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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law


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Settling Liability Disputes with IRS Appeals: The "Hazards of Litigation" Standard

Posted on in Tax Controversy

litigation hazard, tax appeals, Chicago Tax Attorneys"A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in event of litigation, or one which reflects mutual concessions for the purpose of settlement based on relative strength of the opposing positions where there is substantial uncertainty of the result in event of litigation." - Internal Revenue Manual section When you've sent a Letter of Appeal to the IRS asking for an administrative review of a decision that was made by the Examination function regarding your tax dispute, the IRS assigns an Appeals Officer to determine of there is a possibility for settling the issue. The mission of the Appeals Officer is to resolve your case in a way that:

  • Avoids litigation;
  • Is "fair and impartial";
  • Will encourage voluntary compliance;
  • Represents the integrity and efficiency of the IRS.

Because the Appeals Officer's mission explicitly includes the objective of avoiding litigation, they'll generally begin the discussion by going over the various ways in which you could settle out-of-court by reaching a compromise that fully embraces any hazards to the government of litigating the issue.

Hazards of Litigation Defined 

What the Appeals Officer is actually determining is a quantitative analysis of:

  • The likelihood that, if the case goes to Tax Court on the liability issues, what are the chances the government will prevail, and what are the chances that the taxpayer will prevail.
  • The cost of litigation to the government is simply not an issue.

Application of the Hazards of Litigation Standard

The Appeals Officer will carefully review the facts of the case, including those disputed by the taxpayer, along with the applicable law, including:

  • The evidence that is most likely to be presented, it's probative value, and how likely it is to support the taxpayer's case rather than the IRS';
  • The witnesses that are most likely to be called, their availability and credibility;
  • The burden of proof upon the taxpayer and his or her ability to meet it;
  • The clarity (or lack thereof) as to the issues of fact and the issues of law.

If the Appeals Officer determines that the case is likely to be lost, there are few circumstances in which they'll elect to move forward. If they determine it's likely to be won, there are few circumstances when they won't; even if the amount the IRS would win by litigating is not enough to warrant the costs. (There's actually a regulation that prevents an officer from declining a court case merely because it's a 'nuisance'; if they believe the IRS would win, they can't say no just because it would be annoying to go to court). It's important to note, in the paragraph that begins this post, the phrase 'issue by issue,' because it means that the IRS can very easily decide to settle with you on some points of your delinquency, but go to court over others - it isn't necessarily a package deal. So, when you ponder the question of sending an appeals letter to the IRS, consider the relative strength of your case should it end up in court; because your ability to leverage the IRS into a compromise that favors you depends quite a bit on your ability to beat them should they decide not to compromise. One final thought; before opening up the possibility of litigation, be sure to speak with a skilled tax lawyer with in-depth knowledge of tax litigation proceedings. At Chicago-Kent Tax Clinic, our lawyers have extensive U.S. Tax Court litigation experience working both for the IRS and in private practice. We provide low-cost assistance to Chicago area clients who are facing issues with the IRS and Illinois Department of Revenue. For a free consultation with one of our experienced attorneys, contact us today at 312-906-5041.



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