New ways of doing business in Appeals.

Settling the country's federal tax controversies has been the responsibility of the IRS's Appeals organization since the 1920s. Over the decades, Appeals has improved its service to the point where it settles almost 90 percent of the cases that come to it. For years, Appeals has consistently closed between 85 and 90 percent of its cases using the same method: the appeals conference. Now we are looking at some new and better ways of doing business.

Taxpayers should know at the outset, however, that we do not plan to scrap the appeals conference and reinvent the wheel. Our track record is too good to abandon our time-tested policies and procedures, but no organization should stagnate or rest on its laurels. Appeals is exploring and testing new programs to improve its services to taxpayers and taxpayer representatives and to improve its overall products.

Where We've Been

Since 1927, Appeals has resolved tax disputes between taxpayers and the IRS without litigation in a fair and impartial manner. In Fiscal Year 1993, Appeals closed 70,401 cases of which about 88 percent were agreed settlements. These cases were referred to Appeals from Examination, Collection, the Service Centers, and, with respect to docketed cases, from District Counsel. (About 37 percent of Appeals' cases are docketed in the Tax Court.)

Appeals officers are some of the most experienced, well-trained IRS employees. They possess the expertise to take a fresh look at a case, to review its facts and merits, and to use good judgment in evaluating everything relevant to arrive at a settlement that is right for each specific case. They are bound by the Code, regulations, and IRS position favorable to the taxpayer. Where the IRS position is unfavorable to the taxpayer, they can still settle based, among other things, upon the hazards of litigation.

Where We Are Now

Most tax controversies continue to be resolved through negotiation with Appeals. Very few cases end in litigation-about 1,500 in any given year. Even so, Appeals is exploring and developing additional settlement techniques. Today, the business of Appeals is called dispute resolution (DR). The term DR describes any process designed to settle a dispute without litigation. DR techniques range in complexity (and expense) from simple settlement negotiations to mediation to binding arbitration with an unlimited number of hybrid techniques in between. Innovative methods are being developed in response to growing interest in DR.

As the National Director of Appeals, I am interested in developing additional DR techniques that will speed up the settlement process. My interest coincides with a basic DR principle of resolving the dispute at the earliest possible stage. To achieve this goal, we are currently:

* Pioneering early Appeals referral in some of our largest cases. Under this approach, Appeals will, upon the taxpayer's request, consider certain issues and try to resolve them while the case is still in Examination. Hence, the taxpayer has the option of asking the revenue agent to forward certain issues to Appeals while the agent works the rest of the case. This can speed up the entire process while preserving all regular Appeal rights for the taxpayer. We will publish an announcement on these procedures in December 1993.

* Providing the authority under Delegation Order No. 236 to apply previous Appeals settlements on "rollover" and recurring issues in which the facts are the same and where there has been no change in law.

* Developing a process to provide advance determinations in the valuation of art works. This program affords taxpayers the option to request an IRS review of appraisals of art works donated to charity and can eliminate the need to examine the valuation issue at a later date.

* Using the Advance Pricing Agreements, which were established under Rev. Proc. 91-22, as a dispute avoidance program. With an APA, the taxpayer and the IRS negotiate an agreement regarding the taxpayer's pricing methodology for prospective years. This program has been successful at resolving transfer pricing disputes.

There are currently about 45 APA requests and 36 more taxpayers are actively considering the process. Typically, an APA can be reached in a little less than a year, a sharp contrast to the traditional IRS resolution process that can take a number of years.

* Using Tax Court Rule 124 Voluntary Binding Arbitration. The most publicized Tax Court Rule 124 arbitration is the Apple Computer arbitration concerning transfer pricing. That case employed "baseball" arbitration, which required both parties to submit a dollar amount as its final offer and the arbitrator to choose one of the two final numbers. The parties' "final offers" were expected to be much closer together than the amounts on the return and the notice of deficiency. (1)

Arbitration is a flexible DR process that can be adapted to accommodate a wide range of disputes on highly factual topics.

* Considering a proposal to accelerate the disposition of issues through the Industry Specialization Program. Under this proposal, the IRS will resolve unagreed ISP issues in Examination with the review and concurrence of Appeals.

This proposal will initially be limited to Coordinated Examination Program cases. The CEP Case Manager may be able to settle the issue while the case is still in Examination if the proposed resolution is approved by the Appeals ISP coordinator. If a resolution cannot be reached with Examination, the taxpayer still has regular appeal rights.

* Considering procedures for taxpayers to request the involvement of Appeals in the competent authority process.

Where We're Going

Appeals has been making great strides at increasing its "menu" of ways to resolve tax disputes. We remain open to considering even more approaches to settle cases, which is consistent not only with the basic Appeals mission but with the Administrative Dispute Resolution Act of 1990, which encourages federal agencies to consider dispute resolution techniques.

There is no shortage of organizations in Washington available to assist Appeals in its exploration of additional DR techniques. Three of the most prominent are:

* Administrative Conference of the United States, a permanent, independent federal agency chartered in 1964 with the passage of the Administrative Conference Act (5 U.S.C. 571-576). ACUS examines issues of administrative law and agency procedure.

* Federal Mediation and Conciliation Service, an independent agency of the federal government that was established in 1947. FMCS is headquartered in Washington and has 210 mediators located in 78 field offices among nine districts across the country.

* Center for Dispute Settlement, a tax-exempt, nonprofit corporation specializing in the design, implementation, and evaluation of alternative methods ef dispute resolution.

Appeals has established contacts with these and other DR organizations to benefit from the wealth of knowledge and experience that they possess. Here are some of the things we are doing:

* DR Seminars. Working with FMCS, Appeals sponsored a three-day seminar in DR techniques for Appeals executives and managers. We hope to sponsor another DR seminar for other Chief Counsel and IRS executives and representatives from Appeals.

* Systems Design Working Group. ACUS has established an interagency Systems Design Working Group involving representatives from more than a dozen federal agencies. Appeals personnel were active participants on the Design Task Force, which developed a systems design checklist for use by government agencies that was completed in June 1993.

* DR Advisory and Working Groups. An Advisory Group, composed of Appeals executives and managers from the field and National Office as well as representatives from Chief Counsel and other IRS functions, was formed this Spring. The Advisory Group will review and comment on various DR proposals. A smaller Appeals DR Working Group was also formed. Working with ACUS, FMCS and CDS, this group proposes and designs DR pilot projects for consideration by the Advisory Group. The Working Group will also monitor DR pilot projects and draft guidelines.

* Getting the Word Out. The final version of all these proposals will be published in the Internal Revenue Bulletin as a Notice in early December, and then be the subject of a public hearing in Washington in January 1994. The hearing will be similar to ones the IRS holds on proposed regulations. We expect to issue Internal Revenue Manual provisions and a Revenue Procedure on the dispute resolution techniques.

Appeals is moving forward on many fronts. If you have any questions, or if Appeals can help you in any way, please feel free to contact me in Washington at [phone] or write to me. My address is'. National Director of Appeals, 901 D St., S.W., Suite 236, Box 68, Washington, D.C. 20024. (1) A baseball-type arbitration proceeding may induce the parties to settle the case before even it goes to the arbitration panel, since the competing offers are usually closer together than they would otherwise be. Moreover, if a case is settled at Appeals before the arbitration panel reaches its conclusion, the result would be eligible to be "rolled over" by Examination under Delegation Order No. 236.