Modernization in Appeals.

The mission of the IRS Appeals is to resolve tax controversies without litigation in a fair and impartial manner. In fiscal year 1992, Appeals closed 74,000 cases, of which about 88% were agreed settlements. The Appeals's settlement authority is very broad. When there is a tax dispute, Appeals is the place to come for resolution. Its staff has the training and expertise to take a fresh look at a case, evaluate its facts and merits, and use good judgment in weighing everything relevant to arrive at a fair settlement.

Appeals is bound by the Internal Revenue Code, regulations and Service Positions favorable to the taxpayer. If the Service position is unfavorable to the taxpayer, the Appeals can settle via an alternative dispute resolution (ADR). Most tax controversies are still resolved as a result of negotiation in an Appeals conference. Very few are litigated - only about 1,500 in any given year.

While innovative IRS programs can help any taxpayer, the "big" money also comes to Appeals. As of Dec. 31, 1992, the approximately 460 "large cases" in inventory involved over $40 billion in disputed liability. While large cases represent less than 1% of the 60,000 cases in Appeals, they represent over 80% of the total amount of liability in dispute.

For years, tax practitioners and the IRS have met to ask questions, obtain answers and discuss problems. For many years, the same questions seemed to arise, and the same answers were given. Now, times are changing and Appeals is in the vanguard. Instead of explaining the way the system works in response to inquiries, Appeals wants to review its systems to see how they can work better for practitioners and their clients.

Prime examples of this proactive thinking are underway within the Appeals organization. Many modernization efforts have been implemented or are being tested in different parts of the country right now. Appeals is moving on many fronts to improve customer service and reduce the burden on taxpayers.

The Appeals

Customer Service Program

The Appeals Customer Service Program began as a "pilot" in the Denver Appeals Office. The program began with the dual goals of improving the information that taxpayers receive about the appeals process and providing assistance in getting through the process.

The Appeals Service Representative (ASR) assists with problems that might delay getting a case to Appeals after the Service's tax examiner and the taxpayer disagree, answers taxpayer questions about filing protests, responds to questions on the appeals process in general and assists with problems that might delay case closure. Taxpayers are sent a flyer about the program with the examination report that proposes adjustments to their tax liability. The flyer includes the name and telephone number of the ASR.

The Pilot was so successful that the program was expanded to at least one Appeals office in every region during fiscal year 1993. This program demonstrates Appeals's responsiveness to taxpayer needs, thus improving customer satisfaction and reducing the burden on taxpayers.

The participating Appeals offices, ASRs and their telephone numbers are listed by region:

* Central: Cleveland Appeals Office, Denise Neidermeyer, [phone].

* Mid-Atlantic: Newark Appeals Office, Ellen Wassong, [phone].

* Midwest: St. Paul Appeals Office, Nancy Janssen, [phone].

* North Atlantic: Long Island Appeals Office, Lawrence Ostrow, [phone].

* Southeast: Jacksonville Appeals Office, Sandra Taylor, [phone].

* Southwest: Denver Appeals Office and Cheyenne Sub-Office, Marianne Hudson, [phone]; Houston Appeals Office, Sue Marhofer, [phone]; Oklahoma City Appeals Office, Judith Jones, [phone].

* Western: San Francisco Appeals Office, Margaret Gerdine, [phone].

The Delegation of

Settlement Authority Test

The Delegation of Settlement Authority Test gives settlement authority to appeals officers for agreed cases under $10,000 per tax period, with certain exceptions for complex or sensitive cases. The results of this test will determine if it has freed up time for managers and appeals officers, and improved Customer service by reducing the time a case is in Appeals.

The test has been extended for one year (through Sept. 30, 1993) for evaluation purposes. Thus far, this test has run smoothly; no major problems have been encountered. A decision whether to implement the program nationwide is under consideration.

The "test" offices are:

* Mid-Atlantic: All offices.

* Midwest: All offices.

* Southwest: All offices.

* Central: Louisville, Cleveland and Detroit offices.

* Western: Laguna Niguel and San Diego offices.

Appeals service center claims

Taxpayers usually file claims with the service centers to change a previously filed return or establish their right to a refund or credit. When the service center staff members receive the claim, they examine it for accuracy and appropriateness and make the necessary adjustments to the tax liability or determine that it cannot be allowed. If they determine that the claim cannot be allowed, a notice of disallowance is issued to the taxpayer.

This project was initiated when some taxpayers and representatives complained that they had no administrative recourse when a claim was denied by the service center. Although taxpayers could request an appeal, the notice of claim disallowance did not clearly advise them of this right. Taxpayers believed that their only recourse was to file suit.

The notice of claim disallowance has been changed to advise taxpayers that they have a right to an administrative appeal, and to tell them how to protest the disallowance and request reconsideration of their claim. Internal procedures have also been established to receive and review protests to disallowances and process cases to Appeals.

This project was tested during 1991, and the changes to the letters and the new procedures were implemented nationwide in early 1992.

The Collection Appeals Test

Collection formulated a process to determine whether taxpayers need additional opportunities to have the decisions of Collection personnel subject to administrative review by an independent authority. The Collection Appeals Test provides taxpayers with an opportunity for independent review in Appeals of Collection action on their accounts. The substance of this test has been included in recent proposals of the "Taxpayer's Bill of Rights II."

The following actions are "appealable":

* Seizures.

* Notices of levy.

* Liens.

* Installment plans.

* Denial of any collection management conference.

* Issues relating to properly crediting accounts.

This test started in March 1992 in the Indianapolis Appeals Office and covered all taxpayers dealing with Collection Field Branches in Indiana. The test has since been expanded to cover taxpayers living in Washington State and Colorado. At present, test results are under review.

The Service has extended this process to taxpayers whose tax cases are assigned to the Seattle Automated Collection System "call site."

Art valuation determinations

Under the current system, if a taxpayer makes a charitable contribution of fine art in excess of $5,000, a qualified appraisal by a qualified appraiser must be provided to support the value claimed and be submitted with the return. The IRS reviews only the "correctness" of this value after the return has been filed and if the case has been selected for examination.

If the case has been selected for examination and involves artwork with a claimed value of $20,000 or more, the case must be referred to the National Office for review by the Commissioner's Art Advisory Panel. The Panel is composed of 25 art experts who serve without compensation.

Currently under consideration is an advance determination procedure that would provide taxpayers with an option to have the deduction approved and resolved before filing the return. The benefits from such a procedure include:

* Taxpayer certainty, as the value of the claimed deduction will be determined before the tax return is filed.

* Reduction of taxpayers' time and cost.

* Reduction in the number of necessary examinations of artwork.

* Reduction in the possible cases in Appeals and District Counsel.

Use of Installment agreements

Sometimes taxpayers cannot pay all they owe at one time. In the past, only the IRS Collection function could work out an installment agreement. Now, installment agreement authority levels exist for Appeals (along with Collection, Employee Plans and Exempt Organizations, Examination, Problem Resolution Program, and Returns Processing and Taxpayer Service).

The Seattle Appeals Office has been in the forefront of this initiative. It tested offering taxpayers who did not owe other taxes the opportunity to pay liabilities of less than $10,000 in monthly installments, and found the test to be a success.

At the same time Seattle was testing this program, the Installment Agreement Task Force came out with its recommendations, which resulted in the current procedures. The process allows for automatic agreement in amounts under $10,000. It also allows for installment agreements on higher amounts, but these are not automatic and Collection is consulted.

Appeals has implemented this initiative nationwide, enabling its officers to

- tell taxpayers exactly how they are expected to pay their tax liabilities;

- limit the number of additional taxpayer contacts and the expense of such contacts;

- accelerate payments, thereby reducing the growth of the Accounts Receivable Dollar Inventory (ARDI); and

- inform taxpayers who have reservations about payment and collection how they can settle disputed deficiencies through a payment plan for the outstanding liability.

Offers in compromise

With the issuance of a new policy statement (P-5-100) on acceptance of offers in compromise, Appeals is encouraging the use of offers to resolve both older accounts receivable and tax liabilities currently determined by Appeals.

The role of Appeals with respect to offers rejected by the district director has not changed substantially under the new procedures. Appeals is still committed to resolving the dispute between the taxpayer and the district director over the acceptability of an offer in compromise whenever possible. In many cases the offer is the best method to maximize collection of older accounts receivable and to provide the taxpayer with a fresh start. For many taxpayers this provides a preferable alternative to bankruptcy.

Offers can also be used to address taxpayer concerns about the inability to pay a liability currently pending in Appeals. Taxpayers can resolve both the amount of the liability and the method of payment. Appeals can simultaneously determine the amount of the deficiency and request that Collection determine an acceptable offer.

Offers based on doubt as to collectibility still must be examined by the Collection Division to determine collection potential. It may accept the offer in the district after this investigation. However, if the district director recommends rejection of the offer, the taxpayer may request Appeals consideration of the offer.

During the past year, the Appeals manual on offers in compromise has been rewritten to emphasize the new policy statement and encourage the use of offers in compromise. In addition, Appeals has stressed the use of offers in compromise to resolve collectibility issues on pending liability cases.

Expanded ADR

The Service has employed a very successful administrative appeals process for more than 60 years. Now, in an effort to achieve the goals of Compliance 2000, the Service is considering pilot programs to implement additional ADR techniques that go beyond the traditional appeals process.

The Alternative Dispute Resolution Act of 1990 encourages all Federal agencies to explore ADR techniques. These techniques will be reviewed to determine how they fit in with Appeals's "mission."

Taxpayers are urging the Service to augment its approach to resolution of tax controversies without litigation. Appeals has always used some ADR techniques, such as facilitation and negotiation. Taxpayers are now asking Appeals to consider additional ADR techniques, including arbitration, mediation, early neutral evaluation, early Appeals referral and neutral expert fact-finding.

Appeals International Programs has developed a proposal for using ADR techniques to resolve appropriate nondocketed cases (such as Sec. 482 cases). Regional Directors of Appeals, Service executives and Service employees have received (or will receive) ADR training.

Advance pricing agreements 

The advance pricing agreement (APA) process was developed so that taxpayers and the Service could reach an agreement on taxpayers' prospective use of transfer-pricing methods or cost-sharing arrangements. Rev. Proc. 91-22, issued by the Office of Associate Chief Counsel (International), sets forth the procedures for obtaining an APA.

Both taxpayers and the government can derive significant benefits from the APA process. Taxpayers should welcome the concept as a way to obtain certainty in a complex area and to avoid lengthy confrontation with the IRS and possibly with a foreign tax administration. In addition, both the Service and the taxpayer should benefit from a more rapid and less costly resolution of transfer-pricing issues.

The APA program has grown quickly. From a small beginning of just seven APA requests, the current inventory now includes 38 cases, involving at least 16 different countries. Forty cases have been closed, 28 resulted in APAs or related agreements and eight have been approved by the relevant foreign competent authorities. Eight other cases are in the final stages where agreement has been reached in principle (as of June 30, 1993).

The National Director of Appeals and the Associate Chief Counsel (International) have established guidelines that apply at the regional level, defining the responsibility and authority within Appeals consistent with Rev. Proc. 91-22. These guidelines are intended to give direction to the APA and to foster prompt and clear communication concerning Appeals's involvement in the APA process.

Appeals processing sections

In many parts of the country, Appeals can now help taxpayers with billing problems, interest computation questions, late assessments or other account problems through "in-house" processing sections. Implementation of Appeals processing sections (APSS) has resulted in improved service to taxpayers, a reduction in overall processing time, the elimination of redundant work, improvement in quality of work and the establishment of upward mobility positions within Appeals.

The procedures and other necessary action to implement this program include the preparation of position descriptions and critical elements and standards, and appraisal guidelines for employees and managers. Appeals has fostered and supported implementation of this program (currently in various stages of implementation).

* Southwest: All offices have implemented APS.

* Mid-Atlantic: Richmond was operational effective Sept. 1991; the remaining five offices were implemented prior to June 15, 1993.

* Midwest: Kansas City was operational effective Oct. 1992.

* Central: Detroit was operational effective Sept. 1992; Indianapolis plans to implement before Oct. 1, 1993.

* Southeast: Atlanta, New Orleans and Miami plan to implement by Dec. 31, 1993.

* Western: A centralized version of APS has been implemented for four Appeals offices serviced by the Fresno Service Center, with two more offices to follow.

Conclusion

The goal of the Appeals's modernization programs is to improve customer service and reduce the burden on the taxpaying public. While tax simplification is the ultimate answer to better service and burden reduction, Appeals, of course, cannot directly simplify the tax laws. But it can, and does, try to streamline its own procedures, rules and regulations. Such efforts eliminate barriers, provide one-stop service for taxpayers and make it easier for taxpayers and the IRS to work together.