Administrative Appeals Within the Internal Revenue Service

At the heart of the Internal Revenue Service procedural engine lies the internal appeal process, whose  function is to resolve taxpayer disputes through the use of negotiation and settlement, without the necessity of litigation.

The Appeals office has “exclusive and final authority” to mediate tax disputes and to impartially determine tax liability. Appeals Office involvement, at the earliest, may not commence until after the taxpayer had filed a protest in response to receipt of a 30-day letter from the I.R.S. If Appeals fails to resolve the matter at this juncture, further Appeals Office involvement will be precluded after the taxpayer files a Tax Court petition. Still, the taxpayer may choose to bypass early Appeals involvement at the 30-day letter stage.  In this case, Appeals may enter the dispute even after a Tax Court petition has been filed.

As suggested, although Appeals office involvement may begin after the taxpayer has received a 30-day letter, the taxpayer might decide to bypass  early Appeals office involvement in favor of later involvement, or no involvement. This could be accomplished by simply ignoring the 30-day letter. If the taxpayers stands mute upon receipt of this letter, he will be issued a 90-day letter, also known as a statutory notice of deficiency, at the expiration of the 30-day period.

If the taxpayer fails to file a petition in Tax Court seeking a redetermination of the proposed deficiency after receipt of the 90-day letter, he will be assessed the entire amount of the deficiency at the expiration of the 90-day period. After assessment, the taxpayer can call the I.R.S.’s bet by paying the disputed tax and then bringing a refund suit in U.S. District or Claims court alleging that the I.R.S. had erroneously or illegally assessed taxes. Once the assessed tax is paid, however, the doors to the Tax Court are forever closed with respect to that assessment.

Whether to file a protest and seek early Appeals office involvement requires the careful analysis of several competing considerations. For example, filing a protest at the 30-day stage may be an effective dilatory tactic by the taxpayer, since the issuance of a 90-day letter may then be held in abeyance. It might be beneficial for the taxpayer to impede early resolution of the dispute if money that would otherwise be used to pay the disputed tax can earn interest at a rate in excess of that which the I.R.S. would impose on the deficiency if taxpayer ultimately lost the dispute.

In contrast, by ignoring the 30-day letter, and by waiting until actual receipt of the 90-day letter to seek Appeals involvement, the taxpayer will succeed in putting the dispute on a fast track. This may be desirable if the taxpayer seeks an expeditious  resolution of the matter, and does not want the dispute to drag on while he is incurring what could be substantial interest penalties. Once the matter is docketed in Tax Court, but not before, the taxpayer may post bond to stop the running of interest on the disputed tax.

Other factors also militate against filing a protest and seeking early Appeals involvement. First, the taxpayer who files a protest requesting an Appeals office conference risks the possibility that Appeals will find new issues to be raised against the taxpayer on which the taxpayer will then bear the burden of proof if the dispute goes to trial. In contrast, the taxpayer who seeks Appeals office involvement only after he has filed a Tax Court petition minimizes that risk, since Tax Court rules expressly provide that the I.R.S. must bear the burden of persuasion with respect to issues raised after the case has been docketed. Normally, the burden of proof in tax disputes, a burden that may be quite difficult to overcome, is placed squarely on the taxpayer.

If the taxpayer does decide to file a protest seeking early Appeals office involvement, the protest must conform to certain I.R.S. requirements. Aside from purely formalistic requirements, the protest must (1) identify the adjustment being protested; (2) provide facts which support the taxpayer’s position; and (3) provide the legal foundation upon which the taxpayer’s position rests. The taxpayer may also attach documents and affidavits which support the statements made.

Internal appeals procedure differs from court procedure in that evidence which might be held inadmissible in court is not inadmissible in an Appeals forum. Nevertheless, the taxpayer may not
“surprise” the Appeals officer with new evidence at conference since the latter may, in his discretion, remit the new evidence to the district office for verification.

Offers made by the taxpayer in Appeals conferences must be made in good faith. The taxpayer may request terms of settlement which the Appeals officer might consider if his good-faith offer is rejected. While Appeals officers are required to consider litigation hazards, they are prohibited from settling cases based on their “nuisance” value.  This rule is self-enforcing since Appeals officers must justify any settlement with written memoranda.

The I.R.S. is reluctant to enter into “closing” agreements with taxpayers, although by statute it may do so. Instead, the I.R.S. relies on Forms 870 and 870-AD to effectuate settlement agreements. Form 870-AD accords a measure of finality to the dispute, since neither the Service nor the taxpayer may generally reopen a dispute so concluded. Settlements concluded via Form 870 are less final. The I.R.S. may make further assessments, and the taxpayer may file a claim for refund as a prelude to a refund suit. Note that if the dispute has been docketed in Tax Court, neither of these forms may be used. Instead, a stipulated decision drafted by the parties becomes the decision of the Tax Court when signed by the presiding judge.

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