IRS Discontinues Appeals Arbitration Program

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The Appeals Arbitration program will no longer exist as of September 21, 2015. The availability of arbitration following an adverse decision at the appeals stage of a case has been around in one form or another since the year 2000. I say “in one form or another” because it began as a pilot program intended to last only two years. In 2002 the pilot program was extended for another year. Then on October 30, 2006, the IRS published Rev. Proc. 2006-44, 2006-2 C.B. 800, formally establishing the Appeals Arbitration Program. The program underwent further expansion in 2008 when it was opened up to collection cases in select cities, meaning that taxpayers were permitted to request arbitration for resolution of Trust Fund Recover Penalties and rejected Offers in Compromise.

So why is the IRS scrapping appeals arbitration? It might have something to do with the fact that only two cases were settled using arbitration during the 14 years it existed. It has everything to do with that, so good move IRS. But what options are left besides going to US Tax Court? MEDIATION. The main difference between arbitration and mediation is that an arbitrator hands down a decision (sometimes binding) which more closely resembles an actual trial, and a mediator basically just helps the parties look at the issues and talk it out. Per the IRS:

Given the general lack of demand for arbitration and the fact that its use as a tool to settle disputes without litigation has not proven successful, the IRS is eliminating the arbitration program. Although Appeals arbitration is being eliminated, taxpayers may be eligible to request mediation for unresolved issues that remain after completion of settlement discussions in Appeals.

The IRS has a nifty online tool to help you decide if mediation is right for you.

IRS Quietly Rolls out FTS Program Nationwide

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Part of the problem with the IRS’ terrible reputation is that their scandals and mishaps get publicized in every way imaginable, and often for a few days longer than necessary.  But the good things the IRS is doing tend to go unnoticed.  I guess it’s just not as much fun to read about.

I found an example of this today.  The IRS is expanding a pilot program that it began in select locations in 2006 that allowed small businesses to opt for alternative dispute resolution rather than the standard formal appeals process (and then potential litigation) when disputing an audit.  The program is called Fast Track Settlement (FTS).  It is a smart and attractive option, since the IRS claims that disputes can be resolved in 60 days when they go through FTS, and taxpayers maintain their appeals rights through the process.  The only problem I see is that the mediator in a FTS proceeding is an IRS appeals officer rather than a neutral third party.  Yes, appeals is a separate arm of the IRS, but it’s still the IRS as far as I’m concerned.

I’m not sure why it took seven years for the IRS to make FTS available nationwide, but besides that, it seems like another opportunity lost for those in charge of the IRS’ public perception.  The IRS is at least partly to blame for this phenomenon.  In times like these, the IRS needs to be doing everything it can to leverage their good PR, and that means making sure the public knows about every single time-saving and money-saving measure, otherwise we will only remember the Star Trek parody video and similar headlines.

IRS Appeals & Alternative Dispute Resolution

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If you have an IRS tax debt and are unable to achieve a satisfactory resolution with the office originally assigned to handle your matter, you may need to call on the IRS Appeals Office to take a second look.  Last time I wrote about the procedures and steps leading up to Appeals.  Today I will discuss some of the options available to taxpayers already in Appeals.

Once the controversy has advanced to the stage of appeals the IRS offers a variety of “alternative dispute resolution” options designed to keep the matter out of court.

The mission of Appeals is to resolve tax controversies, without litigation, on a basis that 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.

~ IRS Pub 4167

Fast Track Mediation (FTM)

  • Intended for Small Business/Self Employed taxpayers
  • Case remains in SB/SE
  • Parties must agree to FTM using Form 13369
  • Taxpayer meets with IRS representative and third party Appeals personnel
  • Solution normally reached within 40 days
  • Solution is not binding (i.e., parties are not obligated to accept the outcome)
  • Automated Collection Service (ACS) cases excluded

Fast Track Settlement (FTS)

  • Available to most other taxpayers (not just SB/SE)
  • Must complete application, Form 14017
  • Decision normally reached with 60-120 days
  • Taxpayer may withdraw at any time and retains all traditional appeal rights

Arbitration

  • For factual issues only (no legal issues)
  • Outcome is binding
  • Most collection issues excluded

FTB vs. BOE

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Franchise Tax Board vs. California State Board of Equalization

Navigating your way around the IRS can be a formidable task, one that many prefer to leave in the hands of their tax attorney or other tax practitioners. However, practitioners agree that the California equivalent — the Franchise Tax Board (FTB) — is even worse. In general, the California rules tend to be tougher than the federal rules and the FTB personnel tends to be more difficult and steadfast in enforcing their rules.

One specific complexity in California has to do with the procedure for appealing a tax case. Some states have a state tax court serving as the proper venue after a case has been appealed to the limits at the administrative level, which mirrors the federal process and Federal Tax Court. But, of course, California does things differently. Once you have exhausted your options administratively, there is nowhere to go except the California State Board of Equalization (BOE). The state of California Board of Equalization consists of five elected members that function like a court but is not a court. This article from Robert W. Wood further describes the “quirkiness” of the California BOE.

IRS Seeking Comments on Rules Re: Appeals Office Communications

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The IRS is proposing updates on the rules regarding ex parte communications between the Appeals Office and other IRS representatives and departments. The IRS stated: “[t]hese rules are necessary to ensure that the Office of Appeals remains an independent and flexible vehicle for settling audit and collection-related disputes between taxpayers and the IRS.” The proposed rules are set out in Notice 2011-62.

Basically, if the Appeals Office is going to communicate with another division or department within the IRS, the taxpayer, or the taxpayer’s representative, must be given an opportunity to participate in that communication. As far as I’m concerned, any strengthening of this rule is a good change. However, it seems to me that there are far too many exceptions to the proposed ex parte communications rules, almost to the point that the exceptions swallow the rule.

If you agree, or if you have other comments you wish to submit, contact the IRS by August 18, 2011. Visit the IRS Newsroom for mailing, emailing, and hand delivery instructions.