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IRS Alternative Dispute Resolution Options

By Joel N. Crouch on December 19, 2016

In a prior post (here), I talked about the latest IRS Alternative Dispute Resolution (ADR) program, Fast Track Mediation Collection, which replaced the prior Fast Track Mediation program. In this blog post, I want to talk about some of the other ADR programs that are available to taxpayers as an option for resolving tax disputes on an expedited basis.

The 1998 IRS Restructuring and Reform Act included IRC Section 7123 that mandated ADR at the IRS Appeals Division. Section 7123 instructs the IRS to prescribe procedures for early referral to appeals of unresolved issues in examination or collection, procedures for non-binding mediation of unresolved issues, and a pilot program for binding arbitration. With the IRS currently struggling to do more with less resources the ADR alternatives were and are seen as way to shorten audits and resolve matters on an expedited basis.

The IRS Appeals has issued the following statement regarding ADR: “The mission of Appeals is to resolve tax controversies, without litigation, on a basis that is fair and impartial to both the Government and the taxpayer, and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service. Today, alternative dispute resolution instead of litigation is widely valued and applied in many areas of our society. Customers expect more dispute resolution options, and Appeals has adapted its approach to keep up with the new methods and developments.”

Fast Track Settlement (FTS) is available to taxpayers in LB&I (Rev.Proc. 2003-40), SB/SE (Announcement 2011-5) and TE/GE (Announcement 2008-105). FTS is available after Examination has issued Form 5701, Notice of Proposed Adjustment but before the issuance of a 30-day letter. The taxpayer must provide a response to proposed adjustments in the Form 5701 before FTS is available. FTS is available for factual and legal issues and issues that require consideration of the hazards of litigation. Jurisdiction remains with Examination but a specially trained IRS Appeals employee facilitates a discussion between the taxpayer and the revenue agent and their team or group manager with the goal of reaching and executing a settlement to which both parties agree. Either party may request FTS, but both parties must agree. Although FTS is not binding on either party, the IRS reports more than 80% of the cases that involve FTS reach a settlement.

Early Referral to Appeals is available to taxpayers in LB&I only (Rev. Proc. 99-28). Early Referral allows taxpayers whose returns are under the jurisdiction of Examination to request the transfer of a developed but unagreed issue to Appeals, while other issues in the case continue to be developed in Examination. The hope is the resolution of a key issue will break a logjam and encourage the taxpayer and IRS to agree on other less significant issues in the case. Early Referral can also be requested with respect to issues regarding an involuntary change in accounting method, employment tax, employee plans and exempt organizations. Early Referral is available at any time upon request by a taxpayer as long as the issue has been fully developed.

Post Appeals Mediation (PAM) is available when a limited number of legal and factual issues remain unresolved after settlement discussions with IRS Appeals (Rev. Proc. 2014-63). The taxpayer and the IRS must agree to use PAM, but it is generally not available in cases docketed in Tax Court. It is available for both factual issues and legal issues. A specially trained Appeals mediator will be assigned to the case for mediation. In addition, the taxpayer, at his or her own cost, can elect to use a non-IRS co-mediator. Like FTS, the PAM mediator’s role is to impartially facilitate discussions between the parties to reach a settlement of all issues. The IRS reports that more than 50% of the cases that involve PAM are resolved.

Accelerated Issue Resolution (AIR) is available to large corporate taxpayers (Rev. Proc. 94-67). AIR is a voluntary procedure that generally permits Coordinated Industry Case (CIC) taxpayers
to accelerate the resolution of issues with Exam when such issues may also affect tax periods that have not yet been examined. A taxpayer submits a written request for an AIR agreement to the examination team leader for consideration. If accepted there is either a closing agreement or an agreement entered into pursuant to the standard partial or fully agreed deficiency procedures.

Rapid Appeals Process (RAP) is available to large corporate taxpayers (IRM 8.26.11). If all parties agree, the LB&I pre-conference becomes a working conference where Appeals utilizes Fast Track Settlement (FTS) techniques to resolve unagreed issues. Unlike FTS, RAP is available to taxpayers who are already in Appeals.

In 2015, the IRS did away with the pilot program for binding arbitration mandated by IRC Section 7123 due to the “general lack of demand for arbitration and the fact that its use as a tool to settle disputes without litigation has not proven successful” (Rev. Proc. 2015-44). Only two settlements were ever reached during the program’s 14 year existence.

In any IRS matter, consideration must be given to the Alternative Dispute Resolution options available to a taxpayer and if the use of ADR is something that will lead to a faster and better resolution for a taxpayer. For any questions on this or any other tax related matter, please feel free to contact me at (214) 749-2456 or jcrouch@meadowscollier.com.