January 17, 2018
By Stephanie Cumings
Published in Tax Notes
IRS Appeals could reverse course on letting counsel and compliance employees participate in its work, after the latest Taxpayer Advocate Service report said the collaboration threatens Appeals’ independence.
If the IRS continues allowing this type of participation, it will further erode taxpayer faith in the appeals process, practitioners told Tax Analysts.
Sheri A. Dillon of Morgan, Lewis & Bockius LLP hopes the TAS report leads to compliance and counsel only being invited to an appeal when “it’s mutually agreed upon with the taxpayer.” Not only will this ensure that taxpayers “do not get caught in an IRS hall of mirrors” during the negotiations, it will also protect Appeals’ independence, efficiency, and integrity, Dillon said January 12. She also wants Appeals to reestablish face-to-face conferences.
Kathy Petronchak of Alliantgroup LP said compliance personnel’s participation in appeals needs to change. “There are substantial opportunities for compliance to address the facts, law, and arguments in an examination. . . . They have spent many hours preparing a revenue agent’s report, reviewing protests and preparing rebuttals to protests that should provide an Appeals officer with a clear picture of the factual and legal differences when done correctly by compliance and taxpayers,” said Petronchak, who noted that compliance’s involvement stems from a perception that Appeals is “giving away cases.” She added that it’s difficult for a taxpayer not to perceive undue influence from compliance and counsel when the outcome is not to their liking.
There’s reason to believe Appeals might be responsive to these concerns. In the 2016 report, TAS called out Appeals for limiting in-person conferences. Then in September 2017, an IRS official announced that Appeals would return to allowing taxpayers to have in-person conferences in field cases. The most recent TAS report, released January 10, supported this move, but said that Appeals continues to unreasonably restrict in-person conferences.
In October 2016, IRS Appeals modified Internal Revenue Manual section 22.214.171.124.4 to give itself the discretion to invite counsel and compliance to participate in appeals conferences. In the latest report, TAS listed this as among the IRS’s most serious problems and said it could have far-reaching negative consequences. “Among other things, Appeals’ emphasis on expanding participation of Counsel and Compliance in conferences will fundamentally change the nature of conferences, jeopardize both the real and perceived independence of Appeals, and generate additional costs for taxpayers and the government,” according to the report.
Dillon noted that as part of the IRS Restructuring and Reform Act of 1998, Congress recognized the importance of an independent Appeals office so that taxpayers can avoid the IRS hall of mirrors, and it required the IRS to develop and implement a plan to ensure that independent appeals function. “Inviting IRS examination and collection employees to further engage in the appeals process can jeopardize the independence and fresh look Congress intended,” she said.
Petronchak, a former IRS Small Business/Self-Employed Division commissioner, agreed that taxpayers need to see there is an end to what may be a long and grueling exam process. “Having this forced upon a taxpayer is particularly acute since compliance is often not agreeing to participate in fast-track settlement when requested by the taxpayer,” she said. “If the IRS wants to have an option where counsel and compliance are in attendance, they already have this with the rapid appeals process. The important point being that the taxpayer volunteers to have this apply.”
Kathy Petronchak is the Director of IRS Practices and Procedure at alliantgroup and is part of the alliantnational group in Washington, DC. In this role, she provides assistance on a wide range of procedural issues related to IRS procedures, such as pre-filing agreements; alternative dispute resolution; statute of limitations; account problems, and penalty issues. She also assists in representing clients before the IRS with an examination or appeal issue.
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