The evolving role of appeals: the real-world implications for the tax executive.

Editor's Note: This article is adapted from Mr. Canciello's presentation on April 19, 1996, to Tax Executives Institute's 1996 IRS Audit and Appeals Seminar, which was held in Baltimore.

Introduction

At this seminar, you have been focusing on strategies for success in dealing with the Internal Revenue Service on the tax issues of importance to your companies. Yesterday, you looked at preparing for an IRS audits as well as managing and closing the audit process. Today, the focus has shifted to Appeals -- because we all know that, no matter how well an audit has been managed, disputes and disagreements will arise in some cases. In my view, it is a "strategy for success" to use the administrative appeals process when you have a disagreement you cannot resolve with the examiner.

As TEI members, your professional interest is primarily the Coordinated Examination Program (CEP) cases. Last year in Appeals, we closed 249 CEP cases of which 218 were agreed; out of the total, 31, about 12 percent, were docketed in the Tax Court. Appeals resolved 21 of the 31 docketed cases before trial (68 percent).

Although we are able to resolve cases in docketed status, we must do so subject to the Tax Court's timetable and approval of the stipulations reflecting the settlement. Your coming to Appeals in nondocketed status by protesting the examiner's 30-day letter rather than petitioning the Tax Court avoids those constraints.

But, nondocketed or docketed, large or small dollars, it is always a "strategy for success" to come to Appeals. Year after year, we resolve about 85 percent of the thousands of income tax cases that come before us. (Last year, we closed just over 65,000 cases.)

Appeals has been around since 1927; our traditional way of operating is to meet with taxpayers and representatives for discussions on the issues in dispute. Today, our approach still depends on taxpayer conferences, but we have increased the ways we deliver dispute resolution services. We have designed our new programs around dispute resolution principles that are strategies for success beginning with:

1. An ounce of prevention is worth a pound of cure! Translation: We like pre-filing determination procedures that resolve issues in advance. Examples are the IRS's Advance Pricing Agreement Program and our recently-adopted procedure for a determination of value on artwork for estate and gift tax purposes and for a charitable contribution deduction.

2. Another strategy for success is based on the idea that the early bird catches the worm! Translation: Early resolution is best! The Appeals organization is coming to the dispute rather than always waiting for the dispute to come to us. Early referral to Appeals is now available for CEP cases and employment tax issues. Also, the IRS has recently expanded the authority of Examination to apply Appeals settlements or positions in CEP cases on some issues.

3. A third strategy for success is expressed in the saying: A bird in hand is worth two in the bush! Translation: Maximize control and minimize uncertainty. In terms of tax disputes, it means that negotiation between the parties is more likely to result in a mutually-satisfactory outcome than a decision by a third party. An Appeals conference is preferable to litigation.

4. Our fourth strategy for success arises from the fact that variety is the spice of life! Translation: A variety of dispute resolution tools provides options and flexibility that can be packaged to fit the dispute. We are even testing mediation as an extension of the usual Appeals process.

5. Lastly, the IRS is saying, "The more the merrier!" Translation: There is value in having dispute resolution mechanisms for different enforcement actions, and we have recently extended appeal rights to certain enforcement actions by Collection.

I would now like to review our new programs with you in some detail.

Early Referral to Appeals for Coordinated Examination Program Cases: Rev. Proc. 96-9

Rather then waiting for a case to come to Appeals with disputed issues, this program brings dispute resolution services to unagreed issues while the case is still in Examination. Early referral is optional, in that it must be requested by the taxpayer and approved by both Appeals and the District. At present, the program is only available in CEP cases.

The purpose of early referral is to resolve cases more quickly. The early resolution of a key issue may encourage taxpayers and the IRS to agree on other issues in the case. Early referral may save time because Appeals and Examination are working simultaneously.

An additional benefit of early referral is that does not trigger "hot" interest under section 6621(c).

Employment Tax Early Referral Procedures: Announcement 96-13

For a one-year test period that began March 18, 1996, employers may appeal any developed unagreed employment tax issue while an examination is still in progress. It similarly must be initiated by the taxpayer and approved by the District and Appeals. This procedure should reduce the time and expense necessary to resolve employment tax issues, such as the classification of a worker as an employee or independent contractor. Because employment tax issues are frequently continuing ones that affect a number of people, it is especially good to resolve them early in the process.

Simultaneous Appeals/Competent Authority Procedure, Rev. Proc. 96-13

Taxpayers or the U.S. competent authority may now request the involvement of Appeals on issues under competent authority jurisdiction. There are about 16 taxpayers currently using the new procedures.

Taxpayers may request the participation of Appeals in the competent authority process when (1) Examination has proposed an adjustment with respect to an issue which the taxpayer wishes to submit to competent authority; or (2) the taxpayer files a protest and decides to sever the issue and seek competent authority assistance while other issues are referred to or remain in Appeals. Significantly, taxpayers still have rights to negotiate a settlement with Appeals after competent authority. We expect that the time to resolve cases with competent authority issues will be cut significantly with the closer coordination between Appeals and the competent authority function.

Appeals Mediation Procedure: Announcement 95-86

On October 30, 1995, we began a one-year test of an Appeals mediation procedure. We have already used the process successfully in one case which was resolved in a twelve-hour mediation session. The procedures allow taxpayers whose cases are in Appeals and not docketed in any court to request mediation. The mediation procedure is not available for:

* an issue that is designated for litigation;

* an Industry Specialization Program (ISP) issue;

* an Appeals Coordinated Issue (ACI); or

* a competent authority issue.

Mediation is a non-binding process. Mediation usually facilitates the communication process between the parties so that they are able to work out an agreement. The mediator does not have settlement authority or impose a solution.

If the taxpayer and Appeals agree in principle to mediate one or more issues, the first step is to prepare a concise, written mediation agreement. We believe that only a short period of time will be required to prepare the mediation agreement and to select the mediator, especially if the model agreement in Announcement 95-86 is followed. We expect that the actual mediation sessions will be concluded within one or two days for the most complex issues.

Appeals and the taxpayer will share the cost of the mediator. If, however, a mediator from Appeals is selected, Appeals will assume all of the cost. Also, the Department of Defense, Office of Hearings and Appeals, maintains a roster of non-IRS mediators and will assist in selecting one.

Mediation is designed as an optional dispute resolution technique for use only when the usual good-faith negotiations of an Appeals conference have not succeeded in resolving the case. Mediation is an especially good tool for resolving factual issues, such as valuation and transfer pricing issues. It is also relatively inexpensive when compared to the costs of litigation. A strategy for success is that your mediation team must contain someone who has the authority to bind the taxpayer. Mediation can only work when you are ready to commit these resources.

Appeals of Liens, Levies, and Seizures 

Since April 1, 1996, taxpayers have the right to appeal liens, levies, and seizures proposed by the IRS. We have five business days to make a decision. Before a taxpayer comes to Appeals, they are required to have a conference with a Collection manager.

Normally, collection action will be suspended while the case is in Appeals. However, enforcement action may continue if, in the judgment of Collection, withholding the action would be detrimental to the collection of the tax liability. With our consideration being done in five business days, we believe those instances will be rare.

The extremely stringent time frames have been set for these reasons: to give taxpayers an almost immediate decision on liens, levies and seizures, to ensure that taxpayers do not appeal these actions solely to delay collection, and to avoid inconveniencing third parties longer than is necessary when these parties are holding the attached property, such as may occur when a bank is holding funds at our request.

This program is an administrative action to implement a provision in the Taxpayer Bill of Rights 2 that has not yet become law. The IRS and Treasury wish to ensure that the momentum for this type of program is not lost. The appeal of collection actions has been designed to reduce taxpayer burden and enhance taxpayer protection.

Expanded Examination Settlement Authority

In addition to the Appeals programs I have just described, we have been supportive of Examination's efforts to enhance its ability to resolve disputes. The IRS recently expanded the authority of Examination case managers to settle more issues within their jurisdiction by changing existing Delegation Order No. 236 and publishing a new Delegation Order No. 247.

Both orders were effective March 15, 1996. However, to ensure the correct use of the authority, we are assisting in training case managers, Exam industry specialists, Appeals ISP coordinators, and other appropriate field personnel. Our initial train-the-trainer class was held at the end of February. Other classes will be held in the near future. We expect the training to be completed by July 31.

Delegation Order No. 236 (Rev. 2). Newly-revised Delegation Order 236 now allows case managers to settle an issue, regardless of the amount, on the same basis settled in Appeals in a previous, subsequent or the same tax period (settled period), for:

* the same issue of the same taxpayer; or

* the same issue of another taxpayer involved in the same transaction or taxable event; or

* the same issue in a separate, but similar, transaction by any or all of the taxpayers involved in the initial transaction or taxable event.

In order to use the expanded authority, the following must be met:

* The issue must be in a CEP case;

* The facts of the transaction or taxable event must be substantially the same as the facts in the settled period;

* the legal authority has not changed;

* the issue must have been settled independently of other issues (e.g., no trading of issues) in the settled tax period; and

* the issue must have been settled with the same taxpayer or another taxpayer who was directly involved in the transaction or taxable event in the settled period.

Delegation Order No. 236 provides two examples to explain taxpayers "directly involved" in the transaction.

Delegation Order No. 247. New Delegation Order No. 247 gives settlement authority to case managers for certain coordinated issues, regardless of the amount, in the ISP Program and International Field Assistance Specialization Program (IFASP). This authority applies only to an issue in a CEP case on which Appeals has written settlement guidelines or positions. Before finalizing a settlement with the taxpayer, the case manager must have it reviewed and approved by both the Examination industry specialist (or IFASP coordinator, if applicable) and the Appeals ISP coordinator.

The purpose of these expanded settlement opportunities in Examination is to eliminate the need to come to Appeals to resolve issues that Appeals has already considered in other years of the same taxpayer or as part of our coordination activities with either the ISP or the Appeals Coordinated Issue Programs. If Examination can apply the Appeals position, it may well eliminate any disagreement in the case. At the very least, it should decrease the number of unagreed issues that do come forward to Appeals. Either result is desirable considering the size of the large cases and the number of issues they contain. The earlier resolution of any part of the issues should translate into reduced time to resolve the entire case and result in less taxpayer burden.

Need for Evaluation

Because all the programs I have discussed are either new or being tested, we will be monitoring them and evaluating their results. If you use any of our initiatives like mediation or early referral, you will be asked to complete a short Customer Satisfaction Survey. The purpose of the survey is to determine the effectiveness of the specific program and to identify what our customers value. In addition, we are always interested in hearing directly from you about your general concerns with any of our programs and invite you let us know.

Closing Remarks

In closing, I will return to my premise: When you have a tax dispute, coming to Appeals is a "strategy for success." Last year, we closed over 65,000 cases, reaching agreement in 85 percent of them. In CEP cases, we did even better, reaching agreement in 88 percent of the cases.

It is in everyone's best interest to resolve cases administratively in nondocketed status. Many dispute resolution options exist today to make it possible for everyone to resolve a dispute satisfactorily without risking litigation.