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IRS Appeals – Changes Afoot?

by Jean A. Pawlow and Kevin Spencer | Oct 4, 2016 | IRS Appeals, IRS Guidance, Settlements, Uncategorized

IRS Appeals cases within the Large Business and International (LB&I) division that involve a significant number of issues, a significant amount of money, or highly complex issues are typically assigned to a “team” of IRS Appeals officers. The Appeals Team Case Leader (ATCL), however, has “complete control” of the case, is “independent” from the IRS Examination Team and, except for certain coordinated issues, has settlement authority for all work assigned to the Appeals team. See I.R.M. 8.7.11.2 (09-25-2013). Currently there are 35 ATCLs.

Rumors are rampant, however, that the IRS may soon eliminate the ATCL’s settlement authority and require review and approval of settlements by an Appeals Team Manager (ATM), of which there are only a handful. On September 22, 2016, at an annual conference sponsored by the Internal Revenue Service and the New York Chapter of the Tax Executives Institute, Reinhard Schmuck, an ATCL for Area 9 in New York, confirmed that the IRS is considering changes to ATCL’s settlement authority. He indicated that the review was initiated in response to a report filed by the Treasury Inspector General for Tax Administration that determined that in a sample of penalty Appeals cases, the case files did not always support Appeals’ decisions to abate penalties as required by Appeals criteria. See TIGTA Report Number: 2015-10-059 to the Internal Revenue Service Chief of Appeals (July 30, 2015). He cautioned, however, that the IRS had not made any final decisions.

Attendees at the conference, including former Appeals Officers and practitioners, expressed dismay at the proposed change because the LB&I Appeals process, which has worked well and instilled confidence in taxpayers, is not broken. This change may be a devastating blow to resolution at Appeals, and may cause a chilling effect on seeking redress at Appeals before heading to court. What is the use of spending a significant amount of time and effort to negotiate at Appeals if the decision maker is not even part of the negotiations?

What can we expect if the rumors ring true:

(1) Additional delays at Appeals;

(2) Unhappy ATCLs and ATMs;

(3) Unfair and unreasoned settlements;

(4) Increased assertion of penalties; and

(5) Taxpayers avoiding Appeals and an increase in tax litigation.

The new procedures were rumored to be effective October 1. We do not have confirmation of a change in policy, but once the rumors are confirmed, we will report back.

IRS Updates Rules Regarding Appeals Conferences

by Kevin Spencer, Jean A. Pawlow, Bradford E. LaBonte, McDermott Will & Emery, Robin L. Greenhouse and McDermott Will & Emery | Sep 22, 2016 | IRS Appeals, IRS Guidance, Settlements, Uncategorized

The Internal Revenue Service (IRS) has revised the Internal Revenue Manual (IRM) regarding Appeals Conferences. Below is a summary of material changes to IRM 8.6.1, effective October 1, 2016:

The IRM was revised to reflect that most conferences in Appeals will be conducted by telephone. The revision also provides guidance for when in-person conferences are appropriate (e.g., when there are substantial books and records to review that cannot be easily referenced with page numbers or indices, or when there are numerous conference participants that create a risk of an unauthorized disclosure or breach of confidentiality).
IRM 8.6.1.4.1.2, In-Person Conferences: Circuit Riding was added. If the assigned Appeals employee is in a post of duty that conducts circuit riding, circuit riding will be permitted when the address of the taxpayer, representative or business (for business entities) is more than 100 miles from a customer-facing virtual conference site or 150 miles from the nearest Appeals Office. Area Directors have the discretion to deviate from these mileage limitations. Circuit riding will also be allowed if the nearest Appeals Office cannot take the case due to high inventories or lack of technical expertise, or if there is no convenient alternative.
Language was added in IRM 8.6.1.4.4 to state that Appeals has the discretion to invite Counsel and/or Compliance to the conference. The IRM notes that the prohibition against ex parte communications must not be violated and references Rev. Proc. 2012-18.
The definition of a new issue was updated in IRM 8.6.1.6.1(2). The IRM retains prior language stating that a new issue is a matter not raised during Compliance’s consideration and adds that any issue not raised by Compliance in the report (e.g., 30-Day Letter) or rebuttal and disputed by the taxpayer is a new issue.

The revised IRM 8.6.1 is available here.

Sixth Circuit Defines ‘Corporation’ for Purposes of Overpayment Interest

by Roger J. Jones | Aug 22, 2016 | Appellate Courts, Settlements, Tax Refunds, Uncategorized

The US Court of Appeals for the Sixth Circuit recently held in U.S. v. Detroit Medical Center that a nonprofit entity incorporated under state law falls within the definition of a ‘corporation’ for purposes of determining the interest rate applicable to tax refunds. The case is worth reading for its plain meaning analysis as well as its reliance on prior case law dating back hundreds of years.

In Detroit Medical, a not-for-profit corporation overpaid its taxes, entitling it to a refund plus interest. Under the Internal Revenue Code (Code), ‘corporations’ receive lower interest rates on refund than other taxpayers. The taxpayer claimed that, as a not-for-profit corporation, it should not be treated as a ‘corporation’ and thus was eligible for the higher interest rate resulting in an extra $9.1 million in refunds. The Sixth Circuit found nothing in the relevant statute that excludes a not-for-profit corporation from the definition of “corporation.” In reaching its holding, the court relied on various statutory construction principles, including: (1) in the absence of any statutory definition to the contrary, courts presume that Congress adopts the customary meaning of the terms it uses; (2) the word “includes” is a term of inclusion, not exclusion; (3) dictionary definitions (both old and new) are appropriate tools to determine the meaning of a word used in the Code; and (4) when Congress uses particular language in one section of a statute but omits it in another part of the same Act, the general rule is that Congress acted intentionally and purposely in the disparate inclusion or exclusion.

As further support for its plain meaning analysis, the Sixth Circuit relied primarily on an 1819 opinion by Chief Justice Marshal in Dartmouth College that permitted charitable organizations to be treated as corporations. The court further noted that in 1612, Sir Edward Coke wrote in The Case of Sutton’s Hospital that a charitable hospital and school founded at the London Charterhouse was as valid a corporation as any other because it possessed all the characteristics that are of the essence of a corporation. Finally, the court cited to commentaries by William Blackstone from 1753 that charitable corporations are one of three basic kinds of corporations.

The Sixth Circuit’s approach of applying a strict plain meaning analysis is consistent with its approach in prior tax cases, including its interpretation of Code section 956 in The Limited and Code section 1256 in Wright Additionally, the opinion highlights the importance in tax litigation of not limiting one’s argument to just the most recent cases and searching for useful authority outside the tax context. In a recent opinion involving the interpretation of Code section 6662, the Tax Court in Rand employed a similar approach by applying the rule of lenity and relying on an 1820 Supreme Court opinion dealing with homicide at sea.

IRS Updates Appeals Procedures for Tax Court Cases

by Robin L. Greenhouse and McDermott Will & Emery | Mar 25, 2016 | Alternative Dispute Resolution, Court Procedure Matters, IRS Appeals, IRS Guidance, Settlements, Trial Courts, Uncategorized

On March 23, 2016, the Internal Revenue Service (IRS) issued Rev. Proc. 2016-22, 2016-15 IRB 1, which clarifies and describes the practices for the administrative appeals process in cases docketed in the Tax Court. The stated purpose of the revenue procedure is to facilitate effective utilization of appeals and to achieve earlier development and resolution of Tax Court cases.

Previously, the procedures for the appeals process of Tax Court cases was contained in Rev. Proc. 87-24, 1987-1 C.B. 720. In October 2015, the IRS released a proposed revenue procedure updating the rules and requesting public comments. Three substantive comments were received and considered by the IRS, resulting in changes to the proposed revenue procedure. Rev. Proc. 2016-22 states that some of the suggestions that were not adopted may be addressed in other IRS guidance materials.

The general rule followed by the IRS is that all cases docketed in the Tax Court that have not previously been considered by IRS Appeals will be transferred to Appeals unless the taxpayer notifies IRS counsel that it wants to forego settlement consideration by Appeals. This rule is subject to certain exceptions, most notably if the case has been designated for litigation by the IRS. The revenue procedure also provides that “[i]n limited circumstances, a docketed case or issue will not be referred if Division Counsel or a higher level Counsel official determines that referral is not in the interest of sound tax administration.” Although no definition is provided, examples are provided of: (1) a case involving a significant issue common to other cases in litigation for which the IRS maintains a consistent position; or (2) cases related to a case over which the Department of Justice has jurisdiction. Referral to IRS Appeals will generally occur within 30 days of the case becoming at issue in the Tax Court, which can be either the date the Answer is filed by the IRS or a Reply (if required) is filed by the taxpayer.

The revenue procedure clarifies, and limits, the role of IRS counsel when a case is referred to Appeals. Unlike Rev. Proc. 87-24, the new revenue procedure provides that Appeals has sole discretion to determine whether IRS counsel may participate in any settlement conference and will consider input from the taxpayer on this point. It also clarifies that when a case is forwarded to Appeals for consideration, “Appeals has the sole authority to resolve the case through settlement until the case is returned to Counsel.” In the past, taxpayers were concerned about the ability of IRS counsel to disrupt a settlement reached with Appeals. If a settlement is reached with Appeals, IRS counsel’s involvement is ministerial in that counsel should only review any decision document signed by the taxpayer for accuracy and completeness before signing the decision document on behalf of the IRS and filing it with the Tax Court.

The new revenue procedure should also be a welcome development for estate tax cases given that there is no statutory provision to extend the [...]

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