In October 2016, the US Internal Revenue Service again changed how its Office of Appeals interacts with taxpayers and exam teams. On top of the significant changes in the Appeals Judicial Approach and Culture (“AJAC”) directives in 2013 and 2014, the IRS has eliminated the presumptive right to an in-person conference with Appeals, opting instead for greater use of telephonic conferences. The IRS has also clarified how Appeals can seek assistance from exam teams in cases docketed before the US Tax Court. Finally, the IRS has placed an ominous marker down regarding whether taxpayers will continue to have the right to work their cases in Appeals directly with the ultimate decision-maker. All these developments are significant and may make Appeals a less desirable forum for many taxpayers.
Recent History of Appeals Procedures
In the past three years, the AJAC directives have led to significant changes in how Appeals functions. The directives attempted to confer upon Appeals “a quasi judicial approach in the way it handles cases,” Memo. for Appeals Employees, AP-08-0713-03 (July 18, 2013), presumably because Appeals had not been sufficiently judicial in the past. The directives were largely aimed at prohibiting Appeals from considering arguments and evidence not previously raised with the exam team.
The old procedures conferred more flexibility upon Appeals. Under the old procedures, Appeals was “not precluded from requesting additional information or evidence from a taxpayer,” although it could refuse to “accept a case if it must obtain substantial additional information or evidence.” I.R.M. 126.96.36.199 (June 28, 2012). Now, Appeals is required to release jurisdiction to the exam team if the taxpayer “provides new information or evidence” or “raises new issue(s) that [the exam team] has not considered.” AP-08-0714-0004 (July 2, 2014); see also I.R.M. 188.8.131.52 (Aug. 11, 2015). Even if a taxpayer provides no new information but raises a new theory or alternative legal argument, Appeals must give the exam team 45 days to comment on the matter (although in these instances Appeals retains jurisdiction of the case). See AP-08-0714-0004, supra; see also I.R.M. 184.108.40.206.6 (Oct. 1, 2016). These changes have offered advantages for both sides. For taxpayers, AJAC has required Appeals to assess the case as if “it went to court today,” foreclosing a second bite at the apple from either Appeals or the Large Business and International division (“LB&I”). Moreover, all agreements on issues between LB&I and the taxpayer cannot be revisited by Appeals—even if critical to the case.
AJAC brought two other changes of significance. First, LB&I has much greater power to hold a case back from Appeals after a taxpayer has filed a protest. For example, the exam team could assert that the taxpayer has introduced new facts, theories, or arguments in its protest that require additional development at the exam level. Second, exam teams have a formal right to lodge a “written dissent” so as to “voice their concerns about an Appeals settled case.” See AP-08-0713-03, supra; see also I.R.M. 220.127.116.11.9 (Dec. 17, 2013). Experience has taught us that the prospect of dissent can create an external pressure on Appeals because dissents can result in a massive diversion of Appeals resources. It is difficult to envision a “judicial” entity that would surrender control of its docket to a litigant or submit to a session of questions about their decisions.
On October 1, 2016, an update to the Internal Revenue Manual provision on Appeals “Conference Practice” became effective. That update advised Appeals officers to “hold conferences by telephone” unless the situation warrants an in-person conference. I.R.M. 18.104.22.168.1 (Oct. 1, 2016). To decide whether to hold an in-person conference, the manual advises Appeals officers to consider the following factors:
- There are substantial books and records to review that cannot be easily referenced with page numbers or indices.
- The Appeals officer cannot judge the credibility of the taxpayer’s oral testimony without an in-person conference.
- The taxpayer has special needs (e.g., disability, hearing impairment) that can only be accommodated with an in-person conference.
- There are numerous conference participants (e.g., witnesses) who create a risk of an unauthorized disclosure or breach of confidentiality.
- An alternative conference procedure or Rapid Appeals Process involving separate caucuses will be used.
- Another Internal Revenue Manual section calls for an in-person conference.
Id. These factors may pose challenges for large corporate taxpayers because, with the exception of the first factor, they do not appear to account for the size, scope, and complexity of the controversy. In our experience, in-person conferences are often instrumental in obtaining settlements of large Appeals matters. If Appeals does not apply the new factors leniently when faced with a large, complex controversy, corporate taxpayers may find Appeals a less attractive option going forward.
October also saw the release of a “fact sheet” and updates to the Internal Revenue Manual aimed at clarifying how Appeals should handle new information in docketed cases. According to the guidance, if new information arises in Tax Court litigation, Appeals can request that the exam team analyze the information and provide feedback. See Docketed Case Examination Assistance, SBSE-04-1016-0030 (Oct. 3, 2016) (updating I.R.M. 4.2.1). Fortunately, the guidance clarifies that Appeals will attempt to settle a case based on the hazards of litigation (i) when the case was not fully developed by the exam team or (ii) when the exam team declines to provide assistance regarding the new information. See Fact Sheet: IRS Clarifies Office of Appeals Policies (Oct. 1, 2016).
Noticeably absent from the October guidance was any decision on the settlement authority of Appeals Team Case Leaders (“ATCLs”). ATCLs are assigned to “large complex work units received from LB&I.” I.R.M. 22.214.171.124 (Sept. 25, 2013). Unlike other Appeals officers, ATCLs have the authority to settle tax controversies without management approval. Id. There have been rumors that ATCLs may be stripped of settlement authority. But the IRS has not released official guidance on the subject to date.
Recent changes to Appeals procedures have had significant consequences. AJAC established ground rules for proper case development and forced Appeals to make a decision on a case without further factual development, as if it were to go to the Tax Court today. As a result, taxpayers would be well advised to ensure that they present all important information and arguments to the exam team. At the same time, the old saw is still true about waiting to see “what interests the judge,” for it is there that relatively more intricate development might be required. It is therefore critical to strike a proper balance between these two sometimes competing concerns. Taxpayers might want outside counsel to be involved earlier to ensure that (i) the factual content necessary to make the taxpayer’s affirmative case is adequately developed, and (ii) the nature of the current and latent exam-team arguments is well understood so as to anticipate the need for defensive factual material.
October’s guidance may make the need for earlier fact development more acute. Settlement of large cases in Appeals may prove challenging if taxpayers are unsuccessful in obtaining in-person conferences, and, generally, this is especially true if the cases are poorly developed at the exam level. (That development could become more pronounced if ATCLs lose settlement authority.) And by further implementing the rules on new arguments and evidence, the October guidance may continue to reshape Appeals into a forum that has many of the fact-development burdens that litigation entails.