It’s full steam ahead with the IRS’s Office of Appeals (Appeals) initiative (the Appeals Initiative) to allow Exam Teams to participate in the “non-settlement portion of the Appeals conferences for the largest, most complex, cases in Appeals.” Back in May 2017, Appeals first formally implemented its two-year pilot program to allow Appeals Team Case Leaders (ATCL's) to permit Exam Teams, including members from the IRS Office of Chief Counsel (Counsel), to participate in Appeals conferences. Two years later, Appeals announced that the Appeals Initiative would be extended through 1 May 2020, and on 9 September 2019, Appeals released guidelines used by ATCLs to conduct conferences pursuant to the Appeals Initiative. The Appeals Initiative has received significant criticism over the years by taxpayers and their representatives because of the Appeals Initiative’s potential impact on the independence of Appeals. Nevertheless, some taxpayers have found the Appeals Initiative helpful in that it allows the taxpayer and the Exam Team to narrow the issues in front of the ATCL. This article discusses: (1) the historical background of the Appeals Initiative, (2) the guidelines released by Appeals on September 9; and (3) some observations of the Appeals Initiative based on our experiences.

Background on the Appeals Initiative

The Appeals Initiative began in 1 October 2016, when section of the International Revenue Manual (IRM), Participation in Conferences by IRS Employees, was revised to provide, in relevant part, that “Appeals has the discretion to invite Counsel and/or Compliance to the conference.” According to the IRS, the changes to the IRM were consistent with Treas. Reg. § 601.106(c), which provides: “At any conference granted by Appeals on a nondocketed case, the district director will be represented if the Appeals official having settlement authority and the district director deem it advisable.” Then, on 1 May 2017, Appeals formally implemented its two-year pilot Appeals Initiative program. It was unclear to taxpayers and their representatives what processes and procedures Appeals would follow when allowing the Exam Team to participate in Appeals conferences. On 8 August 2017, the IRS posted a series of “FAQs” that provided some guidance on the processes and procedures Appeals should use when the Exam Team is in the room. See further information regarding the IRS’s FAQs at “When Will Appeals Excuse Exam From an Appeals Conference? Who Knows,” Baker McKenzie North America Tax News and Developments, Volume XVII, Issue 9, October 2017.

Over the next two years, Appeals and the IRS responded to significant criticism from several tax practitioners about the implications of the Appeals Initiative. For example, in its 2017 Annual Report to Congress released in January 2018, the National Taxpayer Advocate, who assists taxpayers in resolving problems with the IRS and recommends changes in the administrative practices at the IRS, stated that the participation of the Exam Team and Counsel at Appeals conferences was one of the “most significant problems” for the year. Then, in March 2018, at a Federal Bar Association Section on Taxation conference, Appeals Chief Donna Hansberry defended the Appeals Initiative from criticism by practitioners. In June 2018, in response to practitioner criticism, Reinhard Schmuck, Appeals program manager, stated that Appeals was considering sending a survey to participants in the Appeals Initiative, which ideally would have allowed practitioners to formally voice their concerns about the Appeals Initiative. For the next year, however, practitioners were still waiting to see the surveys. It was not until recently on September 25, 2019, that, according to the IRS, surveys soliciting comments from participants in the Appeals Initiative had been sent out.

Finally, on 10 May 2019, at the Administrative Practice section of the American Bar Association Section on Taxation meeting, deputy chief of Appeals, Andrew Keyso Jr., announced that the program would be extended for another year through May 1, 2020. Keyso mentioned that some taxpayers had begun to embrace the Appeals Initiative and criticism had dissipated. Keyso further stated that ATCLs had found the Appeals Initiative informative because it allowed ATCLs to ask questions of both sides and narrow the issues and the dispute accordingly.

Newly Released Guidelines

On 9 September 2019, Appeals released guidelines used by ATCLs to conduct conferences pursuant to the Appeals Initiative. Included in the guidelines are three exhibits: (1) Exhibit 1: Processes and Procedures; (2) Exhibit 2: Sample Agenda for Expectations Call; and (3) Exhibit 3: Expectations Letter to Taxpayer and/or their Representative.

Exhibit 1 provides processes and procedures that the ATCLs are to use in planning and controlling the case throughout the Appeals Initiative. Among the ATCL’s responsibilities are: (a) organizing an Appeals team; (b) holding an “Expectations Conference Call” with the taxpayer and the Exam Team; (c) providing upfront questions to the parties; (d) requiring the parties to provide any new arguments or information no later than 45 days prior to the opening conference; (e) narrowing the factual and legal differences; and (f) maintaining ongoing communications. According to Exhibit 1, the Exam Team will be excused after both parties have made their opening presentations and the ATCL’s questions have been adequately addressed. Once the Exam Team is excused, settlement negotiations begin between the ATCL and the taxpayer.

Exhibit 2 provides a sample agenda for the Expectations Conference Call. The agenda includes: (a) an explanation of the purpose of the meeting; (b) a discussion of the Appeals Initiative; (c) a review of the issues that will be addressed; (d) setting expectations and a vision for the conferences; and (e) a discussion of other administrative matters. Finally, Exhibit 3 provides a template of the “Expectations Letter” that taxpayers and/or their representatives should expect to receive after the Expectations Conference Call. The Expectations Letter restates many of the same processes and procedures that are listed in Exhibit 1 and should have been discussed during the Expectations Conference Call.

Comments about the guidelines will be accepted by the IRS through November 8, 2019. All comments should be sent to: Internal Revenue Service, Appeals HQ NC Room 717, 1111 Constitution Ave NW, Washington, D.C. 20224.

Program Receives Mixed Reviews

Reviews of the Appeals Initiative have been mixed. On the one hand, the program can encourage the Exam Team to take a harder look at their position. Rather than write up an adjustment and “throw it over the wall” to Appeals, Exam must now own their position. By bringing the Exam Team to the table, the Appeals Initiative forces Exam to defend their case in front of Appeals. For example, in a recent case involving a panoply of anti-abuse regulations aimed at disregarding a restructuring, the Appeals Initiative led to a full concession by Exam after facing the weaknesses of their position. The Appeals Initiative also can facilitate a dialogue between both sides. In another recent case, this one in post-docketed Appeals, the Appeals Initiative led to a favorable settlement for the taxpayer in a case with significant hazards. Although both sides wanted to avoid trial, Counsel had refused to engage in a substantive dialogue about the hazards of the Service’s position. During the Appeals Initiative, however, the Appeals Officer acknowledged those hazards and encouraged Counsel to move on his position, which he ultimately did.

On the other hand, a bold Exam Team can delay negotiations by filibustering, requiring the ATCL to shut down the Exam Team. Appeals is aware of other critiques the program has received, and has already implemented informal suggestions, such as creating guidelines for Appeals team case leaders to conduct conferences. Additionally, the IRS has begun sending surveys soliciting feedback from Appeals Initiative participants. As more ATCLs use the Appeals Initiative, we expect Appeals will make further modifications to improve the program.

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