This article was co-authored by Randall Brody, EA of Tax Samaritan. I wish to acknowledge his keen insight and invaluable contributions to this article.
Picture this. You receive a notice of determination from the IRS informing you that you owe more tax than you reported on your tax return. As is usually the case, the IRS issues a 30-day letter, advising you that you have 30 days to request Appeals consideration of the case.
But a new interim guidance issued by the IRS might make waiting for such a letter the equivalent of “waiting for Godot.” Why? This new guidance severely restricts the rights of certain taxpayers from seeking redress of their disputed tax determinations in Appeals, by foreclosing that option altogether. It might just be the equivalent of the doors of the courthouse being slammed shut to a plaintiff who brings a “stale” personal injury claim.
So how is a taxpayer to know whether he is eligible to go to appeals? That question is best asked in the negative: What circumstances would bar a taxpayer from seeking redress of their disputed tax determination in Appeals?
As a way of background, IRS Appeals initiated the Appeals Judicial Approach and Culture (AJAC) project. The purpose of AJAC is two-fold: (1) first, to review how IRS Appeals handles compliance cases and (2) second, to identify changes to improve their actual and perceived independence.
As part of the AJAC project, Appeals recommended a change in the number of days that must be remaining on the statute of limitations when a case is received in Appeals. This was memorialized in an IRS Small Business/Self-Employed division (“SB/SE”) issued interim guidance (SBSE-04-0714-0024) on July 9, 2014.
As a result of this recommendation, the following changes have been implemented:
• There must be at least 365 days (270 days for estate tax cases or IRC 6206 excessive claim cases) remaining on the statute when a case is initially received by Appeals.
• There must be at least 210 days remaining on the statute of limitations when a case is received in Examination, if Appeals returns the case to Examination for consideration of new information or new issues raised by the taxpayer.
• There must be at least 180 days remaining on the statute of limitations when a case is received in Appeals, if Appeals previously released jurisdiction of the case and returned it to Examination for additional work.
This guidance went into effect back on September 2, 2014 and will be incorporated in the following IRM sections by July 9, 2015:
• IRM 1.4.40, SB/SE Field and Office Examination Group Manager
• IRM 4.8.2, Case Processing
• IRM 4.8.5, Post Examination Case Processing Requirements
• IRM 4.10.8, Report Writing
• IRM 4.32.4, 6707A Penalty
• IRM 25.6.22 Extension of Assessment Statute of Limitations by Consent
• IRM 25.6.23, Examination Process—Assessment Statute of Limitations Controls
If you are one of the “poor unfortunate souls” whose dispute will not be heard by appeals, what should you do? Assuming that you are still at an impasse with the examiner, you can file a petition in the U.S. Tax Court. But before doing so, you must have received a notice of determination. The notice of deficiency is your “ticket” into tax court. The petition must be filed within 90 days of the mailing of the notice of deficiency. Unlike other venues, you need not pay the amount in dispute in order to litigate in tax court, making tax court a desirable venue.
Once your petition has been filed, the IRS will file an answer. In some instances, the response might be to refer your case back to IRS appeals for mediation in the hopes that a trial can be avoided. This is the only way that IRS appeals will hear a case if there is less than 365 days remaining on the statute of limitations when a case is received by Appeals.
If the case is not referred back to IRS appeals, it will be docketed in the U.S. Tax Court and assigned a date for a “calendar call.” The matter will pass from the hands of the IRS examination agent to an attorney from IRS Chief Counsel’s Office, which might not be a bad thing, in light of the fact that IRS Chief Counsel’s Office can take into consideration the “hazards of litigation” when attempting to resolve a case. In evaluating the hazards of litigation, Chief Counsel will consider both “factual hazards” and “legal hazards.” Factual hazards exist when there is either incomplete evidence or conflicting evidence. A simple example will help illustrate “incomplete evidence.” Assume that the taxpayer claimed actual mileage as a business expense. During the examination process, the taxpayer was unable to produce a business mileage log to justify this deduction. As a result, the revenue agent disallowed it. Subsequently, the taxpayer challenged the deficiency by filing a petition in tax court. The taxpayer attached a document to the petition establishing his odometer reading at the beginning and end of the year, and thus his total mileage for that year.
With respect to “legal hazards,” these exist when there is uncertainty as to how the court would apply or interpret the law. Any one of the following can create an uncertainty:
• Absence of legal precedent (i.e., unsettled case law);
• Conflicting case law (i.e., disagreement between the various circuits on what the law should be);
• The IRS’s position is “weak” (i.e, IRS’s position is inconsistent with court decisions); and
• Ambiguity in the applicable statute or regulation.
At the end of the day, Chief Counsel may recommend a resolution that is somewhere between fully sustaining or fully conceding the deficiency based on the uncertainty of the outcome if the case is tried in a court. This might inure to the benefit of the taxpayer.
Other advantages to docketing a case in the Tax Court include the following:
• The IRS bears the burden of persuasion with respect to new issues raised (i.e., issues that were not included in the notice of deficiency);
• If there is any doubt in the mind of the examining agent as to how far the taxpayer is willing to go to dispute the matter, it will be erased by the filing of a tax court petition. The filing of a tax court petition sends a strong message to the IRS that the taxpayer feels so strongly about the matter that he is prepared to “go to the wall” and “fight it out” in court. If a tax court petition was a neon sign hanging in a store window, the message would scream out, “I mean business!” This level of commitment and unyielding determination might be enough to stop the revenue agent dead in his tracks, or at least cause him to “think twice” before casually dismissing the taxpayer’s arguments;
• The filing of a petition forces the IRS to “lock in” its position with the Tax Court (via the Notice of Deficiency) without the benefit of further development of its position through Appeals.
While the advantages are plentiful, there are also disadvantages. Below are a few of the more common ones:
• The taxpayer locks in Tax Court as the forum for any litigation without being able to consider whether one of the other options is more advantageous if settlement negotiations break down;
• A petition locks in the taxpayer’s position as to any facts or legal conclusions to a greater extent than a protest or informal discussions with an Appeals Officer;
• There is a lack of privacy due to the fact that tax court petitions are a matter of public record.
Because you will be up against a formidable adversary in tax court — namely, a seasoned tax attorney from the IRS who is no stranger to litigation — it is best to hire a tax attorney to ensure your rights are protected and to obtain the best result.
Original Post By: Michael DeBlis and Randall Brody