Taxpayer First Act Affirms and Strengthens Administrative Appeal Rights

Recently, Congress enacted legislation that formally requires the IRS to maintain its Office of Appeals (Taxpayer First Act (P.L. 116-25, July 1, 2019). In addition to the “codification” of the Appeal’s Office, the TFA includes provisions that strengthen its independence and impartiality by:

  • Specifying the manner of appointment and qualifications of the Chief of Appeals
  • Limiting interaction with personnel from the Office of Chief Counsel
  • Allowing taxpayer access to case files
  • Requiring written explanations for denial of appeals requests and an opportunity to protest denials

Background of Appeal’s Office

Disputes with the IRS rarely end up in the court system. Most tax disputes, about 100,000 annually, are actually resolved in an informal conference with the Appeal’s Office. 

An appeals process has existed since 1927. However, the IRS was not actually required to provide for independent administrative review of tax disputes until passage of the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-206). The IRS Appeal’s Office serves this function.

Name Updated and Purpose Reaffirmed

In a largely symbolic action, the TFA changes the official name of the Appeal’s Office from the IRS Office of Appeals to the IRS “Independent” Office of Appeals (IRC §7803(e)(1)). The name change serves to stress that the Appeal’s Office operates independently of the IRS examination and collection functions to provide an impartial decision in reviewed disputes.

Similarly, the TFA also codifies the long-standing mission of the Appeal’s Office by specifically providing that its purpose is to resolve Federal tax controversies without litigation on a basis which:

  • is fair and impartial to both the Government and the taxpayer,
  • promotes a consistent application and interpretation of, and voluntary compliance with, the Federal tax laws, and
  • Enhances public confidence in the integrity and efficiency of the Internal Revenue Service (IRC §7803(e)(3)).

Although the Appeal’s Office operates separately from other IRS compliance functions it remains a part of the IRS. The Tax Court recently affirmed this point by specifically ruling that the Appeal’s Office is not an independent agency separate from the IRS. The IRS, therefore, could constitutionally hire its employees without violating the separation of powers doctrine (Aldo Fonticiella (T.C. Memo. 2019-74) (June 13, 2019)).

Appointment of Chief of Appeals

The TFA requires the IRS Commissioner to appoint the Chief of Appeals. The Chief reports directly to the Commissioner.  The Chief is required to have experience in a broad range of Federal tax law controversies and in managing large service organizations (IRC §7803(e)(2)). Appeals staff will report directly to the Chief  (IRC §7803(e)(6)(A)). This provision helps insulate the Chief and employees working for the Appeal’s Office from other parts of the IRS.

Limitations on Contact with Chief Counsel’s Office

The TFA continues to allow the Appeal’s Office to request legal assistance and advice on any pending case from the Office of Chief Counsel without violating rules against ex parte communications. However, “to the extent practicable,” the Chief Counsel may not assign persons who worked on a disputed case prior to referral to Appeals (IRC §7803(e)(6)(B)).

No additional restrictions or remedies for violation of this somewhat flexible standard are provided. Presumably, the input of “tainted” Chief Counsel personnel, including their participation in the taxpayer’s appeals conference, will now only occur in exceptional circumstances.

Easier Access to Case Files

The TFA provides taxpayers meeting an income test the right to review administrative case files. To qualify, the adjusted gross income of an individual in the disputed tax year may not exceed $400,000 and the gross income of a business entity may not exceed $5 million (IRC §7803(e)(7)).

The Appeals Office must provide nonprivileged portions of the file to the taxpayer no later than 10 days prior to the appeals conference. Materials provided by the taxpayer to the IRS during the examination phase are not covered given the taxpayer should have copies. Case files are not available if an appeals request is denied.

Previously, a taxpayer could only obtain a case file by filing a request under the Freedom of Information Act or by requesting it directly from the IRS examination team or the Appeal’s Office. These methods, if effective at all, are potentially burdensome, expensive, and time consuming. Consequently, this provision provides welcome relief to taxpayers.

The case file rule is delayed one year to apply to cases in which a conference occurs after July 1, 2020.

Written Explanation for Denied Appeals Requests

If a taxpayer receives a notice of deficiency and a request for review by the Appeal’s Office is denied, the IRS must provide the taxpayer a written notice explaining in detail the reasons for denial. In addition, the taxpayer has the right to lodge a protest of the denial. The IRS will develop specific procedures for lodging this protest (IRC §7803(e)(5)).

The Appeal’s Office must also submit an annual report that provides the number of denials and the reasons for the denials.

The provision may help limit review denials. The written denial will also make it easier for a court to determine whether the denial was reasonable.

It is important to note that this procedural protection only applies to cases in which a notice of deficiency is issued. Since a taxpayer receiving a notice of deficiency only has 90 days in which to petition the Tax Court and a request for an Appeals conference does not toll the limitations period, taxpayers will still often need to file a petition whether or not the Appeal’s Office reviews the case.

Chief Counsel’s Authority to Deny Appeal Request

Subsequent to enactment of the TFA, the IRS Commissioner delegated to the Office of Chief Counsel authority to deny a taxpayer’s repeal request, provide a written explanation for the denial, and provide protest procedures if the taxpayer’s case is docketed in the Tax Court. In addition, Chief Counsel was delegated authority to receive, review, and decide a taxpayer’s protest of its denial (Delegation Order 30-9 (Rev. 1), effective November 7, 2019 ). The Commissioner in an explanatory statement characterized the delegation order as consistent with IRC §7803(b)(2)(D), which gives Chief Counsel authority to represent the IRS in cases before the Tax Court. The Commissioner states that denial of appeals requests will be “infrequent” and subject to the “highest level of oversight” within the Chief Counsel’s office.

Current IRS guidance provides that the Chief Counsel must refer docketed Tax Court cases to Appeals within 30 days of docketing unless the taxpayer waives the right to an Appeals Conference. Exceptions, however, apply to similar cases with common issues “designated for litigation” or referrals not in the “interest of sound tax administration.” If a case is designated for litigation, the delegation order provides that the authority delegated above to the Chief Counsel when a taxpayer requests an appeals conference belongs to the Deputy Commissioner for Services and Enforcement.

Regulations Coming?

The IRS’s 2019-2020 Priority Guidance Plan singles out regulations to implement the TFA’s provisions dealing with the Appeals Office. Although prioritized regulations often linger for years, practitioners are hopeful that this guidance is indeed on the fast track to completion.  

For additional information, refer to the following resources:

CCH Code Connect Explanation: Internal Revenue Service Independent Office of Appeals

Fact Sheet: IRS Independent Office of Appeals Policies

Code Sec. 7803(e)

IRS Appeals Web Site

Joint Committee on Taxation Description of HR 1957, the Taxpayer First Act of 2019 (JCX-15-19)

By Ray G. Suelzer, J.D., LL.M.

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CCHTaxGroup

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