By Jeffrey Galante, EA
I’m sure you’ve had a similar experience. You’re working with a Revenue Agent or Revenue Officer on a tax controversy matter and you don’t agree with their final decision. You’ve already gotten the IRS’ manager involved and they too don’t agree with your position. What do you do now? Do you formally protest the Government’s decision and go directly to Appeals? This formal process will no doubt result in additional time, costs and frustration to your client…and to you!
There are, however, other ways for your case to be resolved more quickly with the help of the IRS’ Appeals Division before the case is closed by the Examination or Collection Division. These alternatives are part of the Appeals Alternative Dispute Resolution Program or initiative.
In this article I’ll briefly discuss the following alternatives.
·
Fast Track Settlement
·
Fast Track Mediation
·
Early Referral Request
While I could literally write a
book on each of these programs, I’ve limited this article to a brief discussion
of each process and have provided my own insights taken from my working in the
IRS Appeals Division for seventeen years.
Fast Track Settlement [1]
Fast Track Settlement (FTS) offers Large and Mid-Size Business Division (LMSB) taxpayers a way to resolve factual and legal audit issues during the examination process in less than 120-days. Working with LMSB and Appeals, taxpayers can use the settlement authority and mediation skills of Appeals to shorten their overall experience with the Internal Revenue Service by two years.
The goal of FTS is to resolve the outstanding issues while the case is still in the Examination Division’s jurisdiction. The application process requires a one-page application form. If accepted for the FTS Program, the case is assigned to a senior Appeals Officer or an Appeals Team Case Leader to mediate that case. Both the Government and the taxpayer submit position statements to the Appeals mediator prior to the actual mediation. The Appeals mediator analyzes the position papers, performs their own analysis of the outstanding issues, and then comes to a preliminary decision as to how each issues might best be resolved.
The Appeals Officer or Appeals Team Case Leader will then conduct a formal mediation session between the Examination Revenue Agent’s team and the taxpayer’s team. During that session, both the government and the taxpayer will have the opportunity to present their respective positions and respond to questions in a joint session. The Appeals mediator will conduct separate meetings with the opposing sides to explore the possibility of common grounds in an effort to allow both sides to reach a resolution to the issues being discussed.
If at the end of the day, a settlement cannot be reached on some or all of the outstanding unagreed issues, the Appeals mediator will recommend a settlement and ask the parties to consider agreeing to the Appeals recommended settlement. Oftentimes the recommended Appeals resolution is accepted by both the taxpayer and the Government. In addition, the Appeals mediator may apply hazards of litigation to arrive at a recommended settlement.
This process works best if there are no more than five unagreed issues and both the Examination team and taxpayer’s side come to the table with open minds and a willingness to settle the issues.
The FTS Program was very active in 2003 through 2005. However, with the advent of the Government’s goal of closing cases quicker, the FTS Program has suffered. Many LMSB Revenue Agents do not want to hold up closing their case and miss their estimated completion date, in order to take part in a Fast Track Settlement conference. In discussing this situation with Appeals’ senior management, I expressed my concerns about the FTS process not being given serious consideration by the Examination staff. As we speak, Appeals and Examination management staffs are looking into this matter and are looking at ways of resolving this issue.
Fast Track Mediation [2]
The Fast Track Mediation Program
(FTM), implemented on July 1, 2000, gives small businesses, self-employed
taxpayers and the IRS the opportunity to mediate disputes through an IRS
Appeals Officer, who acts as a neutral party.
Most tax disputes are resolved within 40 days compared to several months
through the regular Appeals process.
This program is generally
available for all non-docketed case Examination and Collection Division type
cases including offer-in-compromise, trust fund recovery penalty, and
collection due process. One important
point to note is that FTM is generally not available for issues for which
resolution of the outstanding issues will depend on the assessment of the
hazards of litigation.
The request to participate in the
FTM Program is initiated at the end of an Examination or Collection Division’s determination
by either the taxpayer or Small Business and Self-employed Division
(SB/SE). If the case is accepted into
the FTM Program, an Appeals Officer, who is a trained mediator, is assigned to
facilitate or mediate a resolution to the outstanding issues. The case remains in the Examination or
Collection Division’s jurisdiction during the FTM process. The FTM Appeals mediator does not have
settlement authority and cannot render a decision regarding any of the
outstanding unagreed issues.
If the Government and taxpayer
mutually resolve any of the FTM disputed issues, the Government will secure the
appropriate closing documents from the taxpayer and will close the case through
the normal Examination and Collection Division case closing procedures.
Because the resolution of FTM
cases rely upon the agreement of both the Government and taxpayer, without the
use of Appeals’ settlement authority, the agreement rate on these cases have
not been as high as the Government has anticipated. From my experience, some Appeals Officers,
while formally trained, may not be strong enough to formulate a voluntary
settlement agreement between the Government and the taxpayer.
As a result, the Government has
initiated a test of the Fast Track Settlement Program for cases that originated
in the SB/SE Division (Collection and Examination).
Fast Track
Settlement Test [3]
The Government initiated a pilot program to provide the opportunity for small business and self-employed taxpayers to use the Fast Track Settlement Process (FTS). The purpose of the SB/SE FTS Process is to enable SB/SE taxpayers that have unagreed issues to resolve these issues while the case is still under SB/SE jurisdiction. The SB/SE FTS will be used to resolve both factual and legal issues and may be initiated at any time after an issue has been fully developed, preferably before the issuance of a 30-day letter or equivalent notice.
SB/SE FTS has been available to taxpayers for a test period
of up to two years, since September 5, 2006.
Within this period, there was an initial focused test of six months
during which SB/SE FTS was only available for taxpayers under examination in
If an issue is determined not to be eligible for the SB/SE FTS Program, all issues in the case are not eligible for the FTS Program. While SB/SE FTS is available for many cases, it is not available for the following cases:
· Collection Appeals Program, Collection Due Process, Offer-in Compromise and Trust Fund Recovery cases;
· Correspondence examination cases worked solely in a Campus/Service Center site;
· Cases in which the taxpayer has failed to respond to Service communication and no documentation has been previously submitted for consideration by the Compliance Division;
· Tax Equity & Fiscal Responsibility Act (TEFRA) partnership cases;
· Issues generally outside SB/SE jurisdiction;
· Issues designated for litigation, and issues under consideration for designation for litigation;
· Issues for which the taxpayer has submitted a request for competent authority;
· Issues for which the taxpayer has requested the simultaneous Appeals/Competent Authority procedure;
· Frivolous issues, such as those identified in Rev. Proc. 2006-2, 2006-1 I.R.B. 89;
· Whipsaw issues 4; and
· Issues that have been identified in a Chief Counsel Notice, or equivalent publication, as being excluded from the SB/SE FTS Program
As in the LMSB FTS Program, the Appeals mediator will conduct joint and separate mediation sessions in attempt to secure joint resolution of the unagreed issues. Also, the Appeals mediator has delegated settlement authority to recommend resolution of the unagreed issues. In my opinion, using Appeals settlement authority in SB/SE cases will allow for the opportunity of a greater number of agreed cases, as compared with the SB/SE Mediation Program.
4 The term “whipsaw” refers to the situation produced when the government
is subjected to conflicting claims of taxpayers. A potential whipsaw situation exists whenever
there is a transaction between two parties and differing characteristics of
transactions will benefit one and hurt the other for tax purposes.
Early Referral 5
This procedure under section 7123 of the Internal Revenue Code describes the method by which a taxpayer may request an early referral of one or more unresolved issues from the Examination or Collection Division to the Office of Appeals.
Appropriate issues for early referral are limited to those that:
· if resolved, can reasonably be expected to result in a quicker resolution of the entire case;
· both the taxpayer and the District agree should be referred to Appeals early;
· are fully developed; and
· are part of a case where the remaining issues are not expected to be completed before Appeals could resolve the early referral issue.
The Early Referral process does not include an issue:
· for which a 30-day letter has been issued;
· that is not fully developed;
· when the remaining issues in the case are expected to be completed before Appeals could resolve the early referral issue;
· that is designated for litigation by the Office of Chief Counsel;
· for which the taxpayer has filed a request for Competent Authority assistance, or issues for which the taxpayer intends to seek Competent Authority assistance; or
· that is part of a whipsaw transaction.
The Early Referral procedure will allow you to simultaneously work on the audit or collection matter, while you resolve the unagreed issue with Appeals.
Summary
As you can see, there are several ways to resolve unagreed issues on an expedited basis. However, some programs may be more appropriate than others depending upon your client’s facts and circumstances. Knowing these alternatives and discussing them with your client can be of great value and enhance your practice.
5 Internal Revenue Procedure 99-28