The Internal Revenue Service's announcement of two new alternative dispute programs for offer-in-compromise and trust fund recovery penalty cases comes as welcome news to practitioners who regularly practice before IRS Appeals."The IRS should be complimented in trying to do programs like these," said Marty Davidoff, CPA, Esq., of E. Martin Davidoff and Associates. "It's the IRS at its best. They're looking for different ways to resolve controversies."
The Appeals Office said that it would begin a test of post-appeals mediation and arbitration programs for two years.
"This is a credit to the IRS," agreed Beanna Whitlock, a San Antonio-based preparer and former Director of National Public Liaison for the IRS. "Offers in compromise are almost at a standstill, with very few offers being accepted. Unless a taxpayer fits into a tight pigeonhole, their offer won't be accepted."
"This gives the taxpayer one last shot and a fresh set of eyes to look at the situation," she continued. "There might be one single issue in an offer that the Appeals officer can't get over, and an offer that is otherwise good will be denied. Mediation gives an opportunity to look at the situation from a different perspective."
Mediation and arbitration will be offered for OIC and TFRP cases for taxpayers whose appeals are considered at Appeals offices in Atlanta, Chicago, Cincinnati, Houston, Indianapolis, Louisville, Ky., Phoenix, and San Francisco.
Trust fund recovery penalties, generally assessed in the case of unpaid payroll taxes, are applicable to the willful attempt to evade or defeat a tax by a "responsible person." TFRP imposes a civil penalty equal to 100 percent of the total tax evaded or not accounted for and paid over. A responsible person is an officer or employee of a corporation or a partner or employee of a partnership who is under a duty to collect and pay over the tax.
Under the two alternative dispute resolution programs, either the taxpayer or Appeals may request nonbinding mediation. The taxpayer may decline Appeals' request for mediation. The taxpayer's request for mediation will be evaluated based on criteria found in Revenue Procedure 2002-44 and Announcement 2008-111. A request for binding arbitration must be made jointly by the taxpayer and Appeals. The new procedures do not create any additional authority for settlement by Appeals.
During the test period, Appeals employees will advise taxpayers of the availability of these alternative dispute strategies and the deadline for requesting them when a rejection of an OIC is sustained or a proposed TFRP assessment is sustained. However, an OIC submitted during collection due process as an alternative to a collection action is not eligible for these programs during the test period.
A collection due process hearing is required before the IRS may levy against a taxpayer's property.
The mediation process is available for both legal and factual issues, and the mediator's role is to facilitate settlement negotiations so the parties can reach their own agreement.
The mediator does not have settlement authority over any issue. The arbitration procedure is available for factual issues only.
What's the appeal?
"When I look at what the IRS wants to accomplish, part of me wants to applaud, the other part says that this is cosmetic surgery," said Roni Deutch, chief executive of Roni Deutch Tax Centers. "The program needs open heart surgery."
"The taxpayer has an offer rejected, then appeals and gets rejected again," she continued. "Now they're saying that in these special locations, you have one more bite of the apple. I'm grateful that they will take another look at taxpayers who have lost and consider giving them a fresh start, but for most taxpayers, the whole process is more complicated than bankruptcy."
"There are many issues that should be addressed at the first level, such as dissipated assets," she said. "If your client sold, gifted, transferred or spent money that was in his possession before the offer, the IRS will include that in the offer amount. For example, if a taxpayer loses his job, and cashes in his 401(k) to feed his family, the IRS will include the amount of money he cashed in to live on because they believe he never should have sold the assets. They bring that amount back in and say, 'This is what you owe.' This is one of the issues they will consider when they go to the new appellate program."
"This is a last administrative option before all else fails," said Bill Wandel, CPA, EA, of JK Harris Special Projects. "It's good that they're starting another pilot program, but it's high time. Hopefully this time it will be successful, and be made available at all the other offices. It will limit the costs of litigation both for the IRS and the public."
TFRP cases are likely to increase during the current economic downturn, Wandel observed. "I'm happy they are expanding the alternative dispute resolution process to include TFRP cases," he said. "It's the most abused section of the Tax Code when it comes to enforcement and collection compliance."
"The IRS tries to make as many people 'responsible' as they can. When an employer keeps money that's withheld from employees, it's the government that has to make good on it, so I can understand them being heavy-handed about it," he continued. "We'll see an unfortunate increase in small businessmen trying to stay alive. When the bank won't loan them the funds they need, that's the next step. The IRS will be forced to try to get the money back as best it can, and in the process some innocent people will get hurt. I believe that's one of the goals of the new programs - the IRS is making this available to avoid that happening."
Whitlock agreed. "Not paying your payroll taxes is the first way for a business to borrow money," she said. "Suppose you need $4,000 to keep your business afloat. You just don't pay the IRS what you owe, with the intent that you will make that money up. But intent doesn't pay, and you get further and further behind."
"It's similar with taxpayers who go to work everyday but can't make their mortgage payments, so they have their employer take out less withholding," she continued. "The piper will have to be paid on April 15, but people will feed their families first, rather than pay their taxes."
