The first option is to request a conference with the examiner's "group manager." In some Internal Revenue Districts this conference will be conducted by a senior examiner rather than the actual group manager. The conference with the manager is an opportunity to allow someone in the Service with more experience and, hopefully, a different viewpoint to look at the facts of the case and consider an alternative approach. The group manager has an ongoing relationship with the examiner therefore his initial reaction may be to support the decision of his subordinate. Nevertheless, especially in situations where the examiner is clearly wrong in his interpretation of the law, the group manager will exercise his independent judgment.
The examiner w ill be usually be present at the conference with the group manger. Therefore, counsel should refrain from complaining about how ignorant and unreasonable the examining agent has be en (even if true). As in all dealings with the Internal Revenue Service, abrasive conduct is counter-productive. Along these lines the client normally should not attend this conference nor indeed any meeting with the Internal Revenue Service. Clients are usually unable to keep a sufficient level of emotional detachment, and often make comments which serve no purpose other than to alienate Service officials. In addition, they sometimes provide extraneous information which they think will be helpful, but is actually damaging to their case.
Generally, a conference with the manager is a no-lose situation. However, if the examining agent has located a revenue ruling or case which appears to be directly in point the manager will not be in a position to overrule the examiner's decision.Appeals Division
If no agreement is reached after the conference with the group manager the IRS will send the taxpayer a "30-day letter." The 30 day letter forwards a copy of the examiner's report and solicits the taxpayer's agreement to the proposed changes to his tax liability. The letter also provides that the taxpayer has 30 days to request a hearing with the Regional Director of Appeals. If the taxpayer fails to reply to the 30 day letter, the Service will issue a statutory notice of deficiency or "90 day letter". At that point the taxpayer has the option of filing a petition with the United States Tax Court, or paying the tax and filing a claim for refund, followed by a suit in U.S. District Court or the U.S. Claims Court. 1
The function of the Appeals Office is to "resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service." 2 While some might argue how impartial the Appeals Office is, the fact remains that according to the Internal Revenue Service's Annual Report for 1988, the Appeals Division closed approximately 93,000 cases, of which 90 percent were agreed.Why Request Appellate Review
There are a number of reasons for requesting review of your client's case by the Appeals Office. They include: 1. The Appeals Conference affords an opportunity for a review of errors made by the examiner; 2. The Appeals Conference is an opportunity for negotiating at a higher and more sophisticated level within the Internal Revenue Service; 3. The Appeals Conference is an opportunity for someone within the Service to take a fresh look at the case; 4. The Appeals Conference provides an opportunity to settle based upon the "hazards of litigation"; 5. The Appeals Conference is a necessary step in exhausting all administrative remedies for the purposes of obtaining attorneys fees 3; 6. If the taxpayer ultimately loses, he will have had more time to order his financial affairs so he can pay the tax; and 7. If the case is ultimately litigated the appeals process will have given the taxpayer an early opportunity to learn more about the Internal Revenue Service's theory of the case.
The key reason for requesting an Appeals Conference is the Appeals Officer's authority to settle a case based on the hazards of litigation even though no court case has actually been filed. Unlike examining agents, Appeals Officers may settle a case based upon an overall evaluation of whether or not the Internal Revenue Service is likely to prevail in litigation. The Appeals Officer will review all the available evidence as well as the Internal Revenue Code, Treasury Regulations, administrative rulings and the decided cases in order to make a determination as to the likely outcome if the case is litigated. Based upon the Appeals Officer's evaluation a settlement can be reached in which each side concedes a percentage of the adjustment. The percentage being based upon the relative merits of each side's case. The Service will not, however, settle a case based on its nuisance value. 4
Generally, the authority of the Appeals Officer to settle a case is unlimited, although it is subject to his manager's approval. One of the few restrictions is in cases in which the civil fraud penalty has been asserted, and there has been a referral made to the Justice Department to prosecute the taxpayer criminally. Even though the taxpayer is later acquitted, the approval of District Counsel's office is necessary for the Appeals Officer to concede or reduce the fraud penalty. 5
The most important reason for not requesting an Appeals Conference is the risk that new issues or new grounds to support an adjustment might be raised. Thus, for example even though the only issue raised at the examination level was the allowability of a $3,000 interest expense, the Appeals Officer could allow the interest expense, and disallow a $50,000 charitable contribution. This risk is greatly reduced by not requesting an Appeals Conference.
As mentioned previously, if a taxpayer fails to request an Appeals Conference the Internal Revenue Service will issue its 90 day letter giving the taxpayer the opportunity to petition the Tax Court. Once the 90 day letter has been issued if the Internal Revenue Service wishes to raise a new issue or an increased tax it, rather than the taxpayer will have the burden of proof in the Tax Court. 6 While not requesting an Appeals Conference reduces the risk of a new issue being successful raised it does not eliminate it. To completely eliminate the possibility of incurring a deficiency greater than raised by the Examination Division, the taxpayer should refrain from requesting an Appeals Conference. Instead he should pay the tax claimed to be due, wait until the expiration of the period within which the IRS may make an additional assessment, and file a claim for refund, followed if necessary by a suit for refund in District Court or Claims Court.
In a refund suit; unlike a Tax Court action, the Internal Revenue Service may raise a new issue only to offset any refund due to the taxpayer, not to collect an increased tax. 7 Thus prior to requesting an Appeals Conference a careful review of the entire return should be made to determine whether there is exposure in other areas. Sometimes it is much better to accept a small adjustment, rather than run the risk of having the Service raise a new issue.
It should be noted, however, that an Appeals Officer will not raise a new issue lightly. The Internal Revenue Manual provides that a new issue should not be raised by the Appeals Division unless there are "substantial" grounds for raising the issue and the effect on the tax liability would be material. Substantial means that it is quite certain that the government will prevail if the case were to be litigated. The Manual further states that except in unusual circumstances, Appeals should not raise a new issue unless provable facts to sustain the issue are readily available. 8
A second factor weighing against an Appeals Conference is that it has a tendency to delay the final outcome. The Appeals Division hears both docketed and non-docketed cases. Docketed cases have priority over cases which are not docketed before the Tax Court. Thus a taxpayer who wishes to have his case disposed of quickly may not wish to request an Appellate Conference upon receiving the 30 day letter. Once the 90 day letter is issued and a Petition with the Tax Court is filed, the taxpayer will automatically be afforded an Appeals Conference. 9The Protest
Assuming the decision has been to obtain Appeals Division review at the 30 day letter stage, the next step is to request an Appellate Conference. If the amount in dispute is $2,500 or less, or was the result of an office audit, then an oral request will be sufficient to have the case considered by the Appeals Division. If the amount is between $2,500 and $10,000, a brief written statement of the issues is necessary. If, however, the amount in dispute is greater than $10,000, and is the result of a field audit, then it is necessary to file a written Protest. 10 Although the Internal Revenue Service does not issue a form on which to file a Protest, the required contents of one are set forth in Internal Revenue Service Publication 5. The IRS mails a copy of Publication 5 with the 30 day letter. The required contents of the Protest are as follows:
1. A statement that the taxpayer wishes to appeal the examination determination;
2. The taxpayer's name and address,
3. The date and symbols on the 30 day letter;
4. The tax period or periods involved;
5. An itemized schedule of the non-agreed adjustments; and
6. A statement of facts which support the taxpayer's position as well as a statement outlining the law or other authority.
The Protest must either be signed by the taxpayer certifying it as true under the penalties of perjury or, alternatively, it can be signed by counsel with a declaration that he prepared the Protest, and the extent of his knowledge as to the correctness and truthfulness of the information in the Protest. The following statement will suffice:
The foregoing protest was prepared on the basis of facts which have been furnished to me. I do not know of my own knowledge that the statements of fact contained herein are true and correct.Counsel for Taxpayer
Due to the Internal Revenue Service's penchant for losing documents, the Protest should be accompanied by a power of attorney on Form 2848 even if one has previously been filed.
The starting point in obtaining the best settlement is the well drafted Protest. The Protest the first opportunity that the Appeals Officer has to consider the taxpayer's case. It is important that the facts and arguments which are favorable to the client are clearly laid out in the Protest. In many districts Appeals Officers have very heavy case loads. Therefore if his job is made easy by a well drafted and researched Protest which reduces the need for additional research, the Appeals Officer is more likely to take the easy way out and enter into an advantageous settlement. If, on the other hand, his work is made difficult, it increases the chances that he will be working harder to uphold the Service's initial position.
Drafting a Protest in the short time span required by the constraints of the 30 day letter may not be possible. There are two ways of resolving up this problem. The first is to request an extension of time to file the Protest. The 30 day period is not written in stone, and the IRS is usually willing to allow at least a two week extension, if not longer. If this is still not sufficient time, a skeletal Protest, sufficient to meet the requirements of Publication 5 should be drafted. Later an amended Protest which more fully states the taxpayer's case can be submitted.
After the Protest is filed, taxpayer's counsel will receive a letter from an Appeals Officer inviting him to a conference. In Southern California the time between filing a Protest and receiving an invitation to a conference can exceed six months. Generally Appeals Officers prefer to resolve cases in one conference, although complex cases may require two or more conferences. For that reason taxpayer's counsel should be fully prepared at the first conference with all the evidence necessary to persuade the Appeals Officer of the correctness of the taxpayer's position. Although the Internal Revenue Service's procedural rules provide that factual matters must be submitted in the form of an affidavit or declared to be true under the penalty of perjury, 11 Appeals Officers often accept factual assertions in the form of mere statements from counsel. However, if affidavits can be secured this is obviously more persuasive.
The Appeals Conference is informal. Usually only the Appeals Officer and the taxpayer's counsel are present. No witnesses are called to testify, and no verbatim record is made of the meeting. Under the Taxpayer's Bill of Rights if the taxpayer desires to make a recording of the meeting he may, provided he makes a request to so in advance. 12 At some point during the conference the Appeals Officer may make a settlement offer, or invite one from counsel. If the taxpayer makes a good faith settlement offer which is not acceptable the Appeals Officer should indicate what would be acceptable. 13Documenting The Settlement
If a settlement is reached with the Appeals Division there are three basic methods of documenting the agreement. The taxpayer can sign a Form 870, Form 870-AD, or a closing agreement. The effect of each of these forms is different. The Form 870 does not prevent a taxpayer from bringing a subsequent refund suit, or the IRS from later reopening the case and claiming that an additional tax is due. Of course the taxpayer and the Internal Revenue Service are restricted by the applicable statutes of limitations as to when they may take these actions.
The closing agreement is a creature of statute. It is the only authorized method of achieving finality. Once it has been executed by the parties it may be set aside only on the basis of fraud, malfeasance or misrepresentation of a material fact. 14 Due to its conclusive nature Appeals Officers are instructed to discourage the use of closing agreements. 15 Nevertheless, closing agreements are available where the taxpayer can convince the Appeals Officer that the Service will not be disadvantaged by entering into the agreement. 16 Closing agreements may be used not only as a means of settling a tax liability for a particular year, but also to determine the treatment of a specific item over a period of years. For example, a closing agreement may be used to determine the basis of an asset for the purposes of depreciation, or the amount of income reportable under the installment sales method.
The Form 870-AD serves as a middle-ground between the finality of the closing agreement and the uncertainty of the Form 870. It is the form most commonly used by the Appeals Office. Form 870-AD states that the taxpayer agrees not to file a claim for refund, and that the Internal Revenue Service will not reopen the case in the absence of fraud, malfeasance, concealment or misrepresentation of material fact, an important mistake in mathematical calculation, or excessive tentative allowance of carrybacks." Despite the quoted language, the courts have been divided as to how much finality Form 870-AD provides, since it is not a closing agreement provided for in IRC § 7121. Generally, the principals of equitable estoppel have been applied to prevent taxpayers from bringing a refund suit. 17 Some courts, however, have refused to apply the principal of estoppel where there has been no misrepresentation by the taxpayer, and have allowed a refund suit despite the explicit language of Form 870-AD. 18Technical Advice
If it has not been possible to reach a satisfactory settlement with the Appeals Officer, consideration should be given to reque sting "technical advice" from the Internal Revenue Service's National Office. Technical advice is guidance provided by the Internal Revenue Service's National Office to District and Appeals Offices, answering technical or procedural questions as to the interpretation or application of tax law to a specific taxpayer. 19 The Service's rules for obtaining technical advice are revised each year and printed in the Internal Revenue Bulletin as the second revenue procedure of the year.
Technical advice may be requested from the IRS where an issue is so unusual or complex that it warrants consideration by the National Office or, alternatively, where there is a lack of uniformity in the Service's position throughout the country. Unlike a private letter ruling, it is requested after rather than before a tax return is filed. Although the taxpayer may request technical advice, the Appeals Officer may refuse to forward the case to the National Office. If that happens, the taxpayer is entitled to have the National Office review the Appeal's Officer's decision not to forward the request.
The request to the Appeals Officer to refer a case National Office for technical advice may be oral, however, it is preferable to put it in writing. The request should include a statement of the facts, law and argument on the issue, and the reasons for requesting National Office technical advice. Taxpayers are encouraged to comment on adverse authority.
If the IRS agrees to issue technical advice, and the National Office attorney assigned to the case makes an initial determination which is adverse to the taxpayer, the taxpayer is entitled to a conference in Washington, D.C. This conference is informal and may be held telephonically. Technical advice is generally binding on the Appeals Office if it is favorable to the taxpayer. If it is adverse to the taxpayer, however, the Appeals Officer is not bound, and the case may still be settled favorably to the taxpayer.
Despite this apparent no-lose situation, requesting technical advice holds substantial risks for the taxpayer. First, an unfavorable technical advice will be applied retroactively unless the Service exercises its discretion under IRC § 7805(b) to limit its retroactive effect. Second, in formulating the Government's position, which will ultimately be set forth in the 90 day letter, the Appeals Officer may have seized on a poor argument which could later be defeated in court. The National Office attorney may realize that the Appeal's Officer is relying upon a poor argument, and may set forth a much better one which will be upheld. Additionally, the existence of an unfavorable technical advice will substantially reduce the chances for settlement with Government counsel if litigation is instituted. Therefore a request for technical advice should be made only after careful evaluation of the potential costs and benefits involved.Conclusion
While in some instances litigation may be necessary to resolve a dispute with the Internal Revenue Service, many cases can be settled administratively. Counsel should explore this option fully before accepting an examining agent's decision.
*Dennis Brager, Esq., is a State Bar Certified Tax Specialist in Los Angeles. A former IRS senior trial attorney, Mr. Brager now devotes his efforts exclusively to helping clients resolve their tax problems with the IRS and California State tax agencies. Services include negotiating Tax Debts, Tax Fraud Representation, Tax Litigation, Tax Audit and Appeals Representation, Tax Preparer Penalty Mitigation, Payroll Tax Audits, and California Sales Tax Problems. He may be reached at 800.380.TAX LITIGATOR.
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