IRS Appeals Arbitration Program

The IRS recently released Revenue Procedure 2006-44, which sets out the rules for the finalized IRS Appeals Arbitration program. This new program presents some new opportunities that taxpayers must consider.

The new IRS Appeals Arbitration program provides yet avenue to appeal factual issues that are cannot be resolved by the IRS appeals process. The program is not available for legal issues, issues that the IRS wants to litigate, and some collection issues. The program is available for factual issues related to rejected offers in compromise and responsible persons for purposes of the trust fund recovery penalty.

Both the taxpayer and the IRS must mutually agree to submit to arbitration and the issues, questions, and amounts can be limited in the arbitration agreement between the IRS and the taxpayer.

The taxpayer may initiate arbitration by submitting a written request, after consulting with the IRS appeals office that is handling the case. The Revenue Procedure specifies that the Appeals Team Manager “will” respond within two weeks (this is somewhat humorous, as it often takes months for a team manager to even return a phone call).

The IRS Revenue Procedure says that IRS refusal to arbitrate is not subject to judicial review (which may or may not be true).

The Revenue Procedure then says that after the IRS okay’s the request to arbitrate, the parties “will” enter into a written agreement to arbitrate. The Procedure does not specify what happens if the parties cannot agree on the arbitration terms.

The parties can then select an arbitrator, which can be an IRS Appeals Officer from a different Appeals Office or an outside third party who is registered with “any local or national organization that provides a roster of neutral [arbitrators].” (Just FYI: I might be willing serve as an arbitrator in this type of proceeding, so please contact me if you need this service). The Revenue Procedure also provides that the IRS and the taxpayer are to pay for the cost of arbitration, regardless of which party prevails.

This new program raises a number of issues. First, this new program seems to be an admission by the government that the IRS Appeals process is flawed. By law, the IRS Appeals Office is supposed to provide an independent third party review. There are even specific prohibitions on ex parte communications between the IRS and the IRS Appeals Office, etc. That begs the question of “why the unbiased third party IRS Appeals Office needs to bring in an unbiased third party to handle an IRS appeal?”

Second, if the IRS and taxpayer agree to enter into arbitration, what happens to the statute of limitations for the IRS to assess additional taxes or for the IRS to collect taxes? For example, the statute of limitations for collecting the underlying tax is suspended if the case is before the IRS Appeals Office pursuant to a collection due process hearing request. Is the IRS going to merely not issue a final determination in the collection due process hearing until after the arbitration hearing in order to extend the statute of limitations for collection beyond what is already provided for? If this is the case, is the IRS going to notify taxpayers about this issue in advance?

Can taxpayers use this program to delay IRS collection efforts? We all know that taxpayers are going to try this, yet the IRS Revenue Procedure does not provide any guidance on this. Does this invite taxpayers to use this new program to delay IRS collections?

By the way, are IRS collection efforts going to be suspended during the time that the arbitration hearing is pending (my guess is that in most cases it will not be suspended).

Third, can taxpayers use the new procedure as a sword and not merely a shield? For example, can taxpayers use the arbitration proceeding to get a ruling that the IRS’s position had no basis in fact or law to entitle the taxpayer to an award of attorney fees? Or can taxpayers get a ruling that an IRS employee has violated our tax laws and/or IRS policy (such as the Revenue Restructuring Act of 1998) which requires that the IRS employee be fired?

Even with these questions, the new program may be helpful for taxpayers who find themselves unable to get a fair appeals hearing because the IRS appeals officer has failed to comply with our tax laws and/or IRS policy. I personally have worked a number of cases where the IRS appeals employees’ have failed to give any consideration to any law or fact (In fact, in one case I had an IRS appeals employee tell me that she would not consider anything that was presented and she was going to deny the taxpayers claim – and that was before the taxpayer had an opportunity to submit any evidence, make any arguments, or even say one word).

While this new proceeding might be helpful in these types of cases, my guess is that the IRS will simply refuse any request to arbitrate in these types of cases – i.e., the types of cases for which the program was intended for.

Colorado Tax Attorney Kreig Mitchell helps taxpayers resolve IRS tax troubles and he helps structure financial transactions for tax efficiency. You can find out more about Mr. Mitchell at http://www.irstaxtrouble.com.

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