The Internal Revenue Service has an administrative appeals function that enables taxpayers to have their IRS Audit or Collection cases reviewed by Appeals Officers or Settlement Officers who are independent of the Examination and Collection functions. Historically, over 80% of the cases considered by Appeals are resolved, most often for less than the deficiency proposed by the Area Office.
Appeals employees are among the most technically proficient of all the IRS functions. To be successful in getting your case resolved for the lowest possible amount, it is my opinion that you need a representative who not only is technically proficient in tax law, but is very familiar with the Appeals Division’s processes and procedures. As the former Associate Chief of Appeals for the Los Angeles Appeals Office, I managed groups of Appeals Officers. In that capacity, I reviewed each of my Appeals Officer’s proposed settlement or recommendation for litigation for each of their cases. I either approved or rejected their proposals based upon my analysis of the facts in the case, the law, and when applicable, the hazards of litigation. Hazards of litigation for settlement purposes are ONLY considered in Appeals. That authority is not given to Revenue Agents or Tax Compliance Officers.
You may be asking yourself just what are the hazards of litigation. To illustrate the process, the Appeals Officer first reviews and evaluates the facts in the case, and the applicable statutes and legal precedents. After considering all of these aspects, he or she will evaluate the “hazards” the government (IRS) will face in litigating the case in the appropriate court. If the Appeals Officer believes that the IRS may have a 40% chance of losing the case in trial, then he or she may entertain a settlement proposal whereby the taxpayer concedes 60% of the issue in the case.
If there are multiple issues involved in the case, then each issue will likely have its own hazard of litigation. For example, the facts for one issue may be better developed than for another. There may be more (or less) case law that pertains to one issue or another. As you can imagine, determining the hazards both the IRS and the taxpayer will face in litigation is a very subjective determination. Having a representative who is knowledgeable of the process Appeals Officers use in formulating and applying a hazards of litigation settlement is critically important to achieving a favorable resolution of a case in Appeals.
Currently, the majority of cases in Appeals are the result of collection actions or threatened collection actions. Here is a link to a video authored by Appeals that discusses the Appeals’ process in considering these cases:
Following is the Appeals Policy Statement contained in the IRS Internal Revenue Manual. This statement explains the purpose for the Appeals program and your rights.
Pursuant to the Internal Revenue Service Restructuring and Reform Act of 1998, P.L. 105-206, and Treasury Directive 63-01, this Policy Statement reaffirms the principles of the Appeals administrative dispute resolution process. Since 1927, when the Internal Revenue Service established an administrative appeal to resolve tax disputes without litigation, taxpayers and Appeals have reached mutual agreement in the vast majority of disputed cases. As the Service shifts toward becoming a more customer-oriented agency, the Internal Revenue Service’s commitment to the Appeals administrative dispute resolution process is reaffirmed by the following principles:
Another important matter I would like to discuss is ex-parte communications and its prohibition in Appeals. Basically, this Revenue Procedure that went into effect in 2000 prohibits any Appeals employee from discussing the merits of your case with any employee outside of Appeals (Examination or Collection) without you or your representative being present. This is to ensure the independence of the Appeals Officer or Settlement Officer to the greatest extent possible.
There was a Tax Court case in 2006 where the Court took exception to the Appeals Officer’s ex parte communications with the Compliance Function, and returned the case to Appeals. Here is a summary of that case:
Code Section 6330 (Collection due process—review of administrative determination—offer in compromise—ex parte communications)
IRS’s administrative determination to reject OIC and proceed with lien filing for elder care business owner/convicted tax evader’s self-reported liabilities was remanded to IRS Appeals Office: determination was improper to extent made on basis of ex parte communications with personnel who had pre-CDP involvement with taxpayer. Communications with such personnel were clearly impermissible under applicable rules where they went to not just administrative or minor procedural matters, but contained substantive information about taxpayer’s assets and her disposal of same; and IRS’s attempt to construe same as just part of routine factual investigation was erroneous. Also, fact of taxpayer’s prior evasion conviction didn’t change result; and case law denying remands for taxpayers who offered only frivolous protester-type arguments was distinguished. But, IRS was allowed to decide on remand what would be appropriate remedy for its error. (J. Jean Moore v. Commissioner, (2006) TC Memo 2006-171 , 2006 RIA TC Memo ¶2006-171)
2007 TAX COURT CASE DEALING WITH EX PARTE COMMUNICATIONS AND ABUSE OF DISCRETION BY APPEALS
In 2007, the Tax Court heard another case that addressed Ex Parte communications. In this case, the Revenue Officer wrote a letter to the Appeals Division providing he reasoning why the Appeals Officer should follow his opinion regarding the nature of the case and other matters – all designed to persuade the Appeals or Settlement Officer to sustain the planned levy. You can read about that case here. This case also has a great discussion of abuse of discretion by Appeals.
Another area that I would like to discuss is the raising of affirmative issues by Appeals. In simple terms, this refers to the Appeals’ policy of NOT raising a new issue after receiving your case, typically from Examination. Let’s assume that the IRS audited your return and the Revenue Agent proposed an adjustment to your Schedule C (self-employed business income schedule) by disallowing some of your purchases, and making an adjustment to your ending inventory. The Appeals Officer, in reviewing the case, discovers what he or she believes in an error in a depreciation computation that was never raised in the examination report, and never discussed with you. May the Appeals Officer now raise that issue in Appeals?
The answer is …. maybe. Policy statement P–8–49 provides that an issue on which the taxpayer and Compliance are in agreement should not be reopened by Appeals. A new issue should not be raised in Appeals unless the ground for such action is substantial and the potential effect upon the tax liability is material. In a docketed case (that is in Appeals jurisdiction for settlement), a new issue cannot be raised unless IRS Counsel consents, and the US Tax Court allows the Counsel attorney to amend his or her answer to the petition to raise the affirmative issue – a long shot and challenging task for Counsel.
FAST TRACK SETTLEMENT
The IRS has a “fast track settlement” program in effect for cases in the LMSB (Large and Middle Sized Business) program wherein issues that are unagreed can, under specific circumstances, be referred to Appeals for negotiation while the case remains in the jurisdiction of LMSB. The IRS is now testing this program for cases in SB/SE operation (Small Business/Self-Employed). You can read about this test program here.
APPEALING THE DECISION OF APPEALS
Many of the proposed adverse decisions of the Appeals or Settlement Officer can be appealed to a Court of jurisdiction. For instance, cases involving income, estate and gift tax proposed deficiencies generally can be appealed to the United States Tax Court providing the taxpayer files a timely petition to the Notice of Deficiency issued by Appeals (or the Compliance function, for that matter) Cases involving employment or excise taxes can be appealed to the United States District Court after payment of part or all of the tax (there are rules to follow here….), a claim is filed and the claim is disallowed – with the taxpayer receiving a Statutory Notice of Claim Disallowance. Proposed collection actions that are appeals under the Collection Due Process procedures where an adverse determination is issued can be appealed, but only on the basis of abuse of discretion by the Commissioner. You can read about a good example of this abuse of discretion in this Tax Court case.
There are procedures and time limits to follow, so having a Tax Attorney assist you in the process of appealing an adverse Appeals’ decision is critically important. I have several that I can recommend if you need such assistance.
COLLECTION DUE PROCESS HEARINGS
Code Sec. 6330 generally provides that IRS cannot proceed with the collection of a taxpayer’s liability by levy until he or she has been given proper written notice and the opportunity for an administrative review of the matter (in the form of an Appeals Office hearing) and, if dissatisfied with Appeals’ determination, with judicial review of the administrative determination. Code Sec. 6330(c)(2)(B) provides that the person may raise at the collection due process (CDP) hearing challenges to the existence or amount of the underlying tax liability if he did not receive a statutory notice of deficiency for the tax liability or did not otherwise have an opportunity to dispute it. Such an opportunity includes a prior opportunity for a conference with Appeals that’s offered either before or after the assessment of the liability. (Reg. § 301.6330-1(e)(3), Q&A-E2)
A collection due process hearing must be conducted by an Appeals employee or officer who has had no involvement with respect to the tax for the tax periods covered by the hearing before the first hearing under Code Sec. 6330 , unless the taxpayer waives that requirement. (Code Sec. 6330(b)(3), Reg. § 301.6330-1(d)(1)).
There are specific rules that permit a taxpayer to file a request (Form 12153) for a CDP hearing. Generally, the request MUST be filed no later than 30 days from the date of the Letter 1058 (the letter informing the taxpayer of their right to appeal a planned levy action). If the request is filed AFTER 30 days, but within 1 year of the date of the 1058 letter, then the taxpayer can ask for an EQUIVALENT HEARING. It is similar to a CDP hearing, except (1) the IRS is not prohibited from taking enforcement action during the appear period, and (2) if the decision by Appeals is adverse to the taxpayer, the taxpayer cannot appeal that decision to the US Tax Court on the theory of abuse of discretion.
Bottom line – do NOT miss that 30-day window for filing the appeal!!!
In a 2014 Tax Court case, the Court provided its explanation for an abuse of discretion:
Where (as here) there is no dispute concerning the underlying tax liability, the Court reviews the IRS decision for abuse of discretion. Goza v. Commissioner, 114 T.C. 176, 182 (2000). An abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).
Chief Counsel issued a Notice in 2014 proving instructions to its attorneys to strictly apply the standard of Abuse of Discretion in appealed CDP determinations and not get into litigation over the underlying deficiency. Read about that here.
Pilot program for Appeals arbitration and mediation of OIC and TFRP penalty cases
Ann. 2008-111, 2008-48 IRB 1224 ; IR 2008-135
The IRS announced that it has established a two-year test of the mediation and arbitration procedures for Offer in Compromise (OIC) and Trust Fund Recovery Penalty (TFRP) cases that are under the jurisdiction of the Office of Appeals. IRS has modified Rev Proc 2002-44, 2002-2 CB 10 and Rev Proc 2006-44, 2006-2 CB 800 to reflect the pilot program.
Alternative dispute resolution programs are consistent with the IRS’s efforts to improve tax administration and enhance customer service. Appeals will seek appropriate OIC and TFRP cases for both mediation and arbitration during the two-year test period in order to evaluate the effectiveness of alternative dispute resolution for such cases.
During the two-year test period, Appeals will initially offer mediation and arbitration for OIC and TFRP cases for taxpayers whose appeals are considered at an Appeals office located in one of the following cities: Atlanta, Georgia; Chicago, Illinois; Cincinnati, Ohio; Houston, Texas; Indianapolis, Indiana; Louisville, Kentucky; Phoenix, Arizona; and San Francisco, California.
Appeals may expand the availability of this program to other locations during the two-year test period. Upon completion of the two-year test period, Appeals will evaluate this program, consider necessary adjustments to both the mediation and arbitration components of the program, and determine whether to make the arbitration component permanent.
Scope of mediation and arbitration procedures. The general provisions set forth in Rev Proc 2002-44 and Rev Proc 2006-44 apply to the mediation and arbitration of OIC and TFRP cases under the pilot program except as specifically stated in Ann. 2008-111 . ( Ann. 2008-111, 3 ) Ann. 2008-111, 4 , sets forth additional limitations on OIC cases. For example, neither mediation nor arbitration is available under the pilot program for cases in which the taxpayer declines to amend or increase the offer without stating any specific disagreement with the valuations, figures, or methodology used by Appeals in determining reasonable collection potential.
Ann. 2008-111, 5 , lists appropriate issues for mediation and arbitration in TFRP cases. For example, appropriate issues for arbitration in TFRP cases generally include specific factual determinations concerning whether a person was required to collect, account for, and pay over income, employment, or excise taxes, such as whether the taxpayer was an officer, director, or shareholder of the corporation; had the authority to sign checks; exercised significant control over the corporation’s financial affairs; had the authority to determine which creditors would be paid; was involved in payroll disbursements; had control over the voting stock of the corporation; was involved in making federal tax deposits; and/or had the ability to hire and fire employees.
TAX COURT CASE – ABUSE OF DISCRETION BY APPEALS
Stephen Meeh, et ux. v. Commissioner, TC Memo 2009-180 , Code Sec(s) 6330.
Pursuant to section 6330(d), petitioners seek review of respondent’s determination sustaining a proposed levy with respect to their 2003 and 2004 income taxes. 1
The parties submitted this case fully stipulated pursuant to Rule 122. When they filed their petition, petitioners resided in Oklahoma.
On June 26, 2007, respondent sent petitioners a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, with regard to petitioners’ 2003 and 2004 income taxes. On July 27, 2007, petitioners submitted a timely Form 12153, Request for a Collection Due Process or Equivalent Hearing, on which they indicated they wished to pursue an installment agreement.
By letter dated October 31, 2007, a settlement officer in respondent’s Memphis, Tennessee, Appeals Office scheduled a telephone conference for November 27, 2007, and requested that petitioners submit signed tax returns for 2005 and 2006 as well as Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals.
On November 16, 2007, petitioners telephoned the settlement officer. Failing to reach her, they left voice messages requesting to reschedule the hearing because of a work-related conflict. The settlement officer returned the calls and left voice messages.
In a letter to petitioners dated November 29, 2007, the settlement officer stated: “You did not call at the scheduled time and you had not called to indicate that this date and/or time were not convenient”. The settlement officer acknowledged having received from petitioners the requested 2005 and 2006 tax returns but indicated that she had not received the requested Form 433-A. The letter requested that petitioners submit within 2 weeks any additional information they wished to have considered.
On January 2, 2008, petitioners faxed a letter to the settlement officer expressing their continued interest in a telephone hearing. They indicated that they had been delayed in submitting the requested financial information because of changes in their financial circumstances as of the new year. They requested that the record be clarified to show that, contrary to the statements in the settlement officer’s November 29, 2007, letter, they had in fact exchanged recorded messages with the settlement officer seeking to reschedule the previously scheduled conference.
On January 8, 2008, petitioner husband (Mr. Meeh) telephoned the settlement officer to reschedule the hearing. The settlement officer rescheduled the telephone hearing for 9 a.m., January 15, 2008, and informed petitioners that they had to provide all financial documentation by then in order for her to consider an installment agreement. Mr. Meeh phoned for the hearing at the appointed time on January 15, 2008. The settlement officer was on another call, however, and did not return Mr. Meeh’s call until later that day, leaving a voice message. On January 18, 2008, she left another voice message advising that if she did not hear from petitioners by close of business January 21, 2008, she would have to close the case.
At 4:43 p.m. on January 21, 2008, petitioners faxed to the settlement officer the requested Form 433-A and associated financial information. The settlement officer reviewed this information and determined petitioners’ disposable income to be $2,014 per month. According to her case activity record, on January 22, 2008, the settlement officer telephoned petitioners to “discuss the outcome” and left a voice message for a return call. According to the case activity record, the settlement officer called petitioners again on January 31 and February 26, 2008, and left voice messages requesting a return call. Petitioners allege that Mr. Meeh attempted several times after January 22 to call the settlement officer.
On March 5, 2008, respondent issued to petitioners a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 sustaining the proposed levy (the notice of determination). The notice of determination contains a “Summary of Determination”, which states in its entirety:
Your request for relief from the proposed levy action is being denied. You did not present sufficient documentation to assist us is making an adequate decision under the Collection Due Process [sic]. The collection alternative you proposed was denied based on lack of documentation. Therefore, Appeals has sustained Collections levy action. See attachment for detailed information. The Appeals case memorandum attached to the notice of determination (the attachment) states in part:
Summary and Recommendation ***
The taxpayer has not presented any information to dispute the appropriateness of the collection actions nor have they submitted any documentation to support a discussion of collection alternatives to Appeals.
Brief Background ***
The Settlement Officer offered you a face to face meeting, correspondence hearing and/or a telephonic hearing. You did not indicate your preference. Therefore, you were offered a telephonic hearing in which you failed to phone on the day and at the time that was originally scheduled for you.
Discussion and Analysis ***
II. Relevant Issues Presented by the Taxpayer ISSUE:
Per Form 12153, you made no comments concerning any issues to be raised in during [sic] the Collection Due Process hearing.
The Settlement Officer issued a Substantive Contact letter dated October 31, 2007, offering you a Collection Due Process Hearing on November 27, 2007. The Settlement Officer also requested you to complete a Form 433-A (Collection Information Statement) and to send Form 656 with all required financial documentation and file the 2005 and 2006 Federal Income Tax Return. You phoned on November 16, 2007 leaving a voicemail message to reschedule the hearing. The hearing was not held on November 27, 2007. The Settlement Officer returned the phone call but was unable to reach you. On November 29, 2007, you filed the Federal Income Tax Returns for 2005 and 2006. You did not provide the financial information that was requested of you. The Settlement Officer issued Letter 4000 on November 29, 2007, requesting a second response. The Settlement Officer tried several other times to reach you. On January 8, 2008 you phoned for the conference. You wanted the Settlement Officer to set up an Installment Agreement. You had not sent the financial information requested of you. You were advised to provide the financial information by 01/15/08; the Settlement Officer also rescheduled the hearing on that day. You were informed of the consequences for not responding. You phoned for the hearing, leaving a voicemail message. Your call was return [sic] on the same day; however, we did not hold the hearing. Also, the financial information was not sent. The financial information was finally sent on January 22, 2008. The information was reviewed and the Settlement Officer phoned you on January 31, 2008 to discuss your account. A voicemail message was left for you to return the call. You did not respond. After several unsuccessful attempts to reach you by telephone, the Settlement Officer was unable to connect with you. The Settlement Officer continued with normal processing procedures. The Settlement Officer was unable to assist you or provide a collection alternative to you because you did not cooperate with us. You were informed that we would continue to process your case based on the information in your case file if you failed to respond. We are closing your case with the Appeals Office. ***
III. Balancing of the Need for the Efficient Collection of the Taxes With the Concerns That the Collection Action Be No More Intrusive Than Necessary. Enforced collection is inevitably intrusive, but it does not appear that any less intrusive action will meet the liability. Since you did not present any acceptable alternatives or provide a financial statement, Appeals believes that the levy action balances the need for efficient collection of taxes with the intrusiveness of the action.
Section 6330 provides for notice and opportunity for a hearing before the IRS may levy upon the property of any person. Under section 6330(c)(3), the determination to proceed with a collection action “shall take into consideration *** whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” Once the Appeals Office issues a notice of determination, the taxpayer may seek judicial review in this Court. Sec. 6330(d)(1).
Petitioners have not challenged their underlying liability. Accordingly, we review the Appeals determination for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000). An action constitutes an abuse of discretion if it is arbitrary, capricious, or without sound basis in fact or law. Giamelli v. Commissioner, 129 T.C. 107, 111 (2007).
The principal reason given in the notice of determination for sustaining the proposed levy was petitioners’ failure to present “sufficient documentation”. The attachment goes further, stating that petitioners had failed to submit “any documentation”. Similarly, the attachment indicates that the balancing test mandated by section 6330(c)(3) was satisfied because petitioners “did not present any acceptable alternatives or provide a financial statement”. These stated grounds are contradicted by other statements in the attachment indicating, as the administrative record shows, that petitioners faxed the requested financial information to the settlement officer on January 21, 2008. The administrative record also indicates that, on the basis of the information petitioners provided, the settlement officer was able almost immediately to calculate petitioners’ monthly disposable income. 2
The attachment states: “Per Form 12153, you made no comments concerning any issues to be raised in during [sic] the Collection Due Process hearing.” The Form 12153 clearly indicates, however, that petitioners wished to pursue an installment agreement. The settlement officer failed to make any determination based upon the information petitioners provided as to whether petitioners would qualify for an installment See Judge v. Commissioner, T.C. Memo. 2009-135 [TC Memo 2009-135]. agreement.
The attachment states: “you were offered a telephonic hearing in which you failed to phone on the day and at the time that was originally scheduled for you.” Elsewhere, however, the attachment acknowledges that: “You phoned on November 16, 2007 leaving a voicemail message to reschedule the hearing.” In fact, the administrative record shows that the hearing was eventually rescheduled but did not take place because the settlement officer was unavailable when Mr. Meeh phoned at the appointed hour.
Respondent suggests we should look past these numerous errors and inconsistencies and uphold the determination on the ground that the settlement officer properly closed petitioners’ case because petitioners ultimately failed to return the settlement officer’s calls after January 21, 2008, when petitioners finally submitted the requested financial information. Petitioners allege, to the contrary, that “Mr. Meeh returned all of the messages left for him, and made yet another number of unsolicited calls to the Appeals Officer, several after January 22, 2008.” Petitioners’ allegations are, we believe, consistent with their general pattern of conduct as evidenced in the administrative record. Moreover, their allegations are not inconsistent with the attachment to the notice of determination, which merely states that “the Settlement Officer was unable to connect with you”. We observe that the settlement officer had a history not only of being unavailable when petitioners tried to contact her, even at a time that she had previously scheduled, but of misrepresenting or failing to record petitioners’ efforts to contact her. 3
Neither party appears to be without fault. In particular, petitioners were not always as prompt as they should have been in responding to the settlement officer’s communications and requests; furthermore, their track record is not heartening. See Meeh v. Commissioner, T.C. Memo. 2008-282 [TC Memo 2008-282]. In the final analysis, however, the administrative record is badly muddled, and the notice of determination is so permeated with errors and inconsistencies as to lack a sound basis in fact or law. We conclude that it is appropriate to remand this matter to respondent’s Appeals Office for the sole purpose of permitting petitioners, if they wish, to pursue their requested installment agreement.
To reflect the foregoing,
An appropriate order will be issued.
Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent alleges that the financial information petitioners submitted was incomplete, but on this point, as on others, the record is too muddled for us to draw any firm conclusions, other than to note, as indicated above, that the information was apparently sufficient for the settlement officer to calculate petitioners’ disposable income.
In particular, we note that the settlement officer’s Nov. 29, 2007, letter alleged, with regard to the originally scheduled Nov. 27, 2007, telephone conference, that petitioners had failed to call at the scheduled time and had failed to “indicate that this date and/or time were not convenient.” The administrative record clearly shows, however, that petitioners had in fact exchanged recorded messages with the settlement officer seeking to reschedule the previously scheduled conference because of a work-related conflict.