TEI response to IRS questionnaire on the Appeals Large Case Program.

On June 19, 1996, Tax Executives Institute submitted the following comments to the Internal Revenue Service in response to an IRS questionnaire on the Appeals Large Case Program. The Institute's comments took the form of a letter from TEI President Jack R. Skinner to Thomas R. Roley, Executive Assistant to the National Director of Appeals. They were prepared under the aegis of TEI's IRS Administrative Affairs Committee, which is chaired by Robert L. Ashby of Northern Telecom Inc. In addition to Mr. Ashby, the following members contributed materially to the preparation of TEI's comments: Ralph J. Coselli of Shell Oil Company, Robert H. Proehl of BellSouth Corporation, and Thomas B. Rogers of Apple Computer, Inc.

Thank you very much for your letter dated May 28, with which you enclosed a questionnaire concerning the IRS Appeals Large Case Program. Tax Executives Institute is delighted to have the opportunity to respond to the questionnaire, and we hope that these comments are helpful to the Internal Revenue Service, and to Appeals in particular, as it weighs possible changes in the structure of Appeals. Our members interact with Appeals Team Chiefs and members of their teams on a daily basis, and they have a vital interest in the effective management of the Appeals function.

General Comments

Tax Executives Institute remains a strong advocate of an efficient and independent Appeals organization. We believe the key is for Appeals to provide an independent, fair-minded review of adjustments proposed by the Examination function and protested by the taxpayer. We believe that Appeals should facilitate settlement of issues (and cases) by guarding against extreme or over-aggressive interpretations, and should provide meaningful feedback to the Examination function on how future cases or audit cycles can be handled more efficiently.

The current organizational structure of Appeals (and its Large Case Program) is transparent to most taxpayers. Many, if not most, TEI members likely have interacted only infrequently with the senior Appeals management at either the regional or national level. This does not mean, however, that TEI members have no interest in the structure and management of Appeals. Indeed, as our comments on the specific questions underscore, we believe that structural changes may well serve to advance the goal of an efficient, effective Appeals organization. Structure, however, can only get you so far. The personnel operating within the structure (whatever it is) are of paramount importance. Hence, we would be less than candid if we did not express our concern about the exodus from the IRS, and the Appeals organization in general, of many qualified people whose technical expertise and judgment have been critical to the organization's prior successes. Regardless of Appeals' structure, therefore, we urge the IRS to devote adequate resources to retaining qualified Appeals Officers and to training less experienced personnel and otherwise to ensure that the personnel assigned to manage cases (i.e., Appeal Team Chiefs) have sufficient technical expertise to resolve issues on a fair and informed basis.

Responses to Large Case Appeals Questionnaire

1. Do you believe a change in our structure from what is currently a Regional management structure to either a National or Local Office structure would be good or bad? Why?

The current management structure of Appeals has the same limitations as the IRS's management structure in general: The decentralized matrix structure seemingly assigns responsibility but limits accountability for the effective implementation of national programs and the resolution of cases. Further, the current structure, where the National Director of Appeals has program (or functional) authority but not line authority, arguably vitiates the technical expertise in the National Office by effectively rendering the National Office advisory only. In addition, we seriously question whether the current structure, whereby Regional Directors of Appeals report to their respective Regional Commissioner (and whereby the National Director of Appeals is deprived of line authority), properly serves the goals of preserving Appeals' independence and advancing uniformity across the country. TEI believes that serious consideration should be given to an Appeals management structure that preserves the autonomy of the local offices but makes the personnel ultimately accountable to an Appeals management that resides in the National Office. To this end, we renew our recommendation that the National Director of Appeals be accorded line, as contrasted with functional, authority. [See Figure 1 on the following page.]

While we support giving the National Director of Appeals line authority over the field, we believe changes in the regional structure may yield significant managerial benefits. Specifically, we see merit in the argument that regional management of Appeals permits the IRS to effectively staff CEP Appeals teams by drawing on personnel throughout the region. This is because a completely decentralized (local) approach to Appeals would likely limit this flexibility, whereas a completely centralized structure -- while theoretically attractive -- might prove difficult to manage.

2. In your opinion, does the current organizational structure facilitate the consistent, timely disposition of issues in the Appeals Large Case program? Why or why not?

More often than not, issues are currently resolved in a timely fashion, but we question whether this attribute of the system is attributable to Appeals' organizational structure. Indeed, we believe it is due to (a) having essentially the same Appeals team work more than one audit cycle; (b) having Appeals Officers who specialize in large cases; and (c) being able to draw upon the right people throughout the region to staff cases. Perhaps most important, we believe the ability of Large Case Appeals to resolve issues is attributable to the dedicated and skilled professionals who staff the local offices.

With respect to extremely large or complex issues, the Institute believes the current structure can actually impede timely resolution. Once again, the Regional Director of Appeals' reporting to the Regional Commissioner often gives the taxpayer the impression that review of, or assistance in, a large case appeal will not be completely independent. The actual or perceived lack of independence can impede the resolution of issues.

Our concerns about the current structure of Appeals arise, in part, because of the departure of many seasoned Appeals Officers from the IRS. As the average tenure of Appeals personnel declines, the strengths and weaknesses of the organization's structure will become more noticeable. This is why we believe that the long-term effectiveness of Appeals -- and its independence -- will be better served by eliminating the current link between Appeals and the Examination function at the Regional Commissioner level. Strengthening the link between the field organization and the National Director of Appeals should also advance the goal of consistency, while still permitting factual differences to be taken into account in the resolution of particular cases.

3. Do you care if we are managed locally or regionally? How often do you interact with the Assistant Regional Director of Appeals (Large Case) or the local Chief of Appeals?

Based on the comments received from TEI members, taxpayer interaction with the local Chief of Appeals or the Assistant Regional Director of Appeals (Large Case) occurs infrequently. We attribute this in large measure to the technical competence and experience of the Large Case Team Chiefs. As the IRS's experience level declines, concerns will heighten that Appeals' management may have to become more directly involved in the resolution of issues if Appeals success in settling cases is to continue. Thus, a technically competent and highly experienced Branch Chief or Team Chief would be a great confidence builder for the taxpayer and the system.

4. What should be the role of the National Office in the Appeals Large Case program ?

The National Director of Appeals should have line authority over the Appeals function. The National Office should monitor the implementation of various management initiatives, such as those relating to early referral to Appeals, Appeals involvement with Competent Authority, and the identification, development, and consistent resolution of Appeals Coordinated Issues and other important issues. The National Director of Appeals should also work to resolve procedural disputes involving Examination, Counsel, and Appeals. Hence, the National Office could serve as an informal "supreme court" for taxpayer concerns over issues that are at an impasse at the local level. In addition, although we believe there should be some check on whether the Team Chief is negotiating in good faith, care should be exercised not to undermine the authority of the Appeals Team Chief. In addition, we believe the National Office Appeals function should dedicate itself to assisting the field settle cases by providing technical assistance, and administering a mentoring and development plan for Appeals Officers in Large Case Appeals.

5. Would it be advantageous to have all CEP cases in Appeals handled by CEP specialists and Team Chiefs only versus other Appeals Officers outside the Large Case program? What are your concerns one way or the other?

Appeals does an outstanding job of staffing large case appeals. In general, CEP issues are complex, and more experienced Appeals Officers should handle them. This benefits both the government and the taxpayer, especially given the wider scope of settlement authority accorded Team Chiefs.

6. The Appeals Industry Specialization Program has existed in its expanded form for the last few years. Evaluate its strengths and weaknesses. Is the involvement of the Appeals industry coordinator impacting on the lapse time of your case in Appeals?

From a taxpayer perspective, the Industry Specialization Program has not so much improved the Appeals process as it has slowed it down (since it seems to duplicate the ISP in the Examination function) and injected an element of distrust into the process. Generally, the industry specialist must be dealt with through intermediaries. This reduces confidence in the process and frustrates taxpayers -- and probably IRS personnel, too. Generally, people think that, if they can make their case to the decision-maker, they will prevail; in addition, the absence of the decision-maker may be interpreted as a negotiating tactic. In addition, the involvement of ISP attenuates accountability, and strictly from a management perspective, it does not seem to be wise of course, a relationship of mutual respect between the taxpayer and the Team Chief can reduce the tension and facilitate the efficacious involvement of Appeals ISP personnel in the case.

7. Should Appeals ISP coordinators be team members responsible for the settlement of their specialty issues?

Although the inclusion of Appeals ISP Coordinators as decision-makers on the Appeals Team might increase taxpayer confidence in the process (because they would have the opportunity to interact with the individuals that may in reality be "calling the shots" on the ISP issues), we believe that the Team Chief should remain in charge of -- and responsible for -- the entire case. The goal of Appeals should be to settle entire cases, and fragmenting responsibility for the resolution of individual issues (e.g., by assigning decision-making responsibility to the specialists) would not serve that goal. Hence, although recognizing that industry specialists possess special expertise in respect of certain issues, TEI recommends that ISP personnel remain advisers to the team, but not decision-makers.

8. How would you compare the positions of Exam Case Manager and Appeals Team Chief?

The CEP Examination Case Manager has become almost exclusively a manager of staff and can be far removed from the facts of a taxpayer's case and the complexities of technical issues. Indeed, CEP taxpayers frequently voice concern that the Case Manager declines to become involved in technical issues and, as a result, the elimination of their experience and expertise contributes to the low sustention rate.

At a minimum, it feeds the perception that many Case Managers too frequently accede to the specialists without exercising independent judgment on the merits of particular issues.

In contrast, the Appeals Team Chief not only must be highly experienced but also must be extremely competent technically. Additionally, the Team Chief must also have management skills to administer a large case appeal such as assigning the right Appeals Officers to the right issues, scheduling all the issues to achieve a timely resolution, and keeping focused on the resolution of issues. Most important, the Team Chief must possess and exhibit sound judgment in settling issues and cases, whereas the Examination Case Manager's goal often seems to be merely "to move the case along" without regard to the merits of particular proposed adjustments.

9. Lapse Rate -- We ask now for your thoughts on what Appeals can do to improve our timeliness in handling Large Cases. Any suggestions?

TEI believes that continued emphasis should be placed on post-conference critiques. The purpose of the critique should be to address how the Examination function can improve its handling of future audits, not for Examination to complain about how Appeals "gave away the store." We also think that time limits should be placed on the preparation of Examination's rebuttal to the protest. In this regard, we note that some members report that their cases have languished in Appeals while the Examination team prepares the rebuttal.

10. Our statistics indicate that over the past few years nearly half of the Large Case taxpayers in Appeals raised new issues after beginning the Appeals process. Any thoughts as to why this occurs with such frequency? Can anything be done to get these issues raised and resolved before coming to Appeals?

There are many, often interrelated reasons that new issues are raised after beginning the Appeals process -- some relating to deficiencies in the Examination process, some relating to negotiating tactics, some relating to the complexity of the tax law and to the simple fact that issues may not be identified until late into the examination or even after it is closed. Consider this last reason first. Many CEP taxpayers have a practice of reviewing their returns after filing. This practice continues throughout the limitations period and can uncover issues that produce adjustments (both for and against the taxpayer). There are times when development of these issues cannot be completed during the examination but is completed while the case is pending in Appeals. In these instances, the issues are raised at the first time they are fully developed -- i.e., in Appeals. Moreover, because the issue being reviewed by the taxpayer may or may not evolve into an adjustment, advising the Examination team of the issue would "raise" the issue but would not necessarily "resolve" it any earlier. We note that, as the IRS becomes more and more current in its examinations, the likelihood of a company's raising new issues for the foregoing reasons will grow because the increase in currency will correlatively reduce the amount of time between the filing of the return and the commencement of the examination, during which the company could itself identify issues to include in its section 6662 disclosure statement or otherwise raise during the examination.

Another reason issues are raised in Appeals relates to the taxpayer's confidence in the audit process. The unfortunate truth is that experiences in prior audits may have impaired the taxpayer's relationship with the Examination team and, consequently, lead the taxpayer to hold the affirmative issues until the case reaches Appeals.

In addition, some taxpayers raise issues in Appeals to offset adjustments attributable to issues the taxpayer had (incorrectly) assumed would be resolved in its favor. Other times, issues may be raised to buttress the taxpayer's negotiating position as the settlement of the overall case is considered. Finally, new issues may be raised in Appeals for the simple reason that they are discovered late in the audit and neither the taxpayer nor the audit team wants to prolong the examination by requiring the issue to be addressed.

Of course, taxpayers are not the only party raising new issues. Our members inform us that, with increasing frequency, Examination personnel continue to develop issues or develop new approaches to issues even after the case is in Appeals. Should this continue to occur, or if cases should be returned to the Examination function after they are set to Appeals, taxpayers may feel compelled to have their cases considered by Appeals in docketed status, thereby preserving the rights (for example, in respect of the burden of proof) accorded docketed cases.)

In conclusion, although TEI appreciates the IRS's concern about new issues being raised too often in Appeals, the Institute does not believe the raising of new issues in necessarily a bad thing. We agree that, ordinarily, the earlier an issue is resolved, the better. We also agree that in some cases it may be proper to return the new issue to the Examination function for development. Appeals' retention of this authority should act as a brake on abuse.

Conclusion

Tax Executives Institute appreciates this opportunity to respond to the Internal Revenue Service's questionnaire concerning Large Case Appeals. If you should have any questions about the Institute's comments, please do not hesitate to call either Robert L. Ashby of Northern Telecom, Inc., chair of TEI's IRS Administrative Affairs Committee, at [phone] or Timothy J. McCormally, the Institute's General Counsel and Director of Tax Affairs, at [phone].