Notice 99-50: ex parte communications.

On December 15, 1999, Tax Executives Institute filed the following comments with the Internal Revenue Service relating to Notice 99-50, which provides guidance on the prohibition on ex parte communications between IRS Appeals Officers and other IRS employees. The comments were prepared under the aegis of TEI's IRS Administrative Affairs Committee, whose chair is Robert J. McDonough, Jr. Victoria D. McInnis of General Motors Corporation, Paul O'Connor of Millipore Corporation, Loren M. Opper of Ford Motor Co., and Anthony W. Rackley of The Williams Companies materially participated in the preparation of the comments.

On behalf of Tax Executives Institute, I am pleased to submit the following comments on Notice 99-50, which provides guidance on the prohibition on ex parte communications between IRS Appeals Officers and other employees of the Internal Revenue Service. The proposed revenue procedure was issued by the IRS on September 17, 1999.

Background

Tax Executives Institute is the preeminent association of business tax executives in North America. Our approximately 5,000 members represent 2,800 of the leading corporations through 52 chapters in the United States, Canada, and Europe. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and that taxpayers can comply with in a cost-efficient manner.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the Internal Revenue Service and provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by Notice 99-50, relating to the prohibition on ex parte communications between Appeals Officers and other IRS employees.

The Statutory Mandate

Section 1001(a) of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105226, 112 Stat. 685, requires the Commissioner to develop and implement a plan to reorganize the IRS, including ensuring --

   an independent appeals function within the Internal Revenue Service
   including the prohibition in the plan of ex parte communications between
   appeals officers and other Internal Revenue Service employees to the extent
   that such communications appear to compromise the independence of the
   appeals officers.

The statute is thus not limited to acts that, in fact, compromise Appeals' independence, but rather recognizes that the perception of compromise is equally important.

TEI has long been a strong supporter of Appeals' mission to provide an independent and fair review of adjustments proposed by the Examination function and protested by the taxpayer. As an alternative dispute resolution function, the Appeals process is both informal and efficient. If taxpayers do not view Appeals as independent of other IRS functions, they may opt out of the administrative process, finding litigation a more viable, albeit more costly, alternative. If they believe Appeals is too aligned with Examination or Counsel, their confidence in Appeals' ability to settle cases fairly will be vitiated. The statute recognizes that a taxpayer's perception of Appeals as an independent and objective reviewer may be all that is required to prompt a settlement.

In developing guidance on the prohibition against ex parte communication, the question should not be, "Is this communication legally permissible under the statute?," but rather, "Could this communication create an impression that Appeals' mission to provide a fair, impartial hearing has been compromised?" In other words, the guidance should err on the side of open communications between the IRS and the taxpayer.

Notice 99-50 represents a good first step in ensuring that taxpayers will continue to view the Appeals function as a fair and impartial forum to resolve disputes. TEI commends the IRS for issuing the revenue procedure in a proposed format to permit taxpayers to review the proposal and submit comments before it is implemented.

Section 3 of Notice 99-50 sets forth a series of questions and answers to provide guidance on the scope and application of the ban on ex parte communications. The remainder of these comments addresses issues raised by those questions and answers.

Preliminary Review of the Case

Question 2 asks whether the prohibition on ex parte communications extends to discussions between the Appeals Officer and the originating office during the preliminary review of a case. The proposed procedure states:

   The Appeals Officer may ask general or clarifying questions which do not
   address the strengths and weaknesses of the issues and positions taken in
   the case. For example, the Appeals Officer may ask for clarification of a
   factual description or legal assertion in the file without involving the
   taxpayer/representative. The Appeals Officer may also ask whether certain
   information was requested and whether it was received. The Appeals Officer,
   however, may not engage in discussions of the strengths and weaknesses of
   the issues and positions in the case, which would appear to compromise the
   Appeals Officer's independence.

The proposed procedure thus distinguishes between discussions of facts or assertions in the file (which is permissible) and discussions of the strengths and weaknesses of an issue (which is impermissible).

The line between clarifying factual information and discussing the strengths or weaknesses of a case is a fine one and, unless care is taken, the underlying purpose of the statute may be frustrated.

TEI recommends that the revenue procedure prohibit all communications with other IRS employees except in certain specified circumstances, unless the taxpayer is invited to participate or consents to the ex parte contact. Permitted ex parte communications could include administrative or procedural matters and questions about the calculation of amounts. We recognize that restrictive controls could affect the efficiency or informality of the Appeals process, but believe that this is a tradeoff most taxpayers will accept to ensure a fair review of their cases.

Establishing a bright-line test will minimize confusion about the application of the rule and avoid the appearance of impropriety. Taxpayers and Appeals Officers may well agree that certain types of communications may continue without taxpayer participation, but the protections of the statute should be initially available for all taxpayers.

The Relationship Between Appeals and Counsel

Question 7 asks whether the prohibition on ex parte communications affects the relationship between Appeals and Counsel. The proposed procedure states that the prohibition "does not preclude Chief Counsel attorneys from advising Appeals Officers of the legal position of Chief Counsel on specific questions of law, assisting Appeals Officers in comprehending or interpreting specific legal authorities or otherwise providing legal assistance to Appeals Officers in the course of their duties."

TEI questions the scope of this exclusion. Counsel attorneys are clearly IRS employees and fall within the group covered by the 1998 Act.(1) Even if the argument could be made that Chief Counsel employees were not "IRS employees," however, we suggest the position runs counter to the intent of Congress, which may well view it as sophistic. The IRS should err here on the side of maintaining a high level of taxpayer confidence in the fairness of the system. Communications between Appeals and Counsel should be subject to the same restrictions as communications between Appeals and other IRS employees.

Moreover, because the same attorney often advises both the Examination and Appeals functions in respect of a particular case, excluding Counsel from these rules permits an easy, indirect way for extraneous information to be communicated to Appeals. Permitting Appeals and Examination to receive advice from the same individual seriously impairs the perception of Appeals' independence and may permit agents to do indirectly what they may not do directly. Different attorneys should advise the Examination and Appeals divisions.

Appeals ISP Coordinator

Question 9 asks the effect of the ex parte communication ban on the requirement that Industry Specialist Program (ISP) issues in Appeals be reviewed by the Appeals ISP Coordinator. The IRS responds that existing procedures for review and approval will remain in place, viewing communications between the Appeals Officer and the Appeals ISP Coordinator as entirely internal within the Appeals function.

Although TEI agrees that this is a correct interpretation of the law, the answer is silent about the relationship between the Appeals ISP Coordinator and the ISPs in the Examination function. In the absence of taxpayer involvement or consent, the final revenue procedure should explicitly bar ex parte communications on a particular case between the Appeals ISP Coordinator and other IRS employees, including the specialists in the Examination function.

General Meetings

Question 11 discusses the prohibition in the context of employee-wide meetings. The response notes that topics discussed at the meetings are generally not taxpayer-specific and concludes that such communications do not violate the prohibition because they do not relate to cases under Appeals jurisdiction. The IRS cautions, however, that Appeals must provide the taxpayer with an opportunity to participate when an Appeals Officer engages in a case-specific discussion with the originating office that "addresses the strengths and weaknesses of an issue or position in a specific case that is open in Appeals jurisdiction."

TEI believes that the response should be clarified. For example, a case that has been sent back to the Examination function for further factual development may not technically be under the jurisdiction of Appeals. Regardless of the status of the case, all discussions of taxpayer-specific issues should be avoided. The test should not be whether the issue or case is formally under review by Appeals. We recommend that Question 11 caution against all taxpayer-specific communications during these meetings.

Post-Settlement Conferences

Question 19 discusses the application of the ex parte ban on post-settlement conferences and concludes that the ban is inapplicable because the tax periods have been finalized and the "discussion of the resolution of issues present in those periods does not jeopardize the independence of Appeals." So long as there is no discussion of new issues not considered by Appeals, the communication is not subject to the prohibition.

Although TEI follows the logic of the proposed answer, we believe it assigns too little weight to how the rule applies to taxpayers under continuous audit, especially where recurring issues are involved. Thus, we believe that, if an issue is recurring and appears in a subsequent cycle, the post-settlement conference may serve as a forum for the Examination function to present its views. Preservation of the appearance of independence is achieved by including the taxpayer in conferences where recurring issues will be discussed.

Lack of Enforcement Method

Finally, TEI is concerned about the lack of an enforcement mechanism in the proposed procedure. No one is assigned responsibility for monitoring communications between Appeals Officers and other IRS employees. Moreover, to the extent ex parte communications occur, there are no procedures established for either notifying the taxpayer or imposing a penalty for violation of the prohibition. In our view, there is no adequate assurance for avoiding the appearance of compromising the independence of Appeals Officers.

TEI recommends that Appeals Chiefs assume responsibility for enforcing the prohibition on ex parte communications. The remedy for violating the prohibition, however, should be more than simply sharing the information with taxpayers. It should require that violations be taken into account in evaluating the IRS employee's performance. Additional training of the employee may also be required.

Conclusion

TEI appreciates the opportunity to comment on Notice 99-50, relating to the prohibition on ex parte communications between Appeals and other IRS personnel. If you have any questions on these comments or wish to discuss this issue, please contact Robert J. McDonough, Jr., chair of TEI's IRS Administrative Affairs Committee, at [phone], or Timothy J. McCormally of the Institute's staff at [phone].

(1) Under the 1998 Act, the Chief Counsel reports directly to the Commissioner, except in certain limited circumstances. I.R.C. [sections] 7803(b). See also N(35)000-160 (Jan. 22, 1999) (including Chief Counsel employees within the definition of "IRS employees" for purposes of section 7602(c)).