Possible extension of examination settlement authority.

On February 13, 1995, Tax Executives Institute submitted the following comments to the Internal Revenue Service's Examination Settlement Authority Task Force, which was formed to review the administrative settlement policy within Examination, Appeals, and Counsel and to recommend to the IRS's Large Case Policy Board changes for improving the system. The IRS task force is chaired by David G. Blattner, Regional Commissioner (Midwest), and David L. Jordan, Regional Counsel (Southwest), both of whom previously served in senior policy and management positions in the National Office.

The Institute's preparation of the comments followed a January 24 meeting with the task force to discuss proposals to extend the Examination function's authority to settle issues. TEI was represented at the meeting by Linda B. Burke, TEI President; Robert D. Adams, Chair of TEI's IRS Administrative Affairs Committee; Michael J. Murphy, Executive Director; and Timothy J. McCormally, General Counsel and Director of Tax Affairs. Before the meeting, TEI solicited the views of its IRS Administrative Affairs Committee, and the supplemental written comments were prepared under the aegis of that committee. In addition to Mr. Adams, the following members of the committee contributed to the development of the Institute's comments: Robert L. Ashby of Northern Telecom Inc., John A. Gurovich of US West, Inc., Sheldon A. Kimel of Brunswick Corp., Lonnie R Nicol of Aluminum Company of America, Richard C. Sammut of Whirlpool Corporation, and Harold N. Weber of General Motors Corporation.

On behalf of Tax Executives Institute, I am pleased to supplement the comments that Mike Murphy, Bob Adams, Timothy McCormally, and I presented to the Examination Settlement Authority Task Force on January 24, 1995. At the outset, TEI commends the IRS for establishing the task force, and appreciates the cordial and open-minded reception the Institute received when we met.

During our meeting, we attempted to lay out a principled case for expanding Examination settlement authority, which in turn will advance case currency. We believe it is critically important how this question - and its solution - is framed. As we see it, there are essentially four approaches to extending the range of issues the Examination function can resolve.

First, the issue may be treated as solely one of definition: how the IRS can better distinguish the resolution of factual issues from the settlement of legal issues. A second approach is to focus - not on changes in the operative rules - but on more oversight and a firmer management commitment to the early resolution of issues and cases. A third option is to expand Delegation Order No. 236 significantly to permit settlement of legal issues by, for example, taking into account the hazards of litigation on an issue-by-issue basis. Finally, changes could be made in the operating rules and certain limits imposed, such as a requirement that the settlement of certain issues be subject to some form of review before becoming final.

What all of these approaches share is the principle that examining agents should not set up every conceivable issue, but rather should exercise judgment about the merits of putative issues. This will invariably lead to the resolution of issues earlier in the administrative process. TEI embraces this fundamental goal and encourages the Examination Settlement Authority Task Force to incorporate it expressly in its final report.

Beyond the philosophical overlay that early resolution is to be more expressly encouraged, TEI's views can be summarized by the following four points.

1. The Need for an Independent Appeals Function. TEI's support for the IRS'S settlement authority initiative is conditioned on the continued existence of an independent appeals function within the Internal Revenue Service. Appeals is an indispensable part of the dispute resolution process. We believe that any effort to fold Appeals' settlement function into the Examination function would doom the IRS'S dispute resolution process to failure. Stated simply, foreclosing a taxpayer's ability to have an issue considered by Appeals will lead to more, not less, litigation - a proposition that ill-serves both taxpayers and the IRS. Hence, although some concern has been raised that expanding Examination settlement authority while maintaining an independent Appeals function improperly gives taxpayers a "second bite at the apple," we reject that view and support the task force's initiative as an important step in enhancing case currency while effecting no material change in Appeals' jurisdiction.

2. Examination's Role in Resolving Issues. Care should be taken to avoid unfairly impugning the current performance of Examination personnel by implying that they are currently settling issues improperly and without authority. The Institute has long applauded the IRS'S efforts to "reinvent" the examination process. The IRS has recently made significant strides in resolving issues at the earliest possible stage in the administrative process. We are loath to think that the task force's mandate might be interpreted as suggesting that the Examination function has gone too far in its efforts. The current problems lie not with the progress that has been made to date, but in the inability of IRS management to get "the word" effectively down to the field about the benefits of early resolution.

The Institute thus rejects any suggestion that Examination personnel are so improperly trained that they cannot be trusted to resolve, or settle, issues. We acknowledge that many Examination personnel could benefit from additional training and, further, that the settlement of some issues might properly be placed beyond the pale of Examination's settlement authority. We submit, however, that the policy issue of whether Examination settlement authority should be expanded exists without regard to the competence of Examination personnel. We also suggest that some efforts to restrict the ability of taxpayers and the IRS to resolve issues during the Examination phase may be prompted not only by legitimate concerns over the "decisional accuracy" of particular resolutions - and related questions of ethics and integrity - but by a desire to protect both private and public sector "turf." Thus, just as criticisms of certain non-evasive medical treatments may be prompted by both valid health concerns and the fear that the new techniques might reduce demand for surgical alternatives, opposition to expanding Examination settlement authority may not be wholly altruistic.

3. Earlier Resolution of Issues. Even without a formal change in the level of settlement authority granted the Examination function, the IRS can do more to encourage the earlier resolution of issues. In this regard, the Institute firmly supports the principle underlying Delegation Order No. 236 to resolve rollover or recurring issues. More fundamentally, we believe that the delegation order signalled a very salutary philosophical agents to shift, requiring examining agents exercise informed judgment in assessing whether the facts justify even a proposed adjustment. A decision not to pursue a meritless issue does not constitute "settling" an issue; it can just be common sense. Indeed, taxpayers have been repeatedly told by the IRS that the field service advice process - about which TEI continues to have concerns - is intended to promote taxpayer-favorable resolutions as much as it is intended to refine or strengthen taxpayer-adverse positions.

TEI understands that many issues now being considered by the Appeals organization are fact-dependent. We believe that a significant number of those issues can be properly disposed of by the Examination function without regard to whether the disposition is referred to as "resolution" or "settlement." Too many Case Managers and other Examination personnel are risk averse when it comes to resolving issues. The risks and rewards associated with resolving (or declining to resolve) issues must be altered to inject more accountability into the system. Hence, we believe that the IRS should revise its performance standards to move away from a "dollars recommended" measure to a "dollars collected" standard. Indeed, the measurement system not only should focus on how much money actually flows to the fisc at the end of the process (after Appeals and litigation), but how much it costs the IRS to pursue and collect that amount. (Certainly such an analysis takes place in the private sector in evaluating the wisdom of pursuing particular courses of action.)

Moreover, we recommend that the IRS take steps to ensure the more uniform interpretation and application of Delegation Order No. 236 by both the Examination and the Appeals functions. Hence, in its final report, Appeals should be required to state which issues are being settled "on the merits" (within the meaning of the delegation order) and, if so, Examination should be held accountable for invoking (or not invoking) the delegation order to resolve those issues in a subsequent cycle. The presumption should be that issues identified by Appeals as potentially falling within Delegation Order No. 236 should be settled by the Examination function. If such settlement does not occur, the Case Manager should be required to explain why (including whether the law or facts have changed).

4. Expansion of Examination's Settlement Authority. We believe there is ample room to expand the settlement authority granted to the Examination function without imperiling the integrity of the administrative process. Thus, TEI philosophically supports granting Examination personnel relatively broad authority to "settle" issues on the merits, especially given the significant advisory role played by Counsel personnel in CEP cases.

We appreciate that the IRS may wish to move cautiously in this area. and believe that incremental change is better than no change at all. Hence, the IRS might consider excluding certain issues (such as partnership issues) from the scope of Examination settlement authority altogether, while explicitly authorizing settlement of others (such as issues relating to the granting of relief under the section 9100 regulations), Alternatively, the IRS could condition the exercise of such authority on tile Case Manager's securing field service advice validating the proposed resolution - field service advice that we hope would reflect appropriate input from and involvement by the taxpayer.

Still another approach would be for the IRS to define a range of issues (e.g., timing issues) in respect of which Case Managers will be granted authority. Less desirably, Case Managers could be required to obtain approval for some of their proposed settlements (or, perhaps, their "hazards" settlements), though any such approval process should be as streamlined as possible.