Guidance on prohibition of ex parte communications.

In 1927, the IRS established the Office of Appeals. Its mission is to resolve tax controversies without litigation, to the extent possible, in a fair and impartial manner to both the taxpayer and the government. For cases that cannot be settled at the examination level, Appeals provides the final administrative forum for dispute resolution. Traditionally, there have been no limits on communications between IRS employees and Appeals officers. However, Section 1001(a)(4) of the Internal Revenue Service Restructuring and Reform Act of 1998 (IRS-RRA '98), requires the Service to establish an independent Office of Appeals. Under its reorganization plan, the IRS must ensure an independent Appeals function within the Service by prohibiting ex parte communications between Appeals officers and other IRS employees.

In response to the IRSRRA '98, the Service issued Notice 99-50, a proposed revenue procedure that addresses the prohibition on ex parte communications. The proposed guidance will be effective after it is published in final form; until that time, existing restrictions on communications for cases within Appeals will continue to apply.

Prohibited Ex Parte Communications

Notice 99-50 proposes guidance for addressing the prohibition on ex parte communications when such communications appear to compromise Appeals officers' independence. Ex parte communications are oral or written communications that take place when either the taxpayer or the taxpayer's representative is not present.

In general, communications between Appeals officers and other IRS employees are not permitted unless the taxpayer or his representative is given the opportunity to participate. "Opportunity to participate" means that the taxpayer will be given reasonable notice to attend meetings or participate in conference calls with the Appeals officer and the originating division (e.g., the Examination and Collection Divisions), when the taxpayer's case is discussed.

Permissible Ex Parte Communications

Notice 99-50 also enumerates the types of communications the Service deems permissible:

* Originating office (e.g., the Examination and Collection Divisions). An Appeals officer will be allowed to ask general or clarifying questions. In addition, he may also ask questions about whether certain information was requested or received, or about the anticipated return of the case to the originating function.

* Industry Specialization Program (ISP) Issues. Communications involving the ISP are permitted in cases under Appeals' jurisdiction that must be reviewed and approved by the Appeals ISP Coordinator.

* Post-settlement conferences. Post-settlement conferences with the Examinations Office are generally permitted, because such conferences inform Examinations about the settlement and provide information that mat be helpful in auditing subsequent cycles.

* Delegation Order No, 247. Communications are permitted that involve Delegation Order No. 247, which provides Examinations case managers with limited settlement authority to resolve coordinated issues which have Appeals Settlement Guidelines, subject to review and approval of both Examinations and Appeals ISP coordinators.

* Joint Committee on Taxation. Communications by Appeals with the Joint Committee on Taxation are permitted; the ex parte prohibition applies only to communications between Appeals officers and other IRS employees.

Chief Counsel

Because the Chief Counsel is the legal adviser for the Service (including Appeals officers), special issues arise as to communications between Counsel attorneys and Appeals officers. The most controversial aspect of the IRS's proposed provision is whether the Office of Chief Counsel is excluded from the ex parte prohibition and, thus, can continue to advise Appeals officers without taxpayer involvement. Notice 99-50 provides that, while Appeals officers may continue to obtain legal advice from the Office of Chief Counsel, they remain responsible for independently evaluation a case's strengths and weaknesses and for making independent judgments about the hazards of litigating. Notice 99-50 does not propose to preclude Counsel from speaking with Appeals officers regarding:

* Disclosure of the Chief Counsel's legal position on specific questions of law;

* Comprehension or interpretation of specific legal authorities; or

* Provision of legal assistance to Appeals officers.

Conclusion

When finalized, Notice 99-50 rules will require (in certain cases) a fundamental change in how Appeals officers approach cases and the manner in which Appeals has traditionally operated during an appeal. However, issues involving Appeals Office independence may remain. For example, Counsel might continue to influence Appeals officers. In addition, certain exceptions from the ex parte prohibition do not appear to be completely consistent with the express goals of the IRSRRA '98. Whether the proposed rules will ensure independence or help taxpayers has yet to be determined.

FROM SARAH B. FITZGERALD, J.D., AND LAUREN ROBERTS, J.D., CPA KPMG LLP, WASHINGTON, DC