Demystifying the IRS Appeals Process · IRS Audits and Global Controversy Issues Shawn O’Brien Houston, Texas (713) 238-2848 [email protected] ... –IRS Counsel can more easily

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Demystifying the IRS Appeals Process

Houston TEI Tax School

IRS Audits and Global Controversy IssuesShawn O’BrienHouston, Texas

(713) [email protected]

May 4, 2017

Agenda

• Recent Changes to Appeals Proceedings

• Settling Cases at Appeals

• Practical Observations on Appeals

• Final Questions/Comments

Questions are welcome throughout!

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Recent Changes to Appeals Proceedings

Recent Changes in Appeals Proceedings: Appeals’sRealignment

• Appeals realigned its structure and lines of authority, as of 10/2/16, “to balance spans of control, which had become out of balance from years of attrition through backfills.”

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Recent Changes in Appeals Proceedings: Appeals Conferences by Phone

• The IRM now indicates that most Appeals Conferences will now be conducted over the phone. IRM section 8.6.1.4 (addition dated 10/1/2016).

– In-person conferences are considered appropriate when:

• There are “substantial books and records to review . . .”;

• The Appeals Officer (AO) 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) that create a risk of an unauthorized disclosure or breach of confidentiality;

• An alternative conference procedure (e.g., Post Appeals Mediation or Rapid Appeals Process ) involving separate caucuses will be used; or

• Another IRM section specific to the workstream calls for an in-person conference.

– Taxpayers have voiced concerns that Appeals’ rejection of in-person conferences will spread to other Appeals work-streams.

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Recent Changes in Appeals Process: Conference Participants and Internal Processing

• New IRM section 8.6.1.4.4 (dated for 10/1/16) allows Appeals Officers to invite IRS Exam/Counsel to join the conference.

– Exam/Counsel can pose questions to the taxpayer, but they are excluded from the settlement negotiation phase.

• Revenue Procedure 2016-22 updated procedures issued in 1987 for Appeals processing of docketed cases.

– IRS Counsel can more easily informally designate a case for litigation.

– Designation of a case for litigation blocks Appeals consideration of the case.

• Revenue Procedure 2012-18 (dealing with ex parte) included a provision designed to formalize the dissent process.

– Appeals Officers and Appeals Team Case Leaders have become increasingly sensitized to the potential for negative feedback.

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Recent Changes in Appeals Process: How They Affect Taxpayers (cont’d)

• IRS Chief of Appeals, Kirsten Wielobob, explained certain aspects of its changes in an open letter in November 2016:

– Appeals is encouraging phone conferences, because its centralized campus locations could not accommodate in-person conferences.

• Appeals was instead forced to transfer cases to the field.

• These transfers created “a mismatch between the complexity of the case and the skill level of the employee” and delayed case resolution.

– Appeals Team Case Leaders have retained their settlement authority, but an Appeals Manager still must review the case before an Appeals Team Case Leaders can finalize settlement.

– Appeals will not force any particular resolution technique upon taxpayers (such as a Rapid Appeals Process).

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Settling Cases at Appeals(Successfully)

Settling Cases at Appeals: Primary Aspects of “Appeals Judicial Approach and Culture” (AJAC)

• Appeals will not raise new issues or reopen issues agreed to by taxpayer and IRS Exam (except in the case of fraud or malfeasance).

• Appeals will attempt to settle a case on factual hazards when case submitted by IRS Exam is not fully developed and taxpayer presents no new information or evidence.

• IRS Exam obtained a centralized formal dissent procedure.

• Any new issue or new information that merits investigation and/or requires additional analysis, requires remand of the case to IRS Exam.

• If a taxpayer raises a relevant new theory or legal argument, Appeals will engage IRS Exam for review and comment on the new theory or argument.

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Settling Cases at Appeals: Appeals/LB&I Matrix for AJAC

Type of Information Received Action to be Taken

1. Taxpayer provides Appeals with information that LB&I previously requested during the examination.

Appeals will release jurisdiction of the case to LB&I.

2. Taxpayer, on its own initiative, provides Appeals with information not previously shared with LB&I during examination.

Appeals will release jurisdiction of the case to LB&I.

3. Taxpayer provides information in response to a question or request from Appeals to clarify or corroborate information contained or referenced in the RAR, Protest or Rebuttal.

Appeals will provide LB&I with an opportunity to review and comment on the information within a specified time frame (generally 45 days).

4. Taxpayer makes a new argument (not including new information).

Appeals will provide LB&I with an opportunity to review and comment on the information within a specified time frame (generally 45 days).

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Settling Cases at Appeals: What Does AJAC Mean to You?

More Favorable Less Favorable

If Taxpayer does not raise new issue/facts, case will not be returned to IRS Exam.

IRS Exam has increased involvement in cases going to Appeals, including the need to specify which facts are disagreed.

Any issues agreed between IRS Exam and taxpayer cannot be revisited by Appeals – even if critical to the case.

Moving a case to Appeals requires taxpayers to work sufficiently with IRS Exam so that the case is “fit.”

If the facts are poorly developed by IRS Exam, Appeals must assess the case as if “it went to court today” – no second bite.

More Taxpayer actions or submissions can lead to remand to IRS Exam, after which there may be no end in sight.

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Settling Cases at Appeals: How Do You Add to the Factual Record?

• Strategic use of Information Document Requests (“IDRs”)

• Some tips for adding information after IDRs:

– AJAC rules can help

– Managing expectations

– Protest as the last opportunity to set out the factual record

• Which additions are easier … more difficult?

• Alternatives: Is it ever a good strategy to wait until you are in Appeals?

• How do you document your disagreement on the facts?

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Settling Cases at Appeals: How Do You Handle Disagreements About the Factual Record?

• A “disagreement about the facts” is different than a “disagreement about what the facts mean.”

– Therefore, many or most Appeals cases can be properly positioned as having agreed facts.

• Use the procedures for disagreed facts to reduce the chances of a remand by Appeals.

– Acknowledgement of the Facts (AOF) IDR allows you to list unagreedfacts. IRM section 4.46.4.9.

– Review to determine if you or even Appeals will want more facts.

• You may need to employ a rule of reason about disagreed facts.

– The notorious IRS request, “In our draft NOPA, please identify all facts that are incorrect.”

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Settling Cases at Appeals: How Do You Introduce a New Argument?

• Many “new” arguments are variations on a prior argument.

– Golden Rule to test if an argument is truly new.

– Your credibility may be implicated by how you handle.

• Keep it simple.

– Do you want to align it with a prior argument? Or create a separation?

– Don’t bury your new argument, but avoid superlatives.

• When is it best to do nothing?

– Weak NOPAs.

– Challenging generally leads to more development/improvement.

• Have you thought strategically about Joint Committee on Taxation review?

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Settling Cases at Appeals: How Far Should You Go in Your Protest?

• Protest must effectively advocate without triggering a re-engagement with the Exam Team.

– AJAC increases risk of Exam’s retaining the case.

– Stringing citations.

– Remind your representative who the audience is.

• AJAC 2 provided a broad-sounding standard to re-engage Exam.

– Re-engagement is now triggered by any new issues, legal arguments, information, etc. presented by the taxpayer in Appeals that “clarifies or corroborates” prior submissions to Exam.

– Many AOs are applying the provision literally (asking for taxpayer presentations to give to Exam, etc.).

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Settling Cases at Appeals: Key Considerations in Drafting a Protest

• Be certain your key facts have been presented to Exam and are reflected in NOPAs or IDR responses.

• Address factual errors in the RAR.

• Present additional facts from the record you believe are important.

• Present your positive case, supported with authorities.

• Address the key points of disagreement with the RAR’sarguments.

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Settling Cases at Appeals: Key Considerations inDrafting a Protest (cont’d)

•Remember that the Exam Team will have an opportunity to submit a rebuttal to the Protest.

•Don’t overdo it.

– Be sure to address the key arguments.

– Don’t try to rebut every single point, no matter the size.

– Don’t elevate the importance of issues until you see which questions concern your Appeals team.

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Practical Observationson Appeals

Practical Observations on Appeals: What Should I Do Before the Conference?

• Have discussions with your AO or ATCL before the Pre-Conference or Conference.

• Agree on a schedule of conferences and follow up.

• Try to schedule adequate time between the Pre-Conference and the Conference to allow you to prepare and organize your presentation to address the key points from the Pre-Conference.

• Try to understand which issues interest the Appeals Team.

• Work hard to appear reasonable and ready to reach a resolution.

• Do not denigrate the Exam Team.

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Practical Observations on Appeals: Best Practices for the Pre-Conference

• Attend the Pre-Conference.

– Resist the temptation to engage the Exam Team.

– Listen respectfully, trying not to show disdain or exasperation even at what you think are meritless arguments.

• Focus on the Appeals Team.

– What seems to resonate with it?

– What questions does it have?

• Even where you have been successful in scheduling the conference for a later date, consider a brief presentation AFTER the Exam Team leaves to present your positive case.

• Avoids having the Appeals Team leave having heard only one side.

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Practical Observations on Appeals: Best Practices between the Pre-Conference and the Conference

• Prepare/refine your Presentation.

• Focus on any new arguments from Exam you have not already addressed and on issues Appeals seemed interested in or with which it seemed concerned.

• Provide proof that what you are arguing is “repackaging” what you have already presented and that Exam has had an opportunity to consider it already.

– Necessary to avoid having the information sent to Exam to re-rebut.

– Use frequent citations to your prior submissions.

• Use the time between conferences to your advantage:

– Adjust your approach based on what was important to the Appeals Officer.

– Prepare to fully respond to the Exam Team’s arguments.

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Practical Observations on Appeals: Best Practices for the Appeals Conference

• Decide who should attend and present.

– Should attendees include someone who would be a fact witness?

• Risk of having that person informally “deposed” to resolve fact questions.

• May allow you to address factual uncertainties without having the case sent back, if he/she is responding to a question.

– Should outside advisor or taxpayer present – each case is different?

• Be Organized/Prepared.

– Have a presentation deck that hits your key arguments.

• Don’t just read it.

• Try to make it interesting and entertaining.

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Practical Observations on Appeals: Best Practices for the Appeals Conference (cont’d)

•Don’t just address what you think matters.

•Address what Appeals seemed interested in or explain why it is not relevant.

– Pay special attention to addressing new arguments that Exam raised in its rebuttal or at the Pre-Conference.

– Don’t insult Exam – critique the arguments, not the presenter.

•Deal with unfavorable facts and/or law.

•Avoid raising new facts → leads to a remand.

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Practical Observations on Appeals: Best Practices for the Appeals Conference (cont’d)

• Engage in a dialogue:

– Encourage questions.

– Try to get Appeals to talk so you can address the issues that matter to it.

– Avoid lecturing.

• Be prepared to discuss specifics and negotiate.

– Hazards of litigation.

– Is Appeals bound by IRS positions?

• CCA, TAM, Notices, Settlement Guidelines.

– Principled resolution.

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Practical Observations on Appeals: What Are The Consequences of AJAC So Far?

•Within LB&I:– More attention to the development of factual record.

– Some additional pressure on taxpayers during fact-gathering, including “disagreed” facts before RAR.

– As exam teams focus on Appeals, they become more conscious of how to position their case.

– Exam teams could use AJAC as an offensive weapon or bargaining chip, but this is rare to date.

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Practical Observations on Appeals: What Are The Consequences of AJAC So Far? (cont’d)

•Within Appeals:– Considerable attention to whether any submission requires

LB&I involvement.

• But . . . LB&I involvement is relatively infrequent in properly managed negotiations.

• Appeals does not have a body of knowledge similar to the “practice units” developed by LB&I.

• Appeals Area Directors often become aware of trends through reviewing work units assigned to them. IRM section 8.1.1.5.1 (addition dated 10/1/2016).

– Mixed results on whether Appeals really closes its eyes to undeveloped facts.

– Consider formal dissent procedures.

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Practical Observations on Appeals: Awareness of External Pressures on Appeals

• High profile issues can be political and receive high-level scrutiny.

– Give Appeals a route to minimize these issues.

• A CCA or TAM etc. can make an Appeals Officer cautious.

– Some AOs believe they must give the NO the right to reargue prior to a ruling.

– Where possible, give Appeals a route to determine the facts are different or the wrong question was addressed.

• Joint Committee adds a layer of process and complexity that can affect AO.

– Strong questioning from JC can result in multiple consequences from an AO.

• The formal dissent process from AJAC creates another consequence to the AO in ruling for the taxpayer.

– A formal dissent from the exam team can result in a massive diversion of Appeals’ resources.

– No change to a case once resolved, but the prospect of this process can intrude into the negotiations.

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Practical Observations on Appeals: Appeals Conferring with IRS Chief Counsel

• Appeals can secure legal opinions in either docketed or non-docketed cases from Division Counsel. IRM section 8.6.3.5 (addition dated 10/6/2016).

– Those opinions can address:

• The meaning or force and effect of legal terms in a contract;

• The enforceability of a contract;

• The application of state law to a contract;

• The corporate existence of a transferee; and/or

• Similar questions.

– Appeals cannot directly request a legal opinion from Associate Chief Counsel.

– Division Counsel determines whether a request should be referred to Associate Chief Counsel.

• Appeals Area Directors can request legal advice from Associate Chief Counsel. IRM section 8.6.3.4.1(1) (addition dated 10/6/2016)

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Final Questions/Comments?

Thank you!

Shawn O’BrienHouston, Texas

(713) [email protected]

Documents

Demystifying the IRS Appeals Process · IRS Audits and Global Controversy Issues Shawn O’Brien Houston, Texas (713) 238-2848 [email protected] ... –IRS Counsel can more easily