Tax Controversy & Resolution: Appeals & Fast Track Settlement

Office of Appeals & Fast Track Settlement: Alternative Dispute Resolution

Without competent and experienced representation, taxpayers often find themselves unsatisfied with the results of an audit, interest and penalties on taxes, or another IRS decisions. Thankfully, if you don't agree with your auditor's findings, you do not have to accept the results of the exam or immediately take your disagreement to time-intensive and costly tax court. Instead you may request to appeal the findings, to an appointed independent third-party, including: (1) Office of Appeals or (2) Fast Track Mediation / Settlement.

 

Tax controversies may involve proposed IRS tax assessments, collections, or other actions. When IRS issues a final notice on its findings, taxpayers may generally seek a remedy from the courts. However, the Office of Appeals & Fast Track Mediation processes are less formal and less costly than court proceedings, and is not subject to judicial rules of evidence or procedure.

The IRS Restructuring and Reform Act of 1998 directed the IRS Commissioner to develop and implement an independent Appeals function within the IRS, including a prohibition of “ex parte” communications between Appeals officers and other IRS employees to the extent that such communications appear to compromise the independence of Appeals officers. Essentially, the IRS and Office of Appeals cannot communicate privately and separately without the taxpayer being privy to such communications. Independence from IRS compliance functions allows for Appeals to be objective, impartial, and neutral in fact as well as appearance.

Recently, Appeals implemented several policy and procedural changes to re-emphasize the importance of independence. For additional information on those changes, please refer to the Fact Sheet – IRS Clarifies Office of Appeals Policies and the related Frequently Asked Questions

In many cases, taxpayers come away from the Appeals process with reduced assessments because the appellate conferee has the authority to make settlements that the examination team does not, including the consideration of hazards of litigation, but there are still associated costs. The Appeals process may require additional time and resources, although still significantly less than going to trial. The time and resource needed for Appeals should still be considered when deciding whether to appeal an examination. The Appeals process can take from months to years to complete depending on the complexity of tax issue(s) and the availability of IRS resources.​

About the Office of Appeals

The Internal Revenue Service (IRS) Office of Appeals (Appeals) is an independent organization within the IRS that helps taxpayers resolve their tax disputes through an informal, administrative process. The Office of Appeals was established to help resolve tax controversies fairly and impartially, without litigation to benefit both the U.S. taxpayer and government. Appeals typically is involved when a taxpayer does not agree to the adjustments proposed by the IRS examination team.  Appeals acts as an independent party to the examination. Appeals reviews cases after the IRS has made its decision, offering an objective investigation subsequent to a closed examination. Appeals generally helps settle cases by reducing an adjustment by a particular percentage that the taxpayer may choose to accept. Appeals has no limitation on the number of tax disputes it may recommend for litigation, but its primary objective is to settle tax cases and avoid further litigation.

It should be noted that most examiners complete a Form 4665, Report Transmittal, that is addressed to Appeals. The purpose of this letter is for the examination team to communicate any specific details it wants to convey to Appeals. This could be a description of questionable taxpayer behavior, tactics the taxpayer or its adviser could use to disrupt the examination team's pre-Appeals conference presentation, or any other pertinent information.

After Appeals receives and assigns the case, the ex parte communication rules are implemented. This means the Appeals officer cannot speak with the examination team about the case unless the taxpayer and its adviser are present. This preserves the independence of the Appeals process.

In general, the examiner will prepare for the Appeals officer a pre-Appeals presentation that discusses the case and the relevant taxing authority, and that attempts to convince the Appeals officer that the adjustment should be upheld. The taxpayer and its advisers are also present for the pre-Appeals conference. This is the last contact between the Appeals officer and the examination team. Next, the taxpayer and its adviser meet directly with the Appeals officer to present their case for reducing or overturning the adjustment. This generally is a formal presentation and can require significant time and resources to prepare. Additional meetings to negotiate a settlement and resolve the case are often required.

Important Considerations Regarding Appeals:

  • Appeals are available on the basis of financial disagreement only. You are not be permitted to pursue disputes which are "based on moral, religious, political, constitutional, conscientious, or similar grounds."

  • You must request an appeals conference by filing what is known as a formal written protest.

    • For example, generally the next step involves your receipt from the IRS a "Letter 525" (30-day Notice), which contains information and IRS publications on how to file an appeal/protest. 

    • You will get this letter with a computation report of proposed adjustments to your tax return. It outlines your options if you do not agree with the proposed adjustments. If you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal to the office/individual that sent you the letter.

    • The letter contains information and lists IRS publications on how to file an appeal/protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

      • In addition to other requested information, this formal written protest must also generally include:

      • IRS Proposals of which you disagree;

      • Reasons why you disagree with those IRS proposals;

      • Facts and/or documentation which support your reasoning; and

      • Relevant law or authority which support your reasoning.

  • See Letters and Notices Offering an Appeal Opportunity (link) for additional IRS and appeals letter background requirements.

Appeals is the place for you if ALL of the following apply:  

  • You received a letter from the IRS explaining your right to appeal the IRS’s decision.

  • You do not agree with the IRS’s decision.

  • You are not signing an agreement form sent to you.

  • If all of the above are true, then you may be ready to request an Appeals conference or hearing (see link).

Appeals is NOT for you if ANY of the following apply:

  • The correspondence you received from the IRS was a bill and there was no mention of Appeals.

  • You did not provide all information to support your position to the examiner during the audit.

  • Your only concern is that you cannot afford to pay the amount you owe.

If time is still a concern at the Appeals level, there should be a discussion of how to settle the case at the examination level, or consider other alternatives such as Fast Track (see below) mediation and settlement to avoid the Appeals process.

Fast Track Settlement (FTS): Alternative Resolution Strategy

Appeals also offers alternative resolution services through Fast Track Settlement and other programs. These mediation programs are designed to help you resolve your dispute at the earliest possible stage in the audit or collection process. Fast Track is similar to Appeals, except a resolution is determined at the examination level rather than during an appeal and is significantly less time-consuming.

If a taxpayer and the examination team disagree on certain issues, they can request Fast Track Mediation rather than close the case as unresolved and send it on to Appeals. The request is then sent to an Appeals officer who specializes in mediation. Most Fast Track sessions are completed in one day and follow a similar procedure structure.

The Fast Track mediation begins with the taxpayer and its advisers, the examination team, and the mediation officer in one room. The taxpayer and/or its advisers present their position regarding their disagreement  with the IRS adjustments, and then the IRS examination team presents its case to support why the proposed adjustments should be upheld. The Fast Track mediator then relocates the taxpayer and the examination team into separate rooms. The Fast Track mediator then separately explains the hazards of litigation pertaining to both the taxpayer and examination team based on the mediator's interpretation and weaknesses in each party's argument concerning whether the examination position may, or may not, be upheld in court. 

Fast Track Settlement (FTS) offers taxpayers a way to resolve audit issues during the examination process in 120 days or less. Working with the Large Business and International Division (LB&I) and Appeals, taxpayers can use the settlement authority and mediation skills of Appeals while shortening their overall experience with the Internal Revenue Service. FTS reduces the combined LB&I-Appeals process time significantly.

FTS is generally available for all cases within LB&I’s Compliance jurisdiction and works best when non-agreed issues are limited in number. FTS can also be effectively used in LB&I’s Compliance Assurance Process (CAP) to assist in resolving disputed issues before the tax return is filed. When it is in the best interest of tax administration, only one issue may be accepted into FTS while the audit continues. Cases outside LB&I’s jurisdiction (from other IRS Operating Divisions) may also qualify for FTS.
 

Fast Track Mediation requires time and resource commitments, so taxpayers should come prepared with a professional presentation for the mediator. Fast Track Mediation is a taxpayer's opportunity to present its case and convince the mediator to rule in its favor. Although time and resources are required for this session, the cost is a fraction of the time and money commitment required by the Appeals process.

Advantages of Fast Track Settlement include:

  • Quicker resolution of audit issues (120 days or less)

  • No need for a formal protest to request FTS

  • A one-page application

  • Delegation Order 4-24 (formerly 236, Rev.3) can be used in the next audit cycle

  • Consideration of hazards of litigation

  • No ‘hot‘ interest under IRC §6621

  • Withdrawal from the process at any time

  • Retention of all traditional appeal rights

  • One tax computation

  • Case closes agreed in LB&I

Excluded Cases / Issues Fast Track Settlement (not available in certain situations) include:

  • Issues designated for litigation;

  • For which the taxpayer has submitted a request for Competent Authority (or simultaneous Appeals/Competent Authority) assistance;

  • Issues for which resolution with respect to one party might result in inconsistent treatment in the absence of the participation of another party;

  • Not consistent with sound tax administration; or

  • Excluded from the FTS process by a Chief Counsel Notice, or equivalent publication.

Appeals & Fast Track Representation

The IRS examination process has changed significantly over the past few years. As IRS resources continue to dwindle, significant examination delays are occurring. IRS managers are seeking ways to close cases in a timely fashion to help meet their territory plan. Taxpayers and their advisers should strive to develop a rapport with the IRS examiner and manager and seek ways to resolve cases at the examination level, which would benefit both parties.

AndreTaxCo can provide skilled tax representation before an Appeals officer or related tax authorities to avoid this situation. An important component to a successful appeals process outcome are skilled tax professions to help organize detailed records on your behalf. Making sure your documentation through utilizing experienced tax professionals like AndreTaxCo helps ensure you are in the best position to succeed during mediation alternatives.

Historically, Appeals and Fast Track has been able to settle the majority of the cases that come within its jurisdiction. In addition, taxpayers do not give up judicial review by coming to Appeals or through mediation alternatives. As such, continuing through tax court and further litigation is still a subsequent option if the taxpayer is still unsatisfied with the findings during Appeals or Fast Track.

It is important to be smart about how best to settle unresolved issues. For significant unresolved issues, many taxpayers might receive a better result via Appeals because the appellate conferee has latitude that the examination team does not. However, taxpayers still need to weigh the time and cost commitment against the potential benefits to determine when Appeals or Fast Track Mediation is a better option when contesting IRS examination results.

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