In October 2016, the Internal Revenue Service (IRS) revised the Internal Revenue Manual (Manual) 8.6.1.4.4 to provide IRS Appeals Division (Appeals) with discretion to invite representatives from the IRS Examination Division (Exam) and IRS Office of Chief Counsel (Counsel) to the Appeals conference. Many tax practitioners opposed this change, believing that it undermines the independence of Appeals and may lead to a breakdown in the settlement process.

In May 2017, the American Bar Association (ABA) Section of Taxation submitted comments recommending the reinstatement of the long-standing Manual provision regarding the limited circumstances for attendance by representatives from Exam and Counsel at settlement conferences. Additionally, the Tax Section’s comments were critical of the practice whereby some Appeals Team Case Leaders (ATCLs) in traditional Appeals cases are “strongly encouraging” IRS Exam and the taxpayer to conduct settlement negotiations similar to Rapid Appeals or Fast Track Settlement, such that many taxpayers do not feel they can decline such overtures. The Tax Section comments suggested that the use of Rapid Appeals Process and Fast Track Settlement should be a voluntary decision of both the taxpayer and IRS Exam and the use of these processes should be the exception rather than the rule.

Speaking June 14 at the Texas Federal Tax Institute, IRS Appeals Deputy Chief Nikole Flax described a pilot program that is underway for large cases assigned to ATCLs. For cases under the pilot program, IRS Exam and Counsel will be invited to the Appeals case conference. According to Flax, the inclusion of IRS Exam and Counsel in large cases assigned to an ATCL is intended to improve case resolution efficiency and provide a clearer understanding of the facts and legal arguments in the case.

Flax addressed some of the critical feedback that has been received in the pilot program. According to Flax, a concern that the IRS hears is how long the IRS Exam team is involved in the conference under the pilot program. Flax indicated that the pilot program is not intended to include IRS Exam and Counsel in actual settlement negotiations. Exam should not be involved in the process once the facts are established, the differences in legal theory are known and settlement negotiations are beginning. Flax said she knows “it’s harder to draw that line” in the pilot than it is to limit Exam’s involvement to the pre-conference appeals process, but she added that the IRS is “trying to at least be clear in terms of what the intent is” so that taxpayers and their representatives know when it’s time to exclude IRS Exam from the process.

Flax seemed to downplay the criticism that in large cases “often the exam team and the taxpayer reps have had a long, ugly history and don’t really want to engage anymore,” she said, adding that the IRS is encouraging everyone to separate their emotions from the Appeals conference. Flax also indicated that they are working to address the concern that IRS Exam and Counsel are sending large contingents to the Appeals conference. Flax indicated that the Exam team present at the Appeals conference should not significantly outnumber the taxpayer’s representatives.

Practice Point: It’s important that the ground rules be set in advance for the Appeals Conference. In response to a request to submit to Rapid Appeals, the taxpayer should consider qualifying the acceptance with proviso that the taxpayer will participate as long as it is productive. If the taxpayer’s case is subject to the large case pilot program, there should be a discussion of what will constitute the demarcation point for IRS Exam and Counsel’s departure. Further, IRS Exam and Counsel should be encouraged to limit the number of attendees to avoid a perception of intimidation.