At a recent American Bar Association Section of Taxation meeting in Washington, DC, Deputy Chief of the IRS Office of Appeals Andrew Keyso, Jr. discussed the extension of a pilot program that provides for the potential inclusion of IRS’s Examination teams and Counsel at Appeals conferences. This one-year extension is unwelcome news to many taxpayers who see the program as yet another attempt by the IRS to restrict or even undermine the independence of Appeals and its ability to consider and resolve cases based solely on the respective merits of Examination and taxpayer positions.
Despite its history and controversy, on May 10, Deputy Chief Keyso announced at the Section of Taxation meeting that the original “two-year” pilot program would now be extended another year through May 2020, stating that criticism of the program appeared to have decreased as taxpayers had become more familiar with it. Indeed, Mr. Keyso asserted that certain taxpayers had begun to “embrace” the program following their own experiences. He did, however, confirm that Appeals would release a hinted-at survey to gather opinions about the pilot program during the program’s extension (i.e., by May 2020).
Where will this pilot next “land” Appeals?
As of October 1, 2016, the IRS revised section 18.104.22.168.4 of the Internal Revenue Manual, Participation in Conferences by IRS Employees, to provide:
Following those revisions, effective May 1, 2017, Appeals implemented a two-year pilot program under which certain Appeals Team Case Leaders (ATCLs) would invite representatives from Examination to Appeals conferences for “certain cases.” Appeals’ stated “goals” of the initiative were “to improve conference efficiency, reach case resolution sooner, and offer earlier certainty for issues in future years.” The initiative was to rely on “taxpayers and Compliance participating in focused joint discussions to identify and, where possible, narrow the factual and legal differences, to assist Appeals Officers in evaluating the hazards of litigation.” Appeals’ stated hope was that “[t]he insight that all parties may gain from an open discussion of positions could facilitate resolution of the same or similar issues in subsequent cycles.” Either Examination or Appeals could further invite Counsel from the Chief Counsel office of the IRS’s Large Business and International division.
While 26 C.F.R. § 601.106(c) had already left the decision to include Examination at Appeals conferences to the discretion of Appeals officials, several taxpayers expressed concern about the revisions. In particular, many worried that the revisions might foreshadow the inception of a mandatory Appeals-wide initiative to include Examination at traditional Appeals settlement conferences, as opposed to Examination’s typical participation at “pre-conferences” prior to Appeals settlement conferences between Appeals officers and taxpayers. The inclusion of Examination at Appeals settlement conferences might, in the view of many, prevent Appeals from performing its primary function of settling cases on an impartial basis. For example, in comments submitted on behalf of the American Bar Association (ABA) Section of Taxation to then-IRS Commissioner John A. Koskinen on May 9, 2017, the Section of Taxation observed that “such a significant change in conference procedures could interfere with the ability of Appeals to conduct its traditional role of settling the case based on hazards of litigation.”
Following the pilot program’s implementation in May 2017, taxpayers’ concerns increased. At a Tax Executives Institute conference in September 2017, Reinhard Schmuck, Appeals program manager, responded to criticism from several practitioners about the new pilot program. Certain practitioners felt, for example, that taxpayers were losing faith in the Appeals process following Examination’s mandatory inclusion in their conferences. In the view of at least one practitioner, Examination has the opportunity to respond to any taxpayer arguments in its rebuttal to a taxpayer’s protest brief, giving ATCLs the full benefit of Exam’s views without the need for their inclusion in the Appeals meetings. In response to these and other comments, Mr. Schmuck asserted that Examination’s presence in fact would help ATCLs because they would be better able to make well-informed decisions and to bridge the gaps between legal and factual disagreements.
In its 2017 Annual Report to Congress released in January 2018, the National Taxpayer Advocate listed the participation of Examination personnel and Counsel at Appeals conferences as one of its “most significant problems” for the year. The report stated, in relevant part, that “Appeals’ mission is to settle cases with taxpayers, not negotiate with Counsel and Compliance. By allowing Hearing Officers to include these parties even over the taxpayer’s objection, Appeals is changing the power dynamic and jeopardizing its role as an unbiased decision maker.” Among its recommendations in response to this perceived threat was that “Appeals preserve its actual and perceived independence by adopting Internal Revenue Manual procedures that separate Counsel and Compliance from Appeals conferences unless their inclusion is mutually agreeable to the taxpayer and Hearing Officer involved.”
At a Federal Bar Association Section on Taxation conference in March 2018, Appeals Chief Donna Hansberry defended the pilot program in the face of continued criticism by taxpayers. She noted that the pilot program had not become a “routine procedure” and that the program was not intended to convert an Appeals conference into a “mediation” (akin, for example, to the generally well-regarded Fast-Track program). Appeals Chief Hansberry, further, emphasized that under the pilot program, Examination was not to participate in actual settlement discussions between the taxpayers and ATCLs.
Following both these and similar concerns expressed by taxpayers, in June 2018, Mr. Schmuck stated that Appeals was considering implementing a survey of taxpayers, ATCLs, and Examination participants to obtain their views as to the benefits of including Examination at Appeals conferences. As of today, however, there has been no indication that Appeals has conducted this survey or otherwise gathered feedback from IRS employees, practitioners, or taxpayers.
While Appeals’ leadership maintains that Examination’s presence might be beneficial to Appeals officers under certain circumstances, many taxpayers and their representatives—and even some Appeals officers—continue to express concern about Examination’s participation at Appeals conferences. From the taxpayers’ perspective, it is their inability to resolve their disagreements with Examination that led them to the Appeals office in the first place. Thus, other than in arrangements such as Fast-Track, Examination’s participation beyond the opening pre-conference is, if anything, an impediment to resolving cases. And, from many (although admittedly not all) Appeals officers’ perspectives, Examination’s involvement requires them to “negotiate” with not only the taxpayer but to obtain Examination’s concurrence in seeking a resolution, thereby undermining Appeals’ authority to exercise its own independent judgment.
Appeals’ recent extension of this controversial pilot program to May 2020—in addition to its failure, to date, of issuing the hinted-at survey designed to gather the opinions of those subjected to the program—is of particular interest and concern to many taxpayers. The Appeals office has been a highly effective organization, resolving the vast majority of cases that come its way, year in and year out. Yet, the IRS continues to attempt to chip away at what has made Appeals so effective—its real and perceived independence.
Recognizing that this conference program remains a pilot, many taxpayers can only hope that this particular pilot won’t land Appeals’ airplane on the ash heap of history.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
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 See Tax Notes Doc. 2019-18414 (May 13, 2019).
 See Internal Revenue Manual § 22.214.171.124.4.
 See Tax Notes Doc. 2017-53454 (May 9, 2017).
 See id. at 7.
 See Tax Notes Doc. 2017-70474 (Sept. 21, 2017).
 See id.
 See id.
 See Tax Notes Doc. 2018-10983 (Mar. 12, 2018).
 See Tax Notes Doc. 201-25860 (June 22, 2018).