Proposed changes to the IRS Appeals office could result in more taxpayers needing to resolve disputes with the IRS through litigation, tax practitioners and other stakeholders warn.
The Appeals office is designed as an alternative to resolving tax controversies through litigation. The IRS and Treasury Department proposed rules in September implementing a portion of the 2019 Taxpayer First Act, which codified and outlined the office’s structure and function. A key portion of the proposed regulations describe 24 circumstances when controversies are not eligible for consideration by Appeals.
Lawyers and others with interest in the proposed rules called them too restrictive, contending they would don’t give taxpayers many options to resolve issues with the agency. They also argue the proposed rules go against Congress’s intent of increasing access to Appeals.
A majority of the 10 posted comments raised concerns about or sought clarifications to exceptions detailed in the proposed rules.
“By restricting access to Appeals, taxpayers have less ability to settle tax controversies administratively and are forced to either forgo their rights or to engage in expensive and time consuming litigation,” Jacob Dean, director of tax and business strategy at Ohio-based real estate firm GBX Group LLC, wrote.
The IRS has scheduled a public teleconference on the proposed rules for Nov. 29.
Treasury and the IRS said in the proposed regulations that the exceptions for using appeals laid out in the document typically predate the enactment of the Taxpayer First Act.
“The statute and legislative history demonstrate that the IRS retains discretion to have appropriate limits following the statutory codification of the role of an independent appeals function within the IRS,” the agencies said.
But National Taxpayers Union President Pete Sepp, whose group submitted a comment letter, noted the IRS cited resource constrains in its reasoning for some exceptions. He suggested the IRS use some of the $80 billion in the new tax-and-climate law to bolster Appeals.
“Why not take a step back, or at least a step sideways, to figure out if some of the reasons the IRS is issuing this rulemaking could be eased somewhat by a plan to put more financial resources into the office?” Sepp said in an interview.
Concerns About Exceptions to Appeals
Several commenters took issue with some of the exceptions to using appeals in the proposed regulations.
Two called out for concern are Exception 19, involving disputes where taxpayers argue that a Treasury Department regulation is invalid, and Exception 20, pertaining to disputes where taxpayers argue that IRS notices or revenue procedures are procedurally invalid. The proposed rules provide that Appeals can’t consider issues based on these taxpayer arguments unless there is an unreviewable court opinion that invalidates the guidance being challenged.
Davis Polk & Wardwell attorneys Mario Verdolini and Christopher Baratta argued the proposed rules would “render the Appeals process more inconsistent, random, and less responsive to legal developments.”
As an example they cited a recent court case where GBX challenged an IRS notice on syndicated conservation easement transactions. The Department of Justice admitted for purposes of the case that the IRS hadn’t followed required notice and comment requirements.
“In this case, the DOJ has already assigned some amount of litigating hazard to this question, and it may be informative to Appeals as it weighs how to avoid litigation in other cases,” Verdolini and Baratta wrote. “These Proposed Rules, however, would constrain Appeals’ ability to do so.”
Another exception that drew concerns was Exception 9, which prevents the appeals process from being available in instances when the IRS erroneously rejects or returns offers-in-compromise as unprocessable. That exception was a focus of the letter submitted by the Legal Aid Society of Columbus Low Income Taxpayer Clinic and Southeastern Ohio Legal Services Low Income Taxpayer Clinic.
If the IRS returns offers-in-compromise for small mistakes, it could put low-income taxpayers in a position where they can’t get a neutral third-party to evaluate whether the agency’s decision to return the offer was reasonable, Megan Sullivan, managing attorney of the tax team and low income taxpayer clinic director at the Legal Aid Society, said in an interview.
Not every comment letter took issue with the approach taken in the proposed rules. The Tax Law Center at New York University’s law school said it generally agrees with the exceptions to when Appeals is available to taxpayers.
“The statutory text and legislative history of the TFA confirm that Congress did not intend for access to Appeals to be universally available,” the center wrote in its comment letter.