Of the roughly one hundred thousand cases a year that go before the Internal Revenue Service Appeals Division, more than 80 percent get resolved without going to litigation. That by itself is a good reason for tax professionals to utilize the appeals process, according to Sarah Ingram, chief at the IRS Appeals unit."We see large taxpayers, small taxpayers, individuals. We see large-dollar figures, any topic under the sun," she said. "Almost half of those cases come from the Collection Division, including either collection due process or offers-in-compromise kinds of activities."
The 7,000 members of the Tax Executives Institute have had successful experiences with their interaction with Appeals, said Eli J. Dicker, chief tax counsel at the institute. "They recognize that Appeals is a key step, almost the last step, in the administrative examination process, and reflects the last clear chance before they have to make a judgment: Do they write a check to the IRS or do they write a check heading to the court house? And by and large, they have had satisfactory experiences," he said.
Daniel J. Wiles, managing director of the Washington National Tax Service for Big Four firm PricewaterhouseCoopers, agreed. "Looking at Appeals globally and comparing it to resolution techniques that may be used by other revenue agencies in other countries or states, those other agencies look at IRS Appeals and try to emulate what they've accomplished," he said.
Wiles noted however, that it's important for taxpayers and practitioners to be prepared, "to understand that they can't just go in and wing it, thinking that the Appeals officer or settlement officer will split the difference between them and Collection, or them and Examination. This isn't the way it happens. That's not the fresh look. What Appeals does is they look at the facts, they look at the law, and they try to resolve the issue based on that."
"Now, in some aspects, they appear to be judges," he continued. "But they've got more flexibility than judges, because if you take your case to a judge, the judge is going to say you're right or you're wrong. Appeals doesn't have to do that."
BE A BOY SCOUT
Wiles reiterated his advice about thorough preparation. "You need to keep in mind that the Appeals officer or settlement officer is one of the most senior, most experienced, most sophisticated and technically proficient of all the people that you're going to come in contact with in resolving your case," he said. "Therefore, it's critical that preparation be complete when you come in. And if you prepare your case with the facts in the law and present it to Appeals, that's 80 percent of the effort. The other 20 percent of the effort in getting to a resolution is realism - understanding that there is another side to the story."
The Appeals process advice emerged during a recent meeting of Tax Talk Today, the IRS-sponsored educational forum.
Rob Carmines, a partner in Newport News, Va.-based Carmines, Robbins & Co., agreed about the need for preparation. "You have to be prepared," he said. "But you also have to balance the dollar amount that it might be worth for you to be involved in the process. It's easy to spend eight or nine hours preparing documentation, and coming back needing more answers to questions."
For example, Carmines cited a software product that provides values for charitable donations of used clothing. "The IRS always has a problem with this. Some clients came in after they were audited and had used the program, and the IRS is saying they will accept 20 percent of the values that the program comes up with. If you agree to this, it's an 80 percent reduction. You have to look at the dollar amount of the deduction you are claiming, and the difference may not be worth $1,000 of your time. But if the amount in question is $10,000, the client may have to decide if it's worth paying you $1,000 to pursue Appeals. They might not accept everything, but they will go higher than 10 or 20 percent. The alternative is just pay your tax and play sour grapes."
"The beauty of Appeals is that they're allowed to take into account non-tax law issues, such as the cost and hazards of litigation," said Carmines.
He predicted an increase in the use of the appeals process as the results of the National Research Program audits become an annual affair.
The IRS announced in June that the NRP audits will now be part of an ongoing series of annual individual studies using a multi-year rolling methodology. The study will start in October 2007 and examine about 13,000 randomly selected tax year 2006 individual returns, with similar sample sizes used in subsequent tax years. "We're going to end up sending a ton of stuff to Appeals," he said.
The TEI's Dicker advised practitioners to know who they talk with at Appeals, comparing it to a car dealership where sales persons have to excuse themselves to ask management if they can accept the price. "If they do, you'd like to know that in advance," he said. "That measures the amount of resources that you need to bring to bear, that measures the amount of time; because for many taxpayers, tax issues and tax examination reflect business issues."
The IRS's Ingram noted that fast-track settlement is one of the ways the IRS is trying to get disputes resolved at the lowest possible level. "What Appeals does is bring its settlement authority - sort of parachutes into the case, and tries to help the parties resolve their differences without the necessity of that case going all the way formally to Appeals," she said.
In fast track, "You get a neutral Appeals officer who has not been involved in the case, and Examination is involved and the taxpayer is involved," said PwC's Wiles. "The Appeals officer comes in, mediates in a vague sense, talks to the parties, tells them what their weakness is in their positions, their strength in their positions, and tries to push them together so that they can come to an agreement."
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