By Thomas A. Warnshuis, CPA, MSA, Grand Rapids, Mich. (former IRS revenue agent) | Article featured on Tax Advisor
At the end of an IRS audit many taxpayers are left to decide how to proceed, especially when faced with a proposed adjustment that they disagree with. Before pursuing an appeal, Fast Track Settlement may provide a viable alternative to consider.
IRS Appeals
The mission of the IRS Appeals team is to resolve tax controversies in a fair and impartial manner without litigation. Appeals frequently settles cases by reducing an adjustment by a particular percentage that the taxpayer will choose to accept. Appeals has no specific quota on the number of cases it can recommend for litigation, but there is significant pressure to settle cases and avoid litigation unless a case is egregious.
Most taxpayers do not understand the Appeals process or how Appeals resolves cases. Appeals gets involved when a taxpayer does not agree to the adjustments proposed by the IRS examination team. Appeals acts as an independent party to the examination and takes a fresh look at each case before it. Unresolved cases are closed from the examination field team and assigned to Appeals. It should be noted that most examiners complete a Form 4665, Report Transmittal, that is addressed to Appeals. The purpose of this letter is for the examination team to communicate any specific details it wants Appeals to be aware of. This could be a description of questionable taxpayer behavior, tactics the taxpayer or its adviser could use to disrupt the examination team’s pre-Appeals conference presentation, or any other pertinent information.
After Appeals receives and assigns the case, the ex parte communication rules are implemented. This means the Appeals officer cannot speak with the examination team about the case unless the taxpayer and its adviser are present. This preserves the independence of the Appeals process.
In general, the examiner will prepare for the Appeals officer a pre-Appeals presentation that discusses the case and the relevant taxing authority, and that attempts to convince the Appeals officer that the adjustment should be upheld. The taxpayer and its adviser are present for the pre-Appeals conference. This is the last contact between the Appeals officer and the examination team. Next, the taxpayer and its adviser meet directly with the Appeals officer to present their case for reducing or overturning the adjustment. This generally is a formal presentation and can require significant time and resources to prepare. More meetings to negotiate a settlement and resolve the case likely will be necessary.
In many cases, taxpayers come away from the Appeals process with reduced assessments because the appellate conferee has the authority to make settlements that the examination team does not, including the consideration of hazards of litigation, but there is a downside. The Appeals process requires significant time and resources. The time and resource commitment should be considered when deciding whether to appeal an examination. The Appeals process can take from months to years to complete depending on the complexity of the taxpayer’s case and the availability of IRS resources. If time is a concern for the practitioner and his or her client, there should be a discussion of how to settle the case at the examination level and avoid the Appeals process.
Alternative Resolution Strategy: Fast Track
The IRS has an alternative resolution strategy called Fast Track Mediation. Fast Track is growing in popularity among examination teams and taxpayers. Fast Track is similar to Appeals, except a resolution is determined at the examination level rather than during an appeal and is significantly less time-consuming.
If a taxpayer and the examination team disagree on certain issues during the course of an examination, they can request Fast Track Mediation rather than close the case as unresolved and send it on to Appeals. The request is then sent to an Appeals officer who specializes in mediation. Most Fast Track sessions are completed in one day, and adhere to the following general pattern.
The mediation starts with the taxpayer, its advisers, the examination team, and the mediation officer in one room. The taxpayer and its advisers present their case on why they disagree with the adjustments, and the examination team presents its case on why the adjustments should be upheld. The mediator then moves the taxpayer and its advisers and the examination team into two separate rooms, and the mediator goes to each room and explains the hazards of litigation that each side has in its case. Hazards of litigation are loosely defined as the Appeals officer’s determination of the probability that the examination position might not be upheld in court. In other words, the mediator presents the weaknesses he or she sees in each party’s argument.
The mediator opens discussions to see how much of an adjustment each side would be willing to concede and continues to go room to room until an adjustment reduction percentage is determined. The IRS mediator generally goes back and forth from room to room for the bulk of the day. If an agreement is made on the amount of the adjustment, the issue is considered agreed, the case can be closed, and the Appeals process is avoided. Fast Track therefore can save significant time compared with the Appeals process as a case can be argued, decided, and agreed upon in one day rather than in months or years.
If the sides cannot reach an agreement or either side determines the process is no longer worthwhile, either side can walk away at any time. If the issue is not resolved in Fast Track, the written records from the day and the mediator’s notes are destroyed. The taxpayer can still go to Appeals, and the mediator who was assigned to the Fast Track case has no part in the Appeals process. Taxpayers leave Fast Track mediation with a better sense of the weaknesses in their cases and are able to better prepare for the traditional Appeals process if they decide to go that route.
Fast Track Mediation requires time and resource commitments, so taxpayers should come prepared with a professional presentation for the mediator. Fast Track Mediation is a taxpayer’s opportunity to present its case and convince the mediator to rule in its favor. Although time and resources are required for this session, the cost is a fraction of the time and money commitment required by the Appeals process.
Making the Best Choice
The IRS examination process has changed significantly over the past few years. As IRS resources continue to dwindle, significant examination delays are occurring. IRS managers are seeking ways to close cases in a timely fashion to help meet their territory plan. Taxpayers and their advisers should strive to develop a rapport with the IRS examiner and manager and seek ways to resolve cases at the examination level, which would benefit both parties.
It is important to be smart about how best to settle unresolved issues. For significant unresolved issues, many taxpayers might receive a better result via Appeals because the appellate conferee has latitude that the examination team does not. The latitude comes at a price, however, so taxpayers need to weigh the time and cost commitment against the potential benefits to determine when Fast Track Mediation is a better option.
EditorNotes
Howard Wagner is a director with Crowe Horwath LLP in Louisville, Ky.
For additional information about these items, contact Mr. Wagner at 502-420-4567 or howard.wagner@crowehorwath.com.
Unless otherwise noted, contributors are members of or associated with Crowe Horwath LLP.
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