Proposed IRS Changes Would Likely Increase Access to Appeals

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By Laura Davison

House lawmakers are shopping a bill that would broaden Congress’s oversight of how taxpayers can appeal their tax disputes with the Internal Revenue Service.

The draft legislation, would provide more opportunities for taxpayers to resolve their cases at a newly named IRS Independent Office of Appeals, but could also create structures that are too formal or rigid, making it more difficult for appeals officers to reach settlements with taxpayers, practitioners told Bloomberg Tax.

“It cuts both ways,” said Charles M. Ruchelman, a member at Caplin & Drysdale, Chartered in Washington. “Seasoned appeals officers can be flexible with procedures. It’s not good if they start to feel constrained by statutory or regulatory language.”

The provision is a part of legislative package that would restructure the IRS to focus more on customer service. The legislation is a priority for the Ways and Means Committee and could be approved by the House panel in April.

The Taxpayer First Act, released March 26, calls for codifying an independent Office of Appeals that would limit the agency’s ability to establish the review process for tax disputes and determine how and when taxpayers access their cases. An independent appeals review office was created in 1998—the last time Congress overhauled the agency—but the IRS has continued to use its discretion about which taxpayers can access the review process.

The legislation would require that denied cases receive a written explanation. Taxpayers would also be eligible to request additional consideration if they were denied.

“I think Appeals will think twice before denying a taxpayer a right to an appeals conference,” a decision that’s usually made in conjunction with the Office of Chief Counsel, said Liz Askey, a managing director at Grant Thornton LLP in Washington. “There’s a perception that the IRS has been denying cases and people are finding it more and more difficult to get to appeals.”

The legislation follows the IRS’s denial of an administrative appeal by Facebook Inc. for a $1.73 million tax bill, a decision that the social media company is now fighting. Tax shelter cases also have been shut out of the appeals process.

The legislation could have the effect of curbing cases that the IRS designates for litigation, and gives taxpayers more chances to tell the IRS why their case shouldn’t go to trial, said Edward L. Froelich, of counsel at Morrison & Foerster LLP in Washington. It creates a “due process vehicle” where designated cases can protest to the chief counsel and it has to be reviewed. That’s something that already happens informally now, he said.

The bill also would make it easier for taxpayers to access their case file from the IRS before a review. Currently, taxpayers must submit a Freedom of Information Act request, which can be a slow and cumbersome process.

Communication Questions

The legislation also raises questions about what would happen to the ex parte rules, which cordon off the IRS Appeals officers from other IRS employees to maintain their independence, Askey said.

Under the proposal, the Chief of Appeals could seek legal advice from the Office of Chief Counsel if the staff wasn’t involved in the case or involved in preparing it for litigation.

“It’s clear Congress wants it to be an independent office,” Askey said. “It’s just remains to be seen what this means for the ex parte rules.”

The appeals process has a lot of support from practitioners because it keeps the U.S. Tax Court from being overburdened with cases and it provides an impartial, cost-effective mechanism to reach a compromise, Ruchelman said. It’s important that Congress carefully craft the legislation to maintain its independence and functionality, he said.

“I wouldn’t want the oversight to develop into something else, like a more implied exercise of power of the agency. That doesn’t seem appropriate,” Froelich said. “If Congress doesn’t like how the IRS made a determination about who gets to go to Appeals, it can pass a law.”

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