the Service also recognizes and supports our Appeals mission and our need to be independent.

But what is independence?

Basically, it means we exercise our independent judgment surrounding both the legal and factual disagreements in arriving at a particular settlement offer. We look at and consider the positions taken by the taxpayer and the Service during the examination. We evaluate the relative quality merits of the evidence presented and positions taken by all parties. But we also must consider all of the regulations, revenue rulings, procedures, and other published IRS guidance. Appeals is not independent from the IRS, it is independent within the IRS; we cannot ignore IRS guidance or the Service's decisions such as designating an issue for litigation.

Historically, Appeals' case resolution practices have not changed. For example, Appeals still secures agreement in approximately 85 percent of the cases we consider. This percentage holds true for traditional Appeals, Fast Track Settlement, and Post-Appeals Mediation. We continue to return approximately 15 to 20 percent of the largest cases to Compliance--and this, too, has remained unchanged for many years.

Compliance continues to close approximately 15 percent of its closures to Appeals. What is different, however, is that the number of issues being considered in each case is declining while the complexity of those issues is increasing.

Let's go back to the genesis of TEI's letter to the Commissioner: Appeals" involvement with the shelter initiatives. How is Appeals involved with them?

Our Appeals role is precisely the same for shelter and nonshelter work. I can assure you, Appeals is fulfilling its role in all of the internal discussions surrounding the tax shelter initiatives. Our credibility and effectiveness rest on our ability to uphold our responsibility to fully and fairly consider all points of view.

I'm sure you are aware of the audit of Appeals independence completed last fall by TIGTA [Treasury Inspector General for Tax Administration]. The TIGTA report found Appeals is providing the independence review function mandated by IRS Restructuing and Reform Act of 1998. That report studied in some detail the same issues raised in the TEI letter--and I believe the report should convince all who read it that an independent Appeals is alive and well. In addition, our customer satisfaction results indicate taxpayers and representatives find our independence and fairness in resolving disputes is increasing, and in fact both areas exceed our overall customer satisfaction. Taxpayers do indicate independence is one of their highest priorities for Appeals, so we must deliver it on every case we consider.

Currently, most listed transactions are settled outside of Appeals through the Service's published settlement initiatives. Appeals clearly is the primary driver behind the settlement offer, but we don't actually take possession of the cases and settle them. With exception of the Son of Boss shelter, taxpayers not agreeing with the initiative offer have been able to come to Appeals through the traditional channels, and we resolve based on their individual facts. I do not anticipate the exclusion of Appeals' input into a shelter initiative and case resolution similar what happened with Son of Boss will recur.

Remember, an initiative settlement offer is an opportunity for the taxpayer to resolve its tax dispute. It is an election, not a requirement. Some taxpayers may believe the settlement fairly considers the facts and circumstances of their transactions, and for them, it may make sense to accept the initiative offer. For others, as TEI observes regarding valuation disputes, taxpayers may believe the settlement offer is inadequate, and they may decide to request traditional Appeals consideration of their case. They are free and encouraged to do so. The Service's tax shelter initiatives do not limit the taxpayer's opportunities to resolve disputes; rather they expand it.

One of the provisions in Notice 2005-80 that prompted TEI's concern is the statement that "... eligible persons who forgo resolving eligible transactions under this settlement initiative ... should not expect to receive a better offer in Appeals than that offered under this settlement initiative ... ." The Institute's letter said the statement seems to undermine Appeals independence. What is your response to that concern?

TEI appropriately questions this portion of the announcement. But before I tell you why, let me state I believe this particular statement does not "usurp" our Appeals authority, but ultimately affirms it.

In formulating the settlement position, Appeals has attempted to correctly evaluate all evidence and positions taken and articulate them in the settlement offer. Some taxpayers may find that their particular facts and circumstances are less supportable than that used in making the initiative settlement offer. Others, as in TEI's valuation example, may be in just the opposite position. By using the phrase "should not expect to receive a better offer in Appeals," the Service is attempting to fairly warn taxpayers the initiative settlement offer doesn't represent a floor offer, the lowest common denominator, but rather one that "generally" describes the transactions. Both better and worse settlements have been the outcome for taxpayers exercising their traditional appeal rights.

Can you think of an example where the tax shelter initiative offer is different from how Appeals might settle the case through the exercise of its traditional authority or Fast Track Settlement means?

Certainly. Congress specifically has stated that the interest suspension rules in section 6404(g) of the Code will not apply to listed transactions. The Service, however, has waived that exclusion for taxpayers taking advantage of the Notice 2005-80 settlement offer. This is a benefit accorded only to taxpayers electing the initiative settlement. On its own, outside of the tax shelter initiatives, Appeals does not have the authority to grant this benefit.

Any final comments?

TEI requests affirmation that Appeals has neither abandoned nor compromised its mandate for a fair and impartial consideration of issues. Let me state, unequivocally, that we have not.

And again, I want to thank TEI for its strong support of our Appeals mission and independent role in tax administration.