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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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IRS Appeals "Independence" ?

Posted on in Tax Rants

The IRS Appeals Division has, by design, historically played the role of the so-called "independent" settlement arm of the IRS – the intermediary within the Service that retains the authority and primary function of resolving disputes between taxpayers and the aggressive auditors who often seek to exact unjustified, overstated additional taxes from them.

Over the years, this system has occasionally worked well for some taxpayers.   Assigned "conferees" (as they used to be called) served as a reliable check on certain vindictive, out-of-control Examiners, resulting in agreed additional tax assessments that were generally much more realistic and significantly less than the additional taxes initially proposed by the over-zealous auditors.

But for many taxpayers, the system didn’t, and doesn’t, work so well.

Appeals Officers charged with settlement authority over a specific case have lots of discretion, and discretion always allows for abuse.  For example, the criteria by which these internal settlers propose issue resolution – "the hazards of litigation" - does not lend itself to objective, exacting or uniformly-applied standards.   The idiosyncratic differences among Appeals Officer personalities frequently yield drastically disparate proposed settlements for taxpayers with identical issues.  Consistency and predictability are sorely lacking.   And while this sometimes plays to the benefit of a particular type of taxpayer, i.e., one armed with a persuasive, knowledgeable tax controversy representative, many times a taxpayer gets an unfair proposal or no deal at all, and doesn’t even know it.

This past September, the IRS implemented the Appeals Judicial Approach and Culture ("AJAC") project.  The general idea is to make the Appeals Division appear more judge-like and less an extension of the IRS Examination branch, a common perception and associated complaint leveled by taxpayers and some representatives.    An analysis of whether the particular procedural changes made by AJAC will have the desired impact on taxpayer perception is beyond the scope of this post, and is premature in any event, it being only a few months since the effective date of the new procedures.   However, the question of whether an IRS employee can ever be "independent" enough to fairly resolve a dispute between his or her employer and a taxpayer is, in my opinion, obvious.   Unless you have a truly neutral arbiter, like a U.S. Tax Court Judge, reviewing the opposing arguments and making the disputed factual determinations, I do not believe you can possibly have a fair system for resolving disputes. Either by perception, or in actual practice.

Does this mean I advocate bypassing Appeals entirely and litigating every IRS tax liability dispute?  Of course not – such a strategy is costly, time consuming, and emotionally draining; certainly not right for every taxpayer and every case.  But recognizing the reality and imitations of the IRS Appeals Office, with or without the Solomon-like changes promised by ARAC, may inform and encourage a more cooperative relationship with the Examiner, resulting in quicker and more economically efficient resolutions at that earlier stage.

And for those cases in which an unreasonable, overly-aggressive auditor cannot be primed to reason?   Have no fear about taking your case to the Tax Court, where a truly independent decision-maker resides.

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