Appeals collection developments.

As part of the IRS reorganization, the Appeals organization has been restructured. It now has a different management configuration, new programs and streamlined processes. The new structure' includes three operating divisions--Large & Midsize Business (LMSB), Small Business/Self Employed-Tax Exempt/ Government Entities (SBSE-TEGE) and Wage and Investment (W&I). The Appeals organization assigns collection cases to SBSE-TEGE and W&I appeals officers.

Since the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98), Appeals has reported a steady increase in cases involving collection issues and processes. Presently, collection-related cases are 40% of Appeals' total caseload. This number represents an all-time high, and an exciting challenge and change from the historical focus on income-tax examination issues.

Background

Taxpayers gained new procedural rights and safeguards under the IRSRRA '98, called Collection Due Process (CDP). Taxpayers can appeal proposed levy actions and a filed Notice of Federal Tax Lien. When a taxpayer opposes the filed lien or proposed levy action, he can participate in a CDP hearing, in which he has protections similar to those in dealing with other creditors (Section 3401).

During the CDP hearing, taxpayers can propose alternatives to the collection process. Most taxpayers choose installment agreements and offers in compromise (OICs) as alternatives. The Service cannot take levy action while their CDP case is in Appeals--unless the Service can show that collection is in jeopardy.

Appeals Collection Workload

CDP cases have been the fastest-growing part of Appeals collection inventory. As of February 2001, CDP represented 62% of the total collection workload. The CDP receipts in March 2001 continue the trend. Exhibits 1 and 2 present data on collection inventory and receipts for CDP, OIC, Trust Fund Recovery (TFRP), Penalty Appeals (PENAP), Collection--Miscellaneous (CO-OTHER.) and the Collection Appeals Program (CAP).

Exhibit 1: Collection-type inventory(*)

CDP         62%  (11,136)
PENAP        4%  (754)
OIC         25%  (4,464)
TFRP         6%  (1,029)
Co-Other     2%  (368)
CAP          0%  (69)

(*)Note: Percentages add only to 99%

Exhibit 2: Collection-type receipts

CDP         60%  (7,761)
PENAP        6%  (718)
OIC         23%  (2,951)
TFRP         4%  (513)
Co-Other     2%  (202)
CAP          5%  (640)

Note: Table made from a pie chart.

OIC, PENAP and CAP cases have also been increasing. Appeals offices are preparing for increases in the OIC program because it is popular with the public and IRS Compliance can resolve these cases more efficiently.

The Appeals CDP Hearing

In each CDP case, the Appeals Officer should:

* Obtain verification from the IRS office collecting the tax that the requirements of the law and administrative procedures have been met.

* Address issues presented by the taxpayer, including spousal defense (i.e., innocent spouse), challenges to the proposed collection action, offers by the taxpayer for collection alternatives (e.g., installment agreements and OICs) and challenges to the underlying liability (if the taxpayer did not receive a statutory deficiency notice or otherwise have an opportunity to dispute the liability).

* Consider whether the proposed collection action balances the need for the efficient collection of taxes with the taxpayer's legitimate concern that the collection action be no more intrusive than necessary.

The Office of Appeals is required to address these factors during each CDP hearing (Secs. 6320 and 6330).

Appeals Officer Collection Training

Because the Appeals organization added the collection cases to the traditional Appeals caseload, it initiated an extensive training program. Appeals has about 500 appeals officers trained to resolve CDP cases. These appeals officers have completed a comprehensive training program.

In addition, Appeals has at least 65 settlement officers who are former Collection-function employees selected for their expertise in collection-related regulations and procedures. It trained them to resolve CDP cases, employing Appeals' settlement philosophy. These settlement officers have had impressive careers and experience in the former Collection function of the Service.

Other Appeals Collection Programs

CAP. On April 1,1996, the IRS implemented an administrative appeals program for taxpayers called CAP. Initially, the Service limited taxpayers to raising seizures, levies and liens when Appeals heard these CAP cases. Then, in July 1996, President Clinton signed the Taxpayer Bill of Rights II, granting taxpayers the right to appeal the termination of installment agreements, which was effective as of 1997 (Sec. 6159(d); see also Sec. 7122(d)). Also added to the CAP program were the discharge, subordination, and nonattachment of Federal Tax Lien and third-party claims and nominee liens. Taxpayers who request a CAP appeal now have an opportunity to have the IRS review collection actions without going to court. CAP cases are high-priority. Appeals' goal is to complete a CAP case within five days.

Offer Program. The Appeals Office has been the final arbiter of OICs proposed for rejection by the Service compliance functions. When Congress passed the IRSRRA '98, however, the right to appeal a rejected OIC became law. When Compliance (Collection or Examination) notifies a taxpayer that it proposes to reject an OIC, the taxpayer has 30 days to request Appeals consideration. Appeals then schedules a conference with the taxpayer to review Compliance's reason(s) for rejecting the OIC, discuss the taxpayer's issues and make a determination. Possible outcomes include deciding to sustain Compliance's rejection, accepting the original OIC or securing an amended OIC from the taxpayer that Appeals finds acceptable. As of February 2001, the IRS had a record number of OICs pending. It should be noted that when CDP cases increase, so does the popularity of the OIC program. This will continue to give the Appeals division new challenges.

Fast Track Mediation. As part of a pilot Appeals Fast Track Mediation Program, taxpayers may request mediation of OIC cases up to $50,000 and trust-fund recovery penalties up to $100,000. The Fast Track Mediation Program is currently available in Denver; Houston; Hartford, Connecticut; and Jacksonville, Florida. Additional information on the Fast Track Mediation Program is available at irs.gov/ prod/ind_info/appeals/pub-proc.html.

Other Programs

In addition to CDP, CAP and OIC, the Office of Appeals previously considered (and continues to hear) other types of collection-related issues, such as TFRP, PENAP and jeopardy levies.

Taxpayer/Practitioner Tips

Because Appeals is independent of the IRS investigative processes, taxpayers can assist Appeals by coming to collection-related Appeals hearings (especially CDP, CAP and OIC hearings) prepared to support their cases. Unless the underlying liability is the appeal's primary focus, taxpayers should bring current, verifiable financial statements to the hearing. The Appeals office requires taxpayers to provide this information before it considers any alternatives to, or deviation from, Compliance's initial recommendations. Taxpayers help Appeals facilitate their case by providing recent bank and wage statements, loan balances and asset valuations. If taxpayers come to Appeals without documentation to support their cases, they will experience delays. Under these circumstances, Appeals must send referrals to the Compliance functions for verification of missing information. Appeals is now considering many CDP cases in which taxpayers are raising liability issues that do not meet the criteria under Secs. 6320 and 6330. However, in many of these cases, taxpayers would qualify for the Audit Reconsideration Program under new guidelines implemented in October 2000. If taxpayers used this program in a timely manner, Appeals could correct taxpayers' liabilities as necessary, and potentially stop collection notices.

The criteria for this program are:

1. The taxpayer disagrees with an assessment from an audit or denial of a credit (such as the earned income credit),

2. The taxpayer can identify the adjustment at issue, and has additional information not previously considered during the original examination; or the taxpayer contests substitute return assessments under Sec. 6020(b) by filing delinquent returns, and

3. The taxpayer has not paid the assessment or the Service reverses the tax credit in dispute.

The functional area that processed an Audit Reconsideration case is the first to consider the assessment. If the Service Center or Compliance proposes partial or full disallowance of the request, the Appeals Division offers taxpayers appeal rights in the disallowance letter. However, if Appeals makes an assessment, it also hears the request for reconsideration; see Pub. 3598, What You Should Know About the Audit Reconsideration Process, for more details about this program.

Conclusion

As Appeals approaches its 75th anniversary as the premier dispute resolution organization in the executive branch of government, it faces one of its greatest challenges to effectively deal with the many changes in the source and nature of its case work. The employees of the Appeals organization feel privileged that Congress entrusted them with ensuring independent and fair resolution of CDP cases. For assistance, taxpayers with Appeals collection-related issues can contact an Appeals Outreach Representative toll-free, at [phone]. As a result of the extensive Appeals Collection Training Program, the Appeals organization can effectively respond to the demands of the increased collection caseload of the future.

FROM DANIEL L. BLACK, NATIONAL CHIEF--APPEALS, INTERNAL REVENUE SERVICE, WASHINGTON, DC

Mark H. Ely, J.D., CPA
Partner
Washington National Tax
KPMG LLP
Washington, DC