Chapter Three: Administrative Appeals
HOW TO APPEAL
After the IRS issues a 30-day letter, the taxpayer has 30 days to file a protest to contest the examiner’s determination. If the taxpayer fails to file a protest, Appeals will not obtain jurisdiction of the matter.
The type of protest required depends on the amount of money involved. For cases involving less than $2,500.00 (including penalties), and for office or correspondence audits, the taxpayer need not file a written protest, but instead can request an appeal by telephone. As a practitioner, this is not recommended as the sole method for requesting an appeal. A letter acknowledging the clients receipt of the 30 day letter and a request for an appeals conference should always be mailed certified mail return receipt requested, or hand delivered.
For cases involving more than $2,500 but less than $10,000.00, a brief written statement regarding disputed issues, rather than a full protest is sufficient. Again, the statement should be mailed certified mail return receipt requested, or hand delivered to the District Director’s office.
For cases involving more than $10,000.00 (including penalties), and for employee plan, exempt organizations, partnerships, and S-Corporation cases, a full written protest is required. A written protest should include the following information:
- A statement that the taxpayer wants to appeal the examiner’s determination(s).
- The name and address of the taxpayer.
- The date and symbols from the letter transmitting the examiner’s proposed adjustments.
- The tax periods and years involved.
- A statement of facts supporting the taxpayer’s position on factual issues.
- A statement of the law on which the taxpayer relies.
Lastly, the taxpayer must affirm under penalty of perjury that the factual information contained in the protest is true. The statement should read, “Under penalty of perjury, I declare that the facts presented in my written protest, which are set out in the accompanying statement of facts, schedules, and other attached statements, are to the best of my knowledge and belief, true, correct, and complete.” A practitioner may substitute the above declaration with his or her signature and a statement that he/she prepared the protest and whether or not he/she knows if the facts and accompanying documents are true and correct. See IRS Publication 5, Appeal Rights and Preparation of Protests for Unagreed Cases.
Under reasonable circumstances, the IRS may agree to extend the thirty day period for filing a protest. Such requests should be in writing and delivered to the district director’s office within the thirty day period. The IRS may grant an extension to allow the taxpayer time to obtain a representative, inability to timely prepare a protest due to illness of the taxpayer or representative, or inability to timely prepare an adequate protest due to the complex factual and legal issues involved.
It is important to remember that the taxpayer does not have a statutory right to an appeal. The IRS can simply determine a deficiency and send a 90-day letter without first sending a 30-day letter or offering a conference with appeals. See Ballard v. Commissioner, T.C. Memo 1987-471. However, if the taxpayer desires an appeals conference, he or she is rarely denied the opportunity unless the statute of limitations on assessment is close to expiration and the taxpayer is unwilling to sign an extension.
Lastly, the IRS may rescind a notice of deficiency at the request of the taxpayer. See IRC § 6212(a). One reason for such a rescission can be the taxpayer's request for a conference with Appeals to settle a case despite the failure to make such a request before the issuance of the statutory notice of deficiency. For the procedures for requesting a recession of a statutory notice of deficiency see Rev. Proc. 88-17, 1988-1 C.B. 400, and IRS Form 8626.
PRACTICAL CONSIDERATIONS WHEN REQUESTING AN APPEAL.
The Appeals Division may add to, as well as subtract from, the proposed deficiency. Generally, appeals officers are more highly trained, and have much more experience, than the IRS auditors. They may spot and raise issues that the auditor missed, resulting in a statutory notice of deficiency well in excess of that proposed in the 30-day letter. Thus, requesting an Appeals conference exposes the taxpayer to possible additions to the deficiency proposed at the examination level.
Prior to the IRS Restructuring and Reform Act of 1998, the taxpayer had the burden of proof on any items set forth in the statutory notice of deficiency. See Tax Court Rule 142. This included any additions added to the deficiency proposed by the Appeals Division. The IRS, however, would have the burden of proof for any new matters raised after the filing of a petition in the Tax Court. See Tax Court Rule 142(a). The burden of proof is very difficult for the IRS to carry because the taxpayer is in control of the evidence. Thus, refusing a conference with Appeals could serve as a practical barrier to the addition of items to those in the 30-day letter.
Following the Restructuring and Reform Act, this strategy is less appealing because to obtain the shift of the burden of proof from the taxpayer to the IRS, the taxpayer must exhaust all administrative remedies for resolution, which includes timely responding to a 30 day letter. However, there may still be times when a taxpayer should skip Appeals prior to the issuance of a notice of deficiency. If a taxpayer will be unable to shift the burden because he/she will be most likely unable to meet the criteria for doing so, and if Exam would issue a “bad” notice of deficiency, it may still be appropriate to accept the notice of deficiency and petition the Tax Court because the taxpayer will have another opportunity to settle with Appeals prior to trial.
The issuance of a notice deficiency and a petition to the Tax Court also cut off the use of an administrative summons by the IRS for the tax year or years involved. Universal Manufacturing Co. v. Commissioner, 93 T.C. 589 (1989) and Westreco, Inc. v. Commissioner, TCM 1990-501. This will have the practical effect of reducing the information readily available to the IRS, making the use of the government's limited resources and time a factor to be considered in settlement negotiations.
Lastly, statements made to an appeals officer during an administrative settlement conference may not be protected from use at trial under Rule 408 of the Federal Rules of Evidence.
However, in contrast to the above disadvantages, an Appeals conference may be the only method of settling some issues. The authority of the examiner is much more restricted than that of the Appeals Officer. Novel or complex issues may not receive adequate consideration at the examination level. Appeals officers, however, are willing to give consideration to such matters.
THE APPEALS DIVISION OF THE IRS
The local Appeals Division office for our region is located at Suite 400, 28 Church Street, Buffalo, New York. The Appeals Division has authority to determine tax liabilities and associated penalties for income, estate, and gift taxes, and several other taxes, including those that are and are not subject to the statutory notice of deficiency procedures. See Reg. §1.610.106(a)(1)(ii).
The major function of the Appeals Division is to determine whether there is a basis for settlement of a tax dispute. A tax dispute can reach the Appeals Division as either an administrative appeal (a "non--docketed case") or for settlement of a petition in the Tax Court (a "docketed case"). The jurisdiction of the Appeals Division is set forth in Reg. §601.106(a).
As detailed above, the taxpayer must initiate the request for an appeals conference in a non-docketed case. See Reg. §§ 601.106(a)(1)(iii) and 601.106(b). However, the taxpayer need not file a written request or protest in a docketed case. Generally, the case will be transferred by District Counsel to the Appeals Division for settlement consideration after the initial pleadings are completed.
Practice Pointers
Every practitioner contemplating an appearance before the Appeals Division should read the practice rules set forth in Reg. §601.106(f)(1) through (9), some of which are highlighted below. These rules are in addition to, but not a modification of, the practice rules contained in Circular 230 (31 CFR 10).
The appeals officer cannot settle a case based on nuisance value. The expenses of litigation are generally irrelevant to the IRS. Potential adverse publicity is also seldom a factor in the appeals officer's consideration of a matter.
The Appeals Division settles cases on an issue by issue basis rather than by compromising the total dollar figure. The general standard used by appeals officers is an analysis of the hazards of litigation. This means that the appeals officer can "settle a tax controversy on a basis which fairly reflects the hazards which would exist if the case were litigated." See Reg. §601.106(f)(2). Note the references to litigation. The practitioner must convince the appeals office that there are significant "hazards of litigation". Thus, effective representation of a client before the Appeals Division, in both docketed and non-docketed cases, requires a mastery of:
- The facts of the matter at issue.
- The likelihood of proving those facts at trial, including an understanding of the evidentiary problems for both the taxpayer and the IRS.
- The relative strengths and weakness of the legal arguments for both sides.
- The applicable procedural rules and the realities of pursuing resolution of issues through litigation.
Legal issues can sometimes be resolved through the use of a request for national office technical advice. The procedural rules for such requests are set forth in Reg. §601.106(f)(9).
AGREEMENTS
If the appeals officer and the representative or taxpayer agree to a settlement, the taxpayer or representative will be asked to sign a settlement agreement or a closing agreement. The type of agreement to be executed depends on the type of matters involved and the desires of the taxpayer and the IRS.
Settlement Agreements
Settlement agreements exist generally in the form of 870 type agreements or 870-AD type agreements. Form 870 type agreements do not contain the pledges not to reopen the agreement, which are contained in the 870-AD type agreements. Additionally, the 870 type agreement is effective when received by the IRS, while the Form 870-AD agreement is not final until accepted and signed by the IRS. See IRM 8813 (9-17-91).
Generally, a Form 870-AD is used when the settlement involves mutual concessions. These types of agreements usually include the taxpayer’s waiver not to seek a claim for refund regarding the settled issues or years. As such, although these agreements do not provide the finality of a formal closing agreement, courts have generally interpreted the Form 870-AD type of agreements as barring a claim for refund based on principles of estoppel. See McGraw-Hill, Inc. v. U.S., 90-1 USTC ¶50,053. But also see Whitney v. U.S. 826 F.2d 896 (9th Cir. 1987).
Closing Agreements
Closing agreements are provided for in IRC §7121. This section of the code provides the exclusive procedures for entering into binding closing agreements between the IRS and a taxpayer. These agreements generally exist in two forms. A Form 866 is used for resolution of a tax liability. A Form 906 is used for resolution of specific matters. Both types of agreements can be entered into for periods ending before the agreement. However, only the Form 906 can be used for matters which relate to periods ending after the date of the closing agreement. Regs. §301.7121-1(b).
Both the district and Appeals have authority to enter into closing agreements. Appeals can enter into a closing agreement with a taxpayer at any time before a case is docketed in the Tax Court. However, once a case is docketed, Appeals will generally only enter into a Form 906 agreement if the case involves other years. See Rev. Proc. 68-16. Additionally, the taxpayer will be required to stipulate to the settled issue(s) in the Tax Court. If Appeals settles a tax liability for a docketed case, the Form 866 can only be used when authorized by the Tax Court. See Regs. §601.202(b).
Closing agreements are designed to provide finality to tax controversies. They can not be reopened unless there is a showing of fraud, malfeasance, or misrepresentation of a material fact. IRC §7121. Closing agreements are interpreted by the courts pursuant to contract principles. The taxpayer’s signature on a closing agreement is considered an offer by the taxpayer to settle a liability or issue, and is accepted when signed by the authorized official of the IRS.
Using contract principles, interpretation of the agreement is generally achieved by looking within the four corners of the document. The agreement binds the parties to only those issues specifically agreed to in the closing agreement. As such, it is extremely important to be clear and specific when entering into a closing agreement. Consider and address all issues relevant to, and resolved by, the settlement. See In re Spendthrift Farm, Inc., 931 F.2d 405 (6th Cir. 1991).
Closing agreements generally do not address interest, nor do they preclude the IRS from determining additional tax or penalties related to adjustments which result from the agreement. See Geringer v. Commissioner, T.C. Memo 1991-32. As such, all issues which may be affected by the agreement should be considered and addressed in the agreement.
Lastly, certain Code sections expressly provide that they be given affect notwithstanding any other law or rules of law. See IRM HB 8(13)10 713 (10-14-88). If these code sections apply, the taxpayer can still protect him/herself by expressly providing in the closing agreement the extent to which these provisions will apply.
If the appeals officer and the representative or taxpayer are unable to agree on a settlement, then the Appeals Division will issue the 90-day letter.
Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200
