The role of Appeals in future tax administration.

On May 10, 1995, Tax Executives Institute submitted the following comments to the Internal Revenue Service on the role of Appeals in future tax administration. TEI's comments, which took the form of a letter from TEI President Linda B. Burke to IRS National Director of Appeals James A. Dougherty, were prepared in response to an IRS request for comments on the organizational structure to best accomplish Appeals' role. The Institute's comments were prepared under the aegis of its IRS Administrative Affairs Committee, whose chair is Robert D. Adams of Halliburton Company. Materially participating in the development of these comments were Robert L. Ashby of Northern Telecom Inc., Ralph J. Coselli of Shell Oil Company, Joseph A. Cottonaro of Hershey Foods Corporation, Patrick J. Ellingsworth of Atlantic Richfield Company, Donald L.R. Ouimet of IVAX Corporation, and Thomas B. Rogers of Apple Computer, Inc. A report on the IRS's final actions is included elsewhere in this issue.

On behalf of Tax Executives Institute, I am pleased to provide the following comments on the role of Appeals in future tax administration and the Institute's recommendation on the organizational structure to best accomplish that role. Given the monumental changes the Internal Revenue Service is undergoing in its regional and district structure (as well as the impending changes in the National Office's organization), we commend you for reaching out to your stakeholders on this important project.

Background

First things first. Tax Executives Institute is convinced that an effective Appeals organization is an indispensable part of the federal tax administration system. Hence, while the Institute supports several recent IRS initiatives to achieve earlier resolution of issues at the Examination level, we do not believe these initiatives obviate an independent Appeals organization.

Secondly, TEI and its members have historically had confidence in how Appeals operates. For example, in the Institute's recent "IRS quality survey," Appeals garnered the highest rating of any IRS function. In summary, 62 percent of our respondents rated Appeals "good" or "excellent," 24 percent rated Appeals "satisfactory," and only 13 percent gave Appeals either a "poor" or "unsatisfactory" rating. This is not to say, however, that there is no room for improvement. Hence, we agree that changes can be made to the IRS's organizational structure to enhance Appeals' independence and its effectiveness as the IRS's dispute resolution function.

Before turning to the questions posed in your letter dated April 11, I think it is important to recall the precise focus of TEI's IRS quality survey. Our members were asked how well various functions adhered to the IRS's own Mission Statement and Statement of Principles of Internal Revenue Tax Administration. Hence, the survey elicited information on whether Appeals was seeking to collect "the proper amount of tax revenue at the least cost" and doing so "in a manner warranting the highest degree of public confidence in [the IRS's] integrity, efficiency and fairness." The word "fairness" in the IRS's mission statement has a special resonance in respect of Appeals, implicating its own mission statement:

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.

TEI believes that, in formulating its recommendation to the Commissioner, the IRS's Task Force on the Role of Appeals in Future Tax Administration can do no better than keep that mission statement foremost in its mind: to resolve tax controversies without litigation.

The Role of Appeals: Recommended Structural Change

How can the goal of resolving cases without litigation be attained? In the Institute's opinion, 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 hence 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 more efficiently handled.

In other words, Appeals must provide a fresh, impartial perspective, must place a premium on settling cases, and must be perceived as doing so. Sometimes, a taxpayer perception that Appeals has an open mind is all that is required to prompt a settlement. This is because it is taxpayers who, in the first instance, must decide whether to avail themselves of Appeals. If taxpayers view the system as too calibrated toward litigation, they may "opt out' and "take their chances" in court. If they believe Appeals is too closely aligned to either Examination (whose function it is to fairly identify and raise issues) or Counsel (whose function, like it or not, is to litigate), their confidence in Appeals' ability to resolve cases fairly will be vitiated.

This is an area where we believe an organizational change would be salutary. Specifically, TEI believes that Appeals should be wholly separate from the Office of Chief Counsel. Our proposal, then, is this:

Appeals branch chiefs should

report to Regional Directors

of Appeals, who then report

to the National Director of

Appeals; in turn, the National

Director of Appeals should

report to the Deputy Commissioner.

We believe that this proposed structure would underscore the independence of Appeals and thereby enhance the function's effectiveness. The current structure of Appeals, reflecting the 1982 decision to shift Appeals to the Chief Counsel's "side of the house," has contributed to a perceived diminution in Appeals' independence. Given Counsel's role as the adviser to Examination personnel, it is hardly surprising that taxpayers are less than sanguine about Appeals' reporting to Counsel. Indeed, anecdotal evidence suggests that Counsel has generally become more involved in the management and oversight of Appeals' workload and that this involvement has affected Appeals' attitude toward settlement.

TEI's proposed change would reinforce Appeals' independence by providing that the National Director of Appeals and the Chief Compliance Officer (to whom the Assistant Commissioner, Examination reports) report to the same individual (the Deputy Commissioner). It would also underscore Counsel's advisory, as opposed to supervisory, role.(1) Moreover, by having the Regional Directors of Appeals report to the National Director of Appeals, the proposal would inject greater program accountability into the system. Finally, we believe the change would better harmonize Appeals' management and program structure with its personnel evaluation process.

Appeals' Compliance Responsibilities

Your letter asked for TEI's views on "Appeals' compliance responsibilities" (if any). Let us begin by stating what Appeals should not be. It should not be a fact-finder. It should, however, take a fresh look at the facts as developed by the Examination function and pursue reasonable settlements, taking into account the hazards of litigation. Fulfilling that objective could well enhance future compliance.

Appeals Officers, moreover, should play a significant role in preparing the Examination function for future cases. Appeals should provide feedback not only on the resolution of issues in the current cycle, but on how the current resolution should affect subsequent cycles, if at all. Thus, Appeals should provide guidance on which issues were settled "on the merits" within the meaning of Delegation Order No. 236 and hence are susceptible to future settlement pursuant to the delegation order. In other words, Appeals should work to improve the overall accountability of the Examination function.(2)

Taxpayer Rights and Burdens

Fairness is the fundamental right of all taxpayers. Appeals should establish and maintain an environment of objectivity and independence to ensure fairness and to advance Appeals' mission of settling cases. Appeals should act to expeditiously resolve issues and check burdensome requests and over-zealous interpretations. Moreover, Appeals should strive to temper taxpayer burdens by requiring ample, but not overwhelming, levels of documentation. Thus, we believe that Appeals in a very real sense can provide a 'sanity check" on the process.

We also believe that Appeals should resist imposing additional burdens on taxpayers. Since the role of Appeals is to resolve tax controversies, taxpayers should not ordinarily have to contend with new issues (or new information requests) when the case reaches Appeals. This assumes, of course, that the taxpayer has cooperated with Examination personnel and responded to reasonable information document requests on particular issues. Weak or poorly developed issues should be rejected. Moreover, Appeals should assert control over the case from the date a protest is filed; taxpayers should not have to contend with situations where weeks, even months, pass before a filed protest is acted upon by Appeals.

Finally, we believe that Appeals should continue to demand the highest standards of professional conduct, not only to reach the proper result on the merits in as timely and cost-efficient manner as possible, but also to maintain taxpayer confidentiality.

Summary

In summary, the role of Appeals is to settle cases without litigation. Appeals should act as a settler of issues considering the hazards of litigation, a communicator on how and why issues were resolved, and a reviewer to make sure a case has been properly developed.

Based on the experience of its members, TEI believes that these goals can be better achieved if Appeals were restructured to report to the Deputy Commissioner instead of the Chief Counsel. If you wish to discuss our proposal or have any questions about our comments, please do not hesitate to call either me at [phone] or Timothy J. McCormally, the Institute's General Counsel and Director of Tax Affairs, at [phone].

(1) Thus, TEI is not here contending that the IRS cut back on Counsel's burgeoning role as legal adviser to either Examination or Appeals (though we continue to have process concerns about Counsel's involvement); rather, we believe the proposed change would underscore that decision-making authority continues to be held by the Appeals Officer or Case Manager. (2) We continue to think the measurement system for the Examination function needs to be revised to take into account the ultimate sustention rate, but that is an issue for another day (and another task force).