Mediation.

The mission of the Appeals function in the IRS is to resolve tax controversies without litigation, in a manner that is fair and impartial to both the government and the taxpayer. Several programs have been developed to assist in facilitating a timely settlement in Appeals. Appeals has developed alternative dispute resolution (ADR) procedures that assist in resolving tax disputes more productively. An example of such a procedure is mediation.

Mediation is a negotiation between the taxpayer and the Service with assistance by an objective and neutral third party. The mediator has no authority to impose a decision; however, the mediator facilitates communication between the two parties that do have the power to reach a settlement. Mediation is used at the end of the appeals process as a final attempt at resolution before litigation is necessary. The Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98), as well as the issuance of Announcement 98-99, have increased the interest and awareness in mediation.

Background

The procedures previously used for requesting mediation were outlined in Announcements 95-86 and 97-1. Mediation was only available on Coordinated Examination Program cases generally with disputes of more than $10 million. Therefore, the number of cases using mediation was limited. Only 17 requests for mediation were made, nine of which did not meet the requirements and were thus rejected.

The IRSRRA '98 Changes

The IRSRRA '98 codified the existing mediation procedures but eliminated the dollar threshold, making dispute resolution more readily available. Therefore, the IRS is to issue procedures that expand the availability of mediation. Until these are issued, requests are being accepted on an ad hoc basis. As of late 1998, Appeals was processing five mediation cases filed under the authority of the IRSRRA '98.

Announcement 98-99

In Announcement 98-99, the Service expanded the availability of the mediation dispute resolution technique. Taxpayers already in Appeals may now request mediation for factual issues involving an adjustment of $1 million or more. These procedures are available for requests made during a two-year test period beginning on Nov. 16, 1998. The announcement addresses the fact that the IRSRRA '98 requires taxpayers to have access to mediation below the $1 million threshold. Procedures for this expansion are being developed.

Role oft he mediator. The mediator's main responsibility is to facilitate. Therefore, the mediator will assist in the following:

* Defining issues;

* Promoting communication;

* Encouraging negotiations; and

* Fostering a resolution.

The taxpayer has much to gain and little to lose bemuse he does not forfeit any decision-making authority; mediation is nonbinding and the mediator does not have the authority to settle or render a decision that will negatively affect the taxpayer. This ADR technique has been developed to expedite both the taxpayer and the IRS in negotiating a settlement when other discussions are unsuccessful.

Availability. Announcement 98-99 extended mediation to resolve factual issues under the jurisdiction of Appeals that involve an adjustment of at least $1 million. Therefore, mediation may be helpful in disputes involving adjustments relating to items such as valuation, reasonable compensation or transfer pricing.

Mediation is not available for:

* Issues designated for litigation or docketed in any court;

* Industry Specialization Program issues or an Appeals Coordinated Issue; and

* Issues for which a taxpayer has (or intends) to request competent authority.

Taxpayers may want to consider using mediation in combination with other procedures that expedite issue resolution in appeals, such as the early referral to the appeals process. If issues meet mediation requirements and early referral negotiations are unsuccessful, the taxpayer could continue to encourage acceleration of issue resolution by requesting mediation.

Considerations. There are at least three considerations:

1. Type of mediator: An objective, neutral mediator may be selected from either within the Appeals function or outside the Service. Appeals personnel from another region or the National Office may fill the role as facilitator of the mediation process. In this instance, the IRS National Office Appeals will pay the mediator expenses. However, if a mediator is selected from outside the IRS, the taxpayer and the IRS National Office Appeals will split the costs.

2. Participants: The purpose of mediation is to resolve issues. Accordingly, during mediation sessions, it will be necessary for the participants with decision-making authority to attend. Therefore, a taxpayer will need to have present those participants with settlement authority as well as team members with expertise on the issue.

3. Time commitment: The Service intends for the mediation process to be a relatively brief, concise process. Sessions are expected to last only between one or two days. Therefore, a taxpayer will not be required to invest a large amount of time in using this dispute resolution.

Conclusion

The IRSRRA '98 and the issuance of Announcement 98-99 both seek to expand the provisions to expedite the resolution of tax disputes without the need for litigation. The accessibility of ADR techniques such as mediation provides settlement opportunities that lessen the resolution burden and cost to both the taxpayer and the IRS. With the recent vast expansion of availability, use of the mediation process is expected to increase.

FROM JAMES A. DOUGHERTY, WASHINGTON, DC