The IRS Independent Office of Appeals gives taxpayers a way to resolve many disputes without going to court. Appeals is separate from the IRS function that proposed the adjustments, and it evaluates cases in light of the risks each side would face in litigation. This article explains when Appeals is available, how to request it, and how it fits with Tax Court deadlines.
What IRS Appeals Is
Section 7803(e) of the Internal Revenue Code establishes the IRS Independent Office of Appeals. Its function is to resolve federal tax controversies without litigation on a basis that is fair and impartial to both the government and the taxpayer. IRS Publication 5 describes Appeals as an independent function, separate from the part of the IRS that proposed the changes.
Requesting Appeals After an Examination
When an examination ends without agreement, the IRS typically sends a letter proposing changes and explaining the taxpayer’s appeal rights. Publication 5 directs taxpayers to send their protest to the address in that letter within the time limit the letter specifies.
The form of the request depends on the amount involved:
Small case request. If the total amount of tax and penalties for each tax period involved is $25,000 or less, a taxpayer may generally make a small case request.
Formal written protest. A formal written protest is required when the amount exceeds $25,000 for any period, and in certain other cases, such as partnership and S corporation cases, regardless of the amount. The protest identifies the disputed issues and the supporting facts and law, and it includes a declaration, signed under penalties of perjury, that the facts presented are true, correct, and complete to the best of the taxpayer’s knowledge and belief.
After a Notice of Deficiency
If the dispute is not resolved, or the taxpayer does not respond to the letter proposing changes, the IRS issues a notice of deficiency. From that point the 90-day deadline to petition the Tax Court controls, and it is not extended by discussions with the IRS or a pending request for an Appeals conference.
Filing a timely petition does not end the opportunity to settle. Under Rev. Proc. 2016-22, IRS Chief Counsel generally refers docketed Tax Court cases to Appeals for settlement consideration, although some cases or issues are not referred.
Taxpayers who receive a notice of deficiency should calendar the petition deadline immediately. A timely petition preserves the right to have the Tax Court decide the case before payment, and settlement through Appeals often remains available after the petition is filed.
How Appeals Evaluates a Case
Appeals considers the hazards of litigation. The Internal Revenue Manual describes this as substantial uncertainty, in the event of litigation, about how the courts would interpret and apply the law or what facts the courts would find. Settlements on that basis often involve concessions by both sides. Appeals does not make settlements based on nuisance value, that is, concessions made solely to avoid inconvenience or cost.
Appeals is also subject to rules restricting ex parte communications with other IRS functions, which are designed to protect its independence. For “specified taxpayers,” section 7803(e)(7) requires Appeals to provide access to the nonprivileged portions of the case file on the disputed issues at least 10 days before a scheduled conference. Specified taxpayers include individuals with adjusted gross income of $400,000 or less, and other taxpayers with gross receipts of $5 million or less, for the year in dispute.
Preparing for an Appeals Conference
Effective preparation usually includes organizing the facts and supporting documents for each issue, identifying the statutes, regulations, and cases that apply, and evaluating each issue realistically, including its weaknesses. A clear written protest helps frame the conference. Because Appeals weighs litigation risk, an explanation of how a court would likely view the evidence is often more useful than a general statement of disagreement.
Appeals and the Tax Court Compared
Appeals is an administrative process within the IRS. It is less formal than court, and its settlements are negotiated agreements.
The Tax Court is an independent federal court. A judge decides the case if it does not settle. Payment of the disputed tax is ordinarily postponed while the case is pending, regular case decisions can be appealed to a U.S. Court of Appeals, and small tax case decisions are final. There is no jury.
Appeals also hears other matters, such as collection due process hearings under section 6330. Those hearings have their own deadlines and their own path to the Tax Court.
Considering an IRS Appeals request?
Tax attorney Cassra Minai, Esq. can review the IRS’s proposed changes and your appeal options in a confidential consultation.