Proposed Regs Address Resolution of Federal Tax Controversies without Litigation

(Parker Tax Publishing September 2022)

The IRS issued proposed regulations relating to the IRS Independent Office of Appeals' (Appeals) resolution of federal tax controversies without litigation and relating to requests for referral to that office following the issuance of a notice of deficiency to a taxpayer by the IRS. The proposed regulations define what a "federal tax controversy" is and specify the types of cases that will not be heard by Appeals. REG-125693-19.

Background

Since its establishment by the IRS in 1927, the mission of the IRS Independent Office of Appeals (Appeals) has been to resolve federal tax controversies without litigation on a basis that is fair and impartial to both the government and the taxpayer. In 2019, the Taxpayer First Act of 2019 (TFA), Pub. L. 116 - 25, added Code Sec. 7803(e), which directed Appeals to codify the role of the independent administrative appeals function within the IRS. Code Sec. 7803(e)(2) provides rules regarding the appointment, duties, qualifications, and compensation of the Chief of Appeals who is to supervise and direct Appeals, including that the Chief of Appeals is appointed by and reports directly to the IRS Commissioner. In connection with expressly setting forth the role of Appeals, the TFA codified in Code Sec. 7803(e)(3) the Appeals Mission Statement, with the additional duty of resolving federal tax controversies on a basis that promotes a consistent application and interpretation of, and voluntary compliance with, the federal tax laws.

To meet Appeals' mission, Code Sec. 7803(e)(6)(A) provides that all IRS employees working within Appeals are to report to the Chief of Appeals. In addition, Code Sec. 7803(e)(6)(B) provides the Chief of Appeals with the authority to obtain legal assistance and advice from the staff of the IRS Office of the Chief Counsel (Chief Counsel) with regard to cases pending at Appeals. To the extent practicable, such advice is to be provided by Chief Counsel staff who were not involved in advising the IRS employees directly working on the case before its referral to Appeals or in preparation of the case for litigation.

As an alternative to having a court decide federal tax controversies without litigation (or without further litigation if the taxpayer has petitioned the Tax Court) and to facilitate Appeals' function, Appeals uses one or more dispute resolution methods to settle federal tax controversies. The Appeals dispute resolution methods may include, but are not limited to, a conference, correspondence, and certain Appeals-provided alternative dispute resolution services. These alternative dispute resolution services include fast-track settlement, fast-track mediation, post-Appeals mediation, Rapid Appeals Process, or early referral of issues to Appeals. The most frequent type of federal tax controversy involves a taxpayer disputing a liability that is subject to deficiency procedures under Code Sec. 6212.

Earlier this month, the IRS issued proposed regulations under Code Sec. 7803(e). The proposed regulations define what a federal tax controversy is for purposes of Code Sec. 7803 and lists the types of controversies that will be heard by Appeals and those that will not be heard by Appeals.

Definition of Federal Tax Controversy

Prop. Reg. Sec. 301.7803 - 2(b)(2) defines a "federal tax controversy'' as a dispute over an administrative determination with respect to a particular taxpayer made by the IRS in administering or enforcing the internal revenue laws, related federal tax statutes, and tax conventions to which the United States is a party (i.e., internal revenue laws) that arise out of the examination, collection, or execution of other activities concerning the amount or legality of the taxpayer's income, employment, excise, or estate and gift tax liability; a penalty; or an addition to tax under the internal revenue laws. Under the proposed regulations, Appeals generally continues to resolve a federal tax controversy based on the likelihood the taxpayer's or the IRS's position with respect to the administrative determination made by the IRS would prevail if the federal tax controversy was resolved by a court, as it did before enactment of the TFA. In doing so, Appeals continues to independently consider disputed administrative determinations made by the IRS in administering or enforcing the internal revenue laws with respect to a particular taxpayer arising from the IRS's examination, collection, or execution of other activities with respect to the particular taxpayer and attempts to resolve the disputes without litigation.

The Appeals resolution process is also available to persons who seek review of certain administrative determinations made by the IRS with respect to such persons that do not directly involve their tax liabilities, penalties, or additions to tax. Even though such matters are not within the definition of a federal tax controversy, Prop. Reg. Sec. 301.7803 - 2(b)(3) provides that disputes over administrative determinations made by the IRS with respect to a particular person regarding the listed topics are treated as a federal tax controversy. For example, Appeals considers determinations involving initial or continuing tax exemption or foundation classification of particular organizations, and initial or continuing qualification of particular employee plans, unless the issue underlying that determination is addressed by Chief Counsel through a technical advice issued by the office of an Associate Chief Counsel (Associate Office).

Exceptions to Consideration by Appeals

Prop. Reg. Sec. 301.7803-2(c) provides a list of exceptions for the types of cases that Appeals will not consider including the following:

(1) an administrative determination made by the IRS with respect to a particular taxpayer in which the IRS rejects a frivolous position;

(2) the IRS's assessment of a penalty with respect to a particular taxpayer who submits false information;

(3) any administrative determination made by the IRS under Code Sec. 7623 relating to awards to whistleblowers;

(4) an administrative determination issued by an agency other than the IRS;

(5) a federal tax controversy with respect to a taxpayer while a criminal prosecution or a recommendation for criminal prosecution is pending against the taxpayer for a tax-related offense other than with the concurrence of Chief Counsel and the Department of Justice, as applicable;

(6) the certification or issuance of a notice of certification of a seriously delinquent federal tax debt of a particular taxpayer to the State Department under Code Sec. 7345 (relating to the revocation or denial of a taxpayer's passport in the case of serious tax delinquencies); and

(7) certain adverse actions related to the initial or continuing recognition of tax-exempt status, an entity's classification as a foundation, the initial or continuing determination of employee plan qualification, or a determination involving an obligation and the issuer of an obligation under Code Sec. 103.

For a discussion of appeals to the IRS Independent Office of Appeals, see Parker Tax ¶263,152.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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