National Taxpayer Advocate 2016 Report – IRS Appeals and Alternative Dispute Resolution

In its annual report to the US Congress, the Taxpayer Advocate Service (TAS) had a lot to say about IRS Appeals and the (lack of) use of other alternative dispute resolution (ADR) techniques. In this post, we will highlight what the TAS had to say in this area.

IRS Appeals

Undoubtedly, one of the Internal Revenue Service’s (IRS) most successful dispute resolution techniques has been IRS Appeals. Briefly, after the IRS’s Examination Division proposes a tax adjustment, taxpayers have the statutory right to seek an “appeal” of the decision. IRS Appeals is a separate and seemingly independent division of the IRS where one or more appeals officers review the redeterminations and adjustments made by the Examination Division, and attempt to settle the dispute directly with the taxpayer based upon a “hazards of litigation” analysis, much in the same manner as a judge would rule. The TAS acknowledged the success and utility of the IRS Appeals program and mission, but requested that Congress expand the program, giving the IRS the resources it needs to manifest the full intent of the program.

The TAS reported that funding for IRS Appeals has diminished sharply—by about 11 percent from 2013 to 2016, with staff reduced during the same period by 24 percent. In response to shrinking resources, but hobbled by the same duties and similar case load, IRS Appeals has been forced to implement procedures and policies that hamper its long-term mission of providing a fair and impartial review of the Examination Division’s adjustments. The TAS pointed out that these policies have resulted in (1) creating an inhospitable Appeals environment; (2) limiting in-person Appeals conferences; (3) reducing the Appeals officer’s ability to perform a quality substantive review; and (4) failing to protect the rights of taxpayers when conducting collection Appeals hearings. The TAS noted that there has been a large increase of cases docketed in the US Tax Court before seeking an IRS appeal. The TAS believes that docketing a case before it goes to Appeals has added inefficiency and unnecessarily increased the case load of the Tax Court.

The TAS suggested the following solutions:

1. Expand the locations in which Appeals Officers hear matters. Presently, there are numerous states in which there are no IRS appeals officers. As a result, taxpayers who seek an appeal and request an in-person conference are forced to travel to the states in which an IRS appeals officer is located.
2. Hold more in-person appeals conferences. The TAS report argues that in-person conferences facilitate the efficient and expeditious settlement of matters.
3. Revise procedures and policies to allow IRS appeals officers additional discretion and time to undertake factual development and provide more substantive review of matters.

Practice point: We have recently reported about many of the issues facing taxpayers seeking review by IRS Appeals. The TAS confirms our critiques of the system. IRS Appeals is a very good and useful technique that has a high probability of settling cases. Generally, appeals officers are thoughtful and engaged; however, the lack of resources has put tremendous pressure on an already overworked and under supported system. It makes little sense that Congress would gut the revenue-collecting arm of the federal government. Practitioners and taxpayers alike would applaud the implementation of the recommendations in the TAS report. Indeed, many of the appeals officers themselves, overworked and stripped of their discretion, would likewise support these considerations.

ADR

There is no question that certain ADR programs produce substantial benefits for governments, and assist in the efficient resolution of controversy matters. The IRS has several ADR methods that it employs, for example fast track settlement and post appeals mediation.The TAS acknowledges the substantial benefits of the IRS’s ADR programs, but suggests that these programs need to be expanded and tweaked to fix real and perceived problems.

The IRS offers four types of ADR techniques: fast track settlement (FTS), fast track mediation for collection matters (FTM), post appeals mediation (PAM), and the rapid appeals process. The TAS reports that these ADR techniques accounted for only 306 cases in fiscal year 2017! Of these 306 cases, 251 were actually resolved through settlement. And the trend over the last three years has been a steady decline in ADR cases. TAS explains that one of the problems with the IRS’s ADR program is that it is only available if the IRS agrees to participate. Another cited problem is the perception among taxpayers that the process is rigged in favor of the IRS, as the presiding officers are IRS employees. When ADR is used in a commercial context, for example in collecting a debt, the facilitators are typically third-party neutral, professionals. In the IRS’s case, the ADR facilitators are IRS appeals officers who are not specifically dedicated to the ADR process, but have normal Appeals cases in addition to ADR cases.

In its report, the TAS makes several good suggestions, including the following points:

1. Expand ADR. Make it more available, and remove the IRS’s discretion to resolve controversies through ADR. The TAS believes that ADR should be available to all taxpayers. Publicize and encourage taxpayers to engage in ADR with the IRS instead of following the traditional appeals path. In an effort to demonstrate the efficacy of the program, the IRS should maintain and publish statistics on its ADR program.
2. Independent ADR specialists. The TAS suggests that the IRS have a team of professionals trained and dedicated to ADR. This would increase the public’s trust in the programs.

Practice point: In the last several years, the benefits of seeking resolution under the IRS’s ADR programs have been waning. From experience, the IRS seems to now give only lip service to these programs. The TAS’s suggestions are right on target. A team of dedicated and truly independent ADR professionals could have a profound effect on the system and the number of case both at the IRS and in the courts. The IRS should devote the resources necessary to make this vision a reality and embrace the techniques long used by businesses (think debt collection) and the courts. Indeed, in nearly every court system in the country litigants are required (or at least strongly encouraged) to engage in some sort of ADR prior to seeking redress before the court. If ADR is good enough for the courts, why hasn’t the IRS embraced this tried and tested dispute resolution technique?