The Independent Office of Appeals (“Appeals”) is one of the few venues available to taxpayers to resolve disputes with the US Internal Revenue Service (“IRS”) short of litigation, making the program—as the IRS recognizes—“widely valued.” Central to its mission of resolving these disputes in a “fair and impartial” manner is Appeals’ independence from examination and other non-IRS Appeals functions.1 So when Appeals implemented a pilot program more than three years ago, the Appeals Team Case Leader (“ATCL”) Conferencing Initiative (“Initiative”), under which IRS examination teams (“Compliance”) and the IRS Counsel that advised Compliance could attend and actively participate in taxpayers’ opening IRS Appeals conferences, taxpayers expressed concerns, including that this change would erode Appeals’ independence. Despite potential concerns, Appeals said that it believed that hearing and responding “to each other’s presentations in real time” would narrow and help resolve complex legal and factual differences.2
Before the Initiative, however, Compliance would present its position to Appeals in the “pre-conference,” and then Appeals would excuse Compliance before the taxpayer would make its presentation to Appeals.3 This procedure allowed Appeals to “review the strengths and weaknesses of the respective positions” taken by both parties and “give them a fresh look.”4 While the Initiative ended more than a year ago,5 the IRS recently announced changes to IRS Appeals conference procedures for Large Business & International taxpayers that effectively extend the Initiative indefinitely at the discretion of the ATCL (“Announcement”).6 Only time will tell whether taxpayers' concerns will come true and the new procedures will (1) harm the independence of Appeals or (2) cause a fundamental shift in the nature of Appeals as a tool for resolving cases.
Before announcing its new policy, Appeals reviewed the feedback received during the three-year pilot of the Initiative. Based on this feedback, Appeals explained that ATCLs who participated in the Initiative reported that the joint participation of Compliance and taxpayers in the initial case discussion improved their understanding of the dispute and resolved factual and legal differences between the parties before engaging in settlement negotiations.7 This feedback was particularly true in cases involving expert reports or opinions. The Announcement also states that ATCLs felt that hearing from both sides was a significant improvement over traditional pre-conference proceedings. According to the Announcement, under the traditional pre-conferencing procedures, taxpayers would often challenge Compliance’s statements after Compliance concluded its presentation and left the room. This left ATCLs unable to hear responses to persuasive taxpayer arguments; instead, ATCLs were left in the position of trying to articulate Compliance’s response as best they could. Finally, the Announcement states that ATCLs felt that the Initiative allowed them to better maintain their impartiality since they could directly ask Compliance for its response to the taxpayer’s arguments.
While Appeals concludes that discarding the traditional pre-conference appeals procedures is “beneficial,” several public comments show that taxpayers and other stakeholders disagree.8 First, during the Initiative, several taxpayers expressed concern that ATCLs were pressing Compliance and taxpayers to mediate cases rather than Appeals independently assessing the hazards of litigation and trying to settle the case with the taxpayer. Further, multiple comments, including those submitted by the American Bar Association Section of Taxation, suggested that taxpayer consent should be required for Compliance to attend the non-settlement portion of Appeals conferences. And at least one commenter identified these drawbacks of Compliance participation:
- Derailing the process when the ATCL failed to limit Compliance’s participation to a respectful and productive discussion of core factual disputes.
- Leading to multiple conferences about “immaterial factual nits,” prolonging disputes about insignificant and irrelevant issues.
- Increasing the likelihood that Compliance would be involved in the hazards discussion because there was no clear line between the end of identifying factual and legal issues in dispute and the hazards discussion, chilling a free exchange between Appeals and the taxpayer and decreasing the likelihood of a negotiated settlement.
- Causing the Appeals team to abandon their role as independent and impartial evaluators and slip into the role of mediators, undermining the utility of Appeals as an independent forum in which a taxpayer can resolve a dispute.
The comments reflect concerns about Appeals’ ability to maintain neutrality (or the appearance of neutrality) and to prevent the discussion from being diverted from the real issues. Although Appeals acknowledged that these negative comments exist, the Announcement only meaningfully addresses why Appeals concluded that it would not require taxpayer consent for Compliance’s participation. The Announcement states that requiring taxpayer consent would “effectively substitute the judgment of the taxpayer (or the taxpayer’s representative) for the judgment of the ATCL” as to “how best the ATCL can fully understand the merits of both parties’ positions.”
The Announcement also provides a chart with the results of an extremely small sample-size customer survey on the Initiative that an independent third-party contractor conducted. The contractor identified 57 taxpayers that participated in the Initiative in 2019 and 2020, but only 13 responded. Of the 13 that responded, only 8 said that they were satisfied with a joint discussion conference with Compliance in attendance. And while this satisfaction rate of 62% may seem like a positive response, self-selection bias may be at play here. For instance, it’s plausible that many of the 44 taxpayers that did not respond were dissatisfied and perhaps chose not to respond to prevent poisoning their relationship with the IRS, particularly Appeals, going forward.
Large taxpayers may wonder whether it will be effective to object to an ATCL’s decision to invite Compliance (and the IRS Counsel that advised Compliance) to participate in an Appeals conference. Appeals states that it will consider the taxpayer’s views on Compliance’s participation. But Appeals declined to require taxpayer consent, citing the “policy since at least 1967” of Appeals’ having discretion to invite Compliance and the desire to avoid substituting the taxpayer’s judgment for the ATCL’s judgment on how the ATCL should become familiar with the case. Instead, according to the Announcement, the ATCL will consider several factors in deciding whether to invite Compliance: (1) whether the ATCL’s understanding of the case will be helped by Compliance’s participation, (2) whether the case is factually complex or disputed, (3) whether the case involves experts so that the ATCL would benefit from hearing each side’s view of the other side’s expert and (4) whether the case involves issues of first impression or conflicting precedent. So only time will tell whether a taxpayer’s views will sway Appeals, particularly if the matter contains certain factors (such as factual disputes or issues of first impression) that the ATCL feels favors inviting Compliance.
Moreover, several commentators reported that the dynamic of Appeals changes when Compliance (and the IRS Counsel that advised it) participate in the initial case discussion. Specifically, commentators suggested that the change pushed the regular Appeals process to become a mediation, which arguably sounds similar to the Rapid Appeals Process and Fast Track programs that already exist as voluntary alternatives to the regular Appeals conference route. And since the ATCL has sole discretion whether to invite members from these other IRS offices, taxpayers should be mindful that this raises the potential that two similarly situated taxpayers could have two different Appeals processes that could lead to different experiences and results.9 Thus, taxpayers will need to raise this issue with their ATCL early so that they can advocate for their preference or, at minimum, prepare accordingly. It is unclear whether this concern will materialize, and, so far, taxpayers have seen only limited information collected about the Initiative.
Appeals recently announced changes to its conference procedures that give an ATCL the sole discretion to invite Compliance (and the IRS Counsel that advised it) to an Appeals conference and to require a taxpayer to participate in a joint case discussion with them. The Announcement makes the argument that this change isn’t significant and simply continues “longstanding Appeals’ policy,” but only time will tell whether taxpayers’ concerns—that these new procedures will harm Appeals independence or cause a fundamental shift in the nature of Appeals—will come true.
2 Appeals Team Case Leader Conferencing Initiative: Summary of Findings and Next Steps, IRS Independent Office of Appeals (September 2021) (irs.gov).
3 Before October 2016, Appeals could invite Compliance or other IRS representatives to attend conferences if doing so were “advisable.” IRM 22.214.171.124.4(1) (Nov. 14, 2013) (“If advisable, Appeals may request representatives of the Compliance, Area Director, engineering, or other experts to attend conferences.”); see also IRM 126.96.36.199.4(1) (Nov. 6, 2007) (stating the same). Then, in October 2016, the IRS revised the Internal Revenue Manual so that Appeals had discretion to request Compliance and/or IRS Counsel to attend, removing the reference to whether the invitation was advisable. IRM 188.8.131.52.4 (Oct. 1, 2016) (“Appeals has the discretion to invite Counsel and/or Compliance to the conference. The prohibition against ex parte communications must not be violated. See Rev. Proc. 2012-18. Appeals may also request that other experts attend conferences.”). In its place, the Internal Revenue Manual stated that the prohibition against ex parte communications continued to apply. Id. Around the same time, the IRS stylized the Internal Revenue Manual change as a clarification of existing guidance. Matthew R. Madara, IRS Appeals Conference Procedure Change Follows Prior Guidance, Tax Notes (Mar. 27, 2017) (discussing the statement by IRS Appeals Chief Donna Hansberry on March 20, 2017). But the IRS acknowledged that historically most Appeals conferences were conducted without participation from Compliance or other non-IRS Appeals employees. Id.; Publication 4227 (Rev. 1-2020) (irs.gov).
6 Appeals Team Case Leader Conferencing Initiative: Summary of Findings and Next Steps, IRS Independent Office of Appeals (September 2021) (irs.gov).
8 During the Initiative, practitioners also voiced their client concerns. See Stephanie Cumings, IRS Open to Appeals Pilot ‘Ground Rules’ Checklist, Tax Notes (Sep. 27, 2018) (stating that practitioners expressed concern with the Initiative’s lack of consistency, that cases took too long due to ATCLs’ failure to rein in Compliance and that phone calls occurred between ATCLs and Compliance that taxpayers were excluded from).