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Tax Court Holds IRS Chief Counsel Attorneys May Make Initial Penalty Determination

In general, section 6751 requires that a supervisor give written approval before penalties can be asserted against a taxpayer. In Koh v. Commissioner, T.C. Memo. 2020-77, authored by the US Tax Court’s (Tax Court) most recent addition—Judge Travis Greaves—the Tax Court affirmed that an attorney from Internal Revenue Service (IRS) Chief Counsel may be authorized to assert such penalties in an answer to a Tax Court petition. In Koh, the IRS sent the taxpayer a notice of deficiency that included a determination related to penalties under section 6662(j). The taxpayer filed a petition with the Tax Court contesting the IRS’s determination. In its answer, the IRS Chief Counsel attorney asserted that the taxpayer was liable for accuracy-related penalties under section 6662(b)(1) or (2), in the alternative to the section 6662(j) penalties assessed in the original deficiency notice. The taxpayer sought partial judgment on the pleadings on the grounds that IRS Chief...

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Taxpayer First Act: Changes to the IRS Appeals Process

The enactment of the Taxpayer First Act, H.R. 3151 (116th Cong.) (TFA) brings with it several changes to the procedures and operations of the Internal Revenue Service (IRS). The TFA touches on the following subjects: Establishing the IRS Independent Office of Appeals Improving customer service Changes to enforcement Modernization of the Office of the National Taxpayer Advocate and the IRS Cybersecurity and identity protection, technological changes, and expanded use of electronic systems IRS hiring and disclosure changes Provisions relating to exempt organizations Changes to the penalty for failure to file Determination of budgetary effects Other miscellaneous provisions This post does not discuss each subject, but rather focuses on changes to the IRS Appeals process. The TFA establishes a new “Internal Revenue Service Independent Office of Appeals” that is under the direction of the “Chief of Appeals.” The right of appeal is “generally available to all...

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Is an Increase in LB&I Assertion of Penalties on the Horizon?

On May 31, 2019, the Treasury Inspector General for Tax Administration (TIGTA) released a report indicating that changes may be in the works regarding assertion of accuracy-related penalties in examinations handled by the IRS Large Business & International (LB&I) Division. The TIGTA report reviewed the results of closed LB&I examinations for the fiscal years 2015 through 2017 and concluded that the IRS assessed accuracy-related penalties upon only 6% of the 4,600 examined returns with additional tax assessments of $10,000 or more. In comparison, the IRS Small Business / Self Employed (SB/SE) Division assessed accuracy-related penalties upon 25% of its examined returns with additional tax assessments of $10,000 or more. TIGTA concluded that accuracy-related penalties are infrequently proposed by LB&I, and that LB&I examiners propose penalties at proportionally lower rates than their colleagues in SB/SE. Further, TIGTA found that LB&I...

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Sacked in Tax Court! Procedural Missteps by the IRS Leave the Government’s Blindside Exposed

In Kearse v. Commissioner, T.C. Memo 2019-53, the Tax Court held the Internal Revenue Service (IRS) abused its discretion as part of the taxpayer’s Collection Due Process hearing (CDP hearing) because the Appeals officer failed to properly verify that the assessment of the taxpayer’s unpaid 2010 liability was preceded by a duly mailed notice of deficiency. The taxpayer, well-known to sports fans, was Jevon Kearse. Mr. Kearse, nicknamed “The Freak” for his athletic ability, played for 11 seasons in the National Football League and tallied 74 career sacks as a dominating defensive end. Based on the description of events by the Tax Court, Mr. Kearse’s attorneys outmaneuvered the IRS similar to the way Mr. Kearse had offensive tackles tripping over their shoestrings. Mr. Kearse’s tax case stemmed from the IRS’s disallowance of a bad debt deduction he claimed for the 2010 tax year (which he later claimed was a deductible theft loss). According to the IRS, Mr....

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Facebook Goes to District Court to Enforce Access to IRS Appeals

On November 8, 2017, Facebook, Inc. and Subsidiaries (Facebook) filed a complaint in the District Court for the Northern District of California asserting that the Internal Revenue Service (IRS) had improperly denied Facebook access to Internal Revenue Service (IRS) Appeals. Facebook’s complaint seeks a declaratory judgment that the IRS unlawfully issued Revenue Procedure 2016-22, 2016-15 I.R.B. 1, and unlawfully denied Facebook its statutory right to access an independent administrative forum. Facebook also requests injunctive relief from the IRS’s unlawful position, or action in the nature of mandamus to compel the IRS to provide Facebook access to an independent administrative forum. This action relates to the IRS audit of Facebook’s 2008-2010 tax years and proposed adjustments related to the value of intangible property transferred from Facebook to its Irish subsidiary. Throughout the audit process, Facebook alleges that it made clear to the IRS its desire...

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Virtual IRS Appeals – A New Frontier?

The Internal Revenue Service Office of Appeals (IRS Appeals) recently announced that it will offer a new virtual “face-to-face” option in the form of web-based communication to taxpayers and representatives to resolve tax disputes. IRS Office of Appeals Pilots Virtual Service, IRS (July 24, 2017. This announcement comes on the heels of other changes at IRS Appeals that curtail the ability of taxpayers to have face-to-face hearings with IRS Appeals. The IRS cites the need for the new service because of IRS Appeals’ large (and growing) case load—more than 100,000 cases each year! For some our prior coverage on recent changes at IRS Appeals, see here, here, here and here. Practice Point: In the wake of an ever-shrinking budget, resources and staff, the IRS really has no choice but to try new and arguably more efficient methods to move cases along. The backlog of cases at IRS Appeals is staggering, and our clients are experiencing long wait times until a case is...

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To Agree or Not to Agree, That Is the Question

The last few years have seen significant changes in audit procedures employed by the Internal Revenue Service (IRS). These changes range from the new Information Document Request (IDR) procedures to substantial changes at the IRS Appeals level. This post focuses on the IRS’s attempt to develop an agreed set of facts before a case is submitted to IRS Appeals. As taxpayers and practitioners are aware, IDRs are the most-used tool by IRS revenue agents to obtain information and develop the factual record (other common tools include interviews and site visits). Revenue agents use IDRs in several ways, including to request documents, understand taxpayer positions and identify key personnel involved. The end result of this information gathering is a notice of proposed adjustment, which then forms the basis for the revenue agent’s report in an unagreed case. Revenue agents are now directed to issue a final IDR, the “Acknowledgement of Facts” (AOF) IDR. This IDR...

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ABA Section of Taxation Response to Recent Changes to IRS Appeals

We have covered on several occasions the changes in the past year to the IRS Appeals process. See here, here, here, here and here. The reactions from taxpayers and practitioners to the recent changes has, for the most part, been negative. On May 9, 2017, the American Bar Association Section of Taxation provided comments to the Commissioner of the Internal Revenue Service regarding the recent changes at IRS Appeals (Comments). The comments, which can be found here, can be summarized as follows: First, we recommend that Appeals reinstate the long-standing Internal Revenue Manual (Manual) provision regarding limited circumstances for attendance by representatives of the Service’s Examination divisions (Compliance) and the IRS Office of Chief Counsel (Counsel) at settlement conferences. Second, we recommend that Appeals return the option for face-to-face settlement conferences to taxpayers. Third, we recommend that Appeals publicly reaffirm that independent...

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National Taxpayer Advocate 2016 Report – IRS Appeals and Alternative Dispute Resolution

In its annual report to the US Congress, the Taxpayer Advocate Service (TAS) had a lot to say about IRS Appeals and the (lack of) use of other alternative dispute resolution (ADR) techniques. In this post, we will highlight what the TAS had to say in this area. IRS Appeals Undoubtedly, one of the Internal Revenue Service’s (IRS) most successful dispute resolution techniques has been IRS Appeals. Briefly, after the IRS’s Examination Division proposes a tax adjustment, taxpayers have the statutory right to seek an “appeal” of the decision. IRS Appeals is a separate and seemingly independent division of the IRS where one or more appeals officers review the redeterminations and adjustments made by the Examination Division, and attempt to settle the dispute directly with the taxpayer based upon a “hazards of litigation” analysis, much in the same manner as a judge would rule. The TAS acknowledged the success and utility of the IRS Appeals program and mission, but...

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Tax Controversy Options

Knowing your options for a US Federal tax controversy is helpful in creating a sound and efficient strategy. The attached chart depicts the typical options involved in a US Federal tax controversy, from the IRS’s examination of the return, through administrative appeals, litigation in Tax Court, Circuit Court appeal, and to ultimate assessment of tax.

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