The new approach to settlement authority in Appeals.

The mission of the Internal Revenue Service's Appeals organization is "to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer, and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service." Settlement authority is a tool, which allows Appeals to accomplish this mission. In fiscal year 2000, Appeals, Large Business Specialty Program (LBSP) (formerly Appeals, Large and Mid-size Business) resolved 95 percent of the non-docketed cases agreed and 90 percent of the docketed cases agreed.

While these numbers are impressive, Earl Blanche Jr., Director, Appeals, LBSP, is looking for ways to improve these statistics. Furthermore, Mr. Blanche would like to develop a process to empower the parties to resolve cases in a more expeditious manner. We spoke with Mr. Blanche in May 2002 to discuss settlement authority. He explained to us the procedures currently being implemented to improve the Appeals' settlement process. These procedures include a team approach to settlement as well as various other techniques to expedite the process and monitor the status of the cases. In the fall of 2001, Appeals initiated a pilot program changing the settlement authority in some large cases. Prior to this change, Appeals Team Case Leaders had sole settlement authority over cases assigned to them. This article highlights the changes made and outlines the new team settlement approach to large cases with issues selected for this process.

In the past, Appeals used a standard approach to handling large cases. The same process was used in all cases without consideration of the type of issues or the complexity of the case. The Appeals Team Manager reviewed the case and assigned it to an Appeals Team Case Leader who developed a work plan and requested resources. Issues and complexity dictated the resources requested for the case. The Appeals Team Manager reviewed the work plan and assigned team members (Appeals Officers) to the case. The Appeals Team Case Leader was then responsible for assigning the issues to the Appeals Officers. The Appeals Team Case Leader had settlement authority over all issues including those assigned to team members.

While the settlement limits given to the Appeals Team Case Leaders have raised some concerns, there are internal controls in the process to manage the settlement authority. Examples of these controls include the fact that the Industry Specialization Program (ISP) coordinator must review and approve all settlements of ISP issues and the coordinator for Appeals Coordinated Issues (ACI) must approve all ACI settlements. Specialty coordinated issues and specialty emerging issues must also be reviewed and by their coordinator. Controlled Petroleum Industry Program (PIP) issues are controlled by Delegation Order 153. Additionally, there are controls built into the Appeals process, such as post-review for quality and Joint Committee review in cases involving refunds in excess of $2 million.

Appeals, LBSP wanted to design a process that would retain the existing controls and provide additional controls to assist with the settlement process for high-impact and complex issues. Thus, a team was formed to review stakeholder input and best practices to determine the best approach to settlement authority. This team was led by the Director, LBSP Operating Unit, and included an Industry Director from Compliance, an Associate Area Counsel from Chief Counsel, two Appeals Team Case Leaders, and two Appeals Area Directors. The team mapped the entire settlement process and conducted numerous interviews to find areas for improvement. Based on their work, it was determined that an Appeals Team Case Leader consensus approach to making decisions on complex or high-impact issues would be beneficial to the process.

The Screening Panel/Working Panel Approach

The new approach to handling large cases introduces the concept of a screening panel. The purpose of this panel is to review the large cases to assess the complexity of the issues and to determine the need for the issues to be handled by multiple Appeals Team Case Leaders in a working panel. The screening pane] consists of one Appeals Team Manager and two Appeals Team Case Leaders. To be considered by the panel, the cases will involve significant amounts of money at issue (generally, the tax in dispute will be $10 million or more) and a significant number of issues (including some that are highly complex for the Appeals Team Case Leader to coordinate). The goal of the screening panel is to screen approximately 150 cases a year, essentially the largest cases received each year by Appeals.

The new approach works, as follows. After the Appeals Team Manager's initial review of the case, the case will be sent to a screening pane] to determine which issues, if any, require handling by a working panel. Among the factors taken into account in determining whether the case involves a high-impact issue are complexity and materiality. A subjective, rather than a quantitative approach, is being taken with respect to materiality. The panel will use its professional judgment in determining which issues are material and should be assigned to the working panel. The Appeals Team Manager will make the final determination based on the input of the two Appeals Team Case Leaders. The screening panel will not be used for ACI issues, ISP issues with written settlement guidelines, or specialty coordinated issues with approved guidelines since stringent controls already exist in these areas. Also, cases in the LMSB Fast-Track Dispute Resolution Program are exempt from the panel approach.

Once the screening panel identifies a case with high-impact issues, the Appeals Team Manager will designate a panel of three Appeals Team Case Leaders to handle the issue or issues (two Appeals Team Case Leaders may be used, but such a change requires management approval). The remaining issues in the case will be handled in the traditional manner with the Appeals Team Case Leader having settlement authority. The purpose of the working panel is to provide additional resources in the decision-making process for high-impact, complex issues. The Appeals process for the panel is similar to the one used by the Appeals Team Case Leader, except that a consensus of the panel is required to make decisions on the issues. If the team cannot achieve consensus, a manager is brought in to facilitate the decision-making process; the actual decision, however, still rests with the working panel. If after the manager's intervention, the panel is still unable to reach a consensus, the manager will take ownership of the issue and make the determination. Significantly, to date the panel has reached consensus in all cases, thereby obviating the manager's rendering a decision.

To test this team approach, an 18-month pilot program was initiated about 9 months ago. To date, 66 cases have gone through the screening panel and 18 have been accepted for working panel consideration. Thus far, Appeals has seen many benefits as a result of this process. Employee feedback has been positive. Issues are being assigned to the appropriate Appeals Officer based on the level of complexity and materiality. In addition, the quality of issue resolution has improved. Furthermore, this process encourages knowledge sharing among the Appeals Team Case Leaders and Appeals Team Managers and provides for more consistent treatment of taxpayers.

One concern with this approach is that it may be more difficult to have three individuals with diverse views reach a consensus on a settlement. On the other hand, the team approach may be helpful when one Appeals Officer is stuck on a position. Finally, taxpayers will have to carefully plan their Appeals's presentation so that it addresses the concerns of all three Appeals Team Case Leaders.

Management Involvement

Another new emphasis in Appeals is an effort to increase the Appeals Team Manager's involvement in case management. The Appeals Team Manager will be required to document their activities in the cases, e.g., approving work plans, reviewing conference memorandums, and documenting quarterly status reviews.

Fast Track Dispute Resolution

An alternative dispute resolution technique that has been introduced to improve the settlement process is the fast track dispute resolution program. The program utilizes Appeals' tools while the case is still in the Compliance jurisdiction, thus providing issue resolution at the earliest level within the IRS. There are two options for fast track dispute resolution. The first is fast track mediation in which an Appeals' official acts as a mediator to help the parties resolve factual issues. The second option, fast track settlement, allows an Appeals Team Case Leader to use their settlement authority to achieve a mutually acceptable agreement by the parties. The fast track dispute resolution program has been extremely successful. As of May 2002, 39 cases had been accepted into the program and 20 had already been settled; another 23 cases were pending acceptance into the program. On average, it has taken 62 days to settle a case, starting with the day the application is signed by both parties. Thus far, there has only been one case that has not been settled in the program.

Push and Press

Two other internal initiatives that Appeals is using to improve the settlement process are called "Push" and "Press." These are techniques to monitor the status of cases and alert management when cases become over-aged. "Push" is a process that requires Area Directors to report to the Director, Appeals, LBSP on the status of all cases that have been open for more than 72 months. "Press" is a process where Appeals Team Managers must report to the Area Director on the status of all cases between 60 and 72 months old. As of October 1, 2001, there were 77 cases being monitored in these programs. Mr. Blanche reported that the majority of the cases have either closed or are projected to close. Appeals, LBSP hopes to reduce this number dramatically in the next year.

In sum, Appeals is taking a hard look at the settlement process in hopes of improving the quality of the decision-making process while making it more timely. Providing Appeals Officers with the appropriate settlement authority is key to Appeals maintaining their mission of resolving cases prior to litigation. Using a team approach, improving management involvement, employing alternative dispute resolution techniques, and monitoring the status of the cases are just some of the ways Appeals is improving the manner in which cases are resolved.

James A. Dougherty is Director, Tax Controversy Services for Deloitte & Touche LLP in Washington D.C. He formerly served as National Director of Appeals for the Internal Revenue Service, and is a frequent contributor to The Tax Executive.

Rona M. Faust is a Senior Accountant, Tax Controversy Services in Deloitte & Touche's Washington, D.C., office. The authors thank Earl Blanche, Jr., Director, Appeals, LBSP for the Internal Revenue Service, for his generous time and valuable input in the development of this article.