1. Independence

The TFA gave Appeals a new name: “Internal Revenue Service Independent Office of Appeals.” The addition of the single word “independent” to the title of the office was significant to Congress, and it is significant to taxpayers. Independent is defined as: “Not subject to the control or influence of another.” Independent, Black’s Law Dictionary (11th ed. 2019). Given that the full name includes reference to the IRS, Congress understood that the IRS would still house Appeals, but Congress also intended that Appeals would not be subject to the control of the IRS, just as the National Taxpayer Advocate reports to the Commissioner but remains independent. Specifically, the legislative history provides, in relevant part:

To foster confidence in the integrity of the IRS and the independence of its administrative proceedings and to encourage voluntary compliance, the Committee believes it is advisable to codify the role of an independent administrative appeals function within the IRS and provide new guidelines for procedures that the IRS is to follow in the new office. In doing so, the Committee seeks to reassure taxpayers of the independence of the persons providing the administrative review. 

H.R. Rep. No. 116-39 (“House TFA Report”), at 29 (2019).

The Proposed Regulations, however, do not provide new guidelines. Instead, they seek to reimpose old guidelines. This misinterpretation of Congressional intent, taken together with other IRS actions permitting further encroachment by the Examination Division and the Office of Chief Counsel in Appeals Conferences, reveal that the Proposed Regulations further the IRS goal of hobbling Appeals’ independence for any taxpayer fortunate enough to still receive access to Appeals. Even the National Taxpayer Advocate noted this problem in her 2022 purple book:

The expansion of Appeals conferences to routinely involve Counsel and Compliance personnel alters the relationship between taxpayers and Appeals Officers. It makes interactions less negotiation-based and transforms the conference into a more contentious and one-sided proceeding. This approach is also seemingly inconsistent with Congress’s intent to “reassure taxpayers of the independence” of Appeals. 

Recognizing the IRS’s intention to continue both the practice of including the very intransigent personnel that led to the taxpayers to seek a conference with Appeals in the first place and the encroachment on Appeals’ independence even before these Proposed Regulations were issued, the National Taxpayer Advocate asserted that Congress should amend the Internal Revenue Code to end this practice, and proposed a new Section 7803(e):

A taxpayer shall have the right to a conference with the Independent Office of Appeals that does not include personnel from the Office of Chief Counsel or the compliance functions of the Internal Revenue Service unless the taxpayer specifically consents to the participation of those parties in the conference. 

The National Taxpayer Advocate sees the writing on the wall regarding Appeals’ independence, and so too should we.

       2.  File Taxes

Another major change instituted by the TFA was the taxpayer’s right to a copy of its administrative file at least 10 days before a conference with Appeals. Sec. 7803(e)(7)(A). This demonstrates the importance of the taxpayer being on notice of the specifics of the case against them and providing the taxpayer with access to the documents considered by the IRS with sufficient time to prepare before the Appeals conference.  

The TFA was signed into law before the Pandemic. Prior to this addition, many taxpayers requested their administrative files via Freedom of Information Act (“FOIA”) requests, which were fulfilled in a timely manner. [7] Due to the Pandemic, that process has been severely backlogged and it is now taking more than a year to obtain the FOIA file (which includes both the taxpayer’s documents and IRS documents with redactions). Accordingly, many more taxpayers are relying on this new provision to get access to their administrative file via the TFA because the Code says they should have these documents before the conference.  Alternatively, some Appeals Officers are delaying Conferences to permit taxpayer to receive the FOIA file before the conference. 

On June 17, 2022, the IRS issued a memo to Appeals employees.[8] The memo specifically states taxpayers are not entitled to the documents they previously provided to the IRS. This is important because documents may have been lost or the taxpayer may have hired representation for the first time or changed representation. Fires, floods, hurricanes, and other natural disasters lead to lost documents each year, why should taxpayers not be entitled to a copy of their own documents along with the rest of their administrative file?  It is true the TFA limited additional access only to IRS documents, but considering the known backlog in the Disclosure Office, Appeals does not reference FOIA procedures or any exceptions. This ignores the reality that the FOIA file is likely not even available to the taxpayer at the time of the conference and yet both Appeals and Exam have had access to the taxpayer’s documents, while the taxpayer may not even have access to his own documents to point out erroneous conclusions by Exam or Appeals. This is especially burdensome when the exam may have taken years and the taxpayer may have decided to obtain counsel later in the process.

While this may have been an attempt to reduce the administrative costs to Appeals before the Pandemic, it ignores the reality that the primary way to obtain the administrative file (FOIA) is effectively unavailable. There is no doubt that the administrative file includes both documents submitted by the taxpayer and documents created by the IRS during exam and should be provided to the taxpayer through FOIA, Chief Counsel, or Appeals. In many docketed cases, the FOIA request was made before the petition, the IRS attorney assigned to the case does not provide the administrative file because it was already requested via FOIA, and the case is sent to Appeals, who also does not provide the full administrative file and instead only provides redacted IRS documents. Strict adherence to the provision of Sec. 7803(e)(7) in light of extraordinary times hampers the taxpayer’s ability to present its case to Appeals and discover what else it might need to present at the Appeals conference. The Proposed Regulations do not even mention Section 7803(e)(7). Where the taxpayer requests a full copy of the administrative file through FOIA and can prove the request and that the Disclosure Office has extended its deadline to reply beyond the Appeals Conference date, Appeals should either provide a full copy of the administrative file or delay the conference to allow time for the FOIA file to be made available to the taxpayer.

       3.  Access to Appeals

As outlined by others, [9] Congress has enacted several statutes in an effort to expand access to Appeals. The courts, however, found neither the Restructuring and Reform Act of 1998 (“RRA 98”) nor the Taxpayer Bill of Rights (“TBOR 2015”) provided a guaranteed right to Appeals. Thus, the TFA direction that Appeals “shall be generally available to all taxpayers” expressed the intent of Congress to expand access to Appeals—the rule, not the exception, would be access to Appeals. The House Report states:

Independent Appeals is intended to perform functions similar to those of the current Appeals. Independent Appeals is to resolve tax controversies and review administrative decisions of the IRS in a fair and impartial manner, for the purposes of enhancing public confidence, promoting voluntary compliance, and ensuring consistent application and interpretation of Federal tax laws. Resolution of tax controversies in this manner is generally available to all taxpayers, subject to reasonable exceptions that the Secretary may provide. Thus, cases of a type that are referred to Appeals under present law remain eligible for referral to Independent Appeals.

House TFA Report, at 30-31 [emphasis supplied].

The Proposed Regulations ignore the fact that the majority of this language ended up in the final language of the TFA and in the Internal Revenue Code. Instead, Treasury and the Proposed Regulations characterize the phrase “subject to reasonable exceptions” far more broadly than Congress intended:

the Treasury Department and the IRS retain after the enactment of the TFA their historical discretion to determine whether the resolution of particular types of disputes is appropriate for the Appeals resolution process, or the discretion of the IRS to determine whether a particular Federal tax controversy is appropriate for the Appeals resolution process. 

87 Fed. Reg. 55936 (Sept. 13, 2022). 

The rules of statutory construction mandate that no statutory language is superfluous, and yet the Proposed Regulations set forth the IRS’s intent to simply ignore statutory language. The Proposed Regulations intend to exclude from Appeals all disputes and issues the IRS claims were, or should have been, within its right to exclude from Appeals prior to enactment of the TFA—rendering the TFA a nullity on the issue of access to Appeals.

a.  Status quo ante

Historically, the IRS could refuse to send any case or issue to Appeals. [10] The caselaw supported the IRS’s position even after RRA 98 and TBOR 2015. [11] The IRS had the right to designate cases or issues for litigation and taxpayers effectively had no access to Appeals if IRS Counsel wished it. Further IRS Counsel had only a limited role in Appeals. It was against this backdrop that Congress passed the TFA mandating greater access to Appeals.

i.  Role of IRS Counsel in Appeals

When Appeals is successful in settling a docketed case, it prepares the appropriate settlement document. [12] IRS Counsel’s role is limited: “Normally, Field Counsel will review the settlement documents prepared by Appeals during its settlement jurisdiction for form and accuracy only, without regard to the substance of a settlement effectuated by Appeals. Field Counsel may, however, initiate contact with Appeals if questions arise upon review concerning the substance of a proposed settlement. In any such communication, care must be exercised to honor the restrictions on ex parte communications with Appeals.” [13] Accordingly, IRS Counsel’s review is limited to form and accuracy; substantive discussions after settlement could amount to prohibited ex parte communications. Yet, the IRS has routinely included Counsel in Appeals Conferences through policy changes and in contravention of Congress’ instruction to reassure taxpayers of Appeals’ independence.

b.  Change in position by passage of the TFA

Currently, even cases designated for litigation by the IRS have access to Appeals. In fact, current IRS procedures require that all cases in which a Petition is filed are automatically sent to Appeals for consideration. A review of Tax Court orders reveal continuances are being granted to permit petitioners an opportunity to go to Appeals and potentially settle their case. Accordingly, the IRS currently understands the TFA requires that generally everyone has access to Appeals. While this access may be in name only, these Proposed Regulations would completely remove access for these cases.

Further, recent caselaw discussed below shows IRS has significant hazards of litigation due to failures to comply with the APA and the government’s concessions that they did not comply with the APA. [14] These Proposed Regulations would only ensure Appeals cannot consider the whole body of caselaw or perhaps no caselaw at all (depending on the level of published guidance) and therefore remove Appeals’ most valuable tool in ascertaining appropriate settlement terms.

c.  Proposed changes to return to status quo ante

Rather than relying on Congressional language that generally all taxpayers have access, the Proposed Regulations turn that presumption on its head. The Exceptions the IRS seeks to enshrine in regulation are not reasonable or narrowly construed. I do not agree that “reasonable exceptions” should include the remainder of the 24 exceptions. A close reader will conclude that consideration of the IRS’s public comments and actions coupled with these Proposed Regulations completely swallow the rule.

       4.  Whistleblower Award cases

One category of cases the Proposed Regulations seek to bar access to Appeals is Whistleblower award cases. The Proposed Regulations outline that these cases are currently excluded by subregulatory guidance:  Rev. Proc. 2016-22. By including them in the Proposed Regulations, the IRS seeks greater deference to this complete bar and is another category of cases where the IRS is not expanding any access to Appeals. The authority relied upon for this sweeping bar is its own definition of Federal Tax Controversy in these Proposed Regulations. The Proposed Regulation text is as follows:

(2) Definition of Federal tax controversy. For purposes of this section, a Federal tax controversy is defined as a dispute over an administrative determination with respect to a particular taxpayer made by the IRS in administering or enforcing the internal revenue laws, related Federal tax statutes, and tax conventions to which the United States is a party (collectively referred to as internal revenue laws) that arises out of the examination, collection, or execution of other activities concerning the amount or legality of the taxpayer's income, employment, excise, or estate and gift tax liability; a penalty; or an addition to tax under the internal revenue laws.

87 Fed. Reg. 55949 (Sept. 13, 2022).

This definition is potentially problematic given the caselaw regarding Sec. 6103 discovery of the underlying taxpayer in Whistleblower cases in Court. In court filings in the Whistleblower 972-17W Tax Court case, the IRS argued that because Sec. 6103 related only to a case arising “out of, or in connection with, determining the taxpayer’s civil or criminal liability, or the collection of such civil liability, in respect of any tax imposed [by the Code]” and because the case related to the whistleblower and not the underlying taxpayer, it could not provide the underlying taxpayer’s documents. In Whistleblower 972-17W v. Comm’r, 159 T.C. 1 (2022), the Court found instead that Sec. 6103(h) provided no bar to provision of the underlying taxpayer’s information. The Court stated:

At issue here are returns and return information of taxpayers 1, 2, and 3, who are not parties to this case. Accordingly, section 6103(h)(4)(A) will apply only if this case “arose out of, or in connection with” determining the civil or criminal liabilities of taxpayers 1, 2, and 3 in respect of any tax imposed under the Code

Id. at 12-13.

If Congress had meant to limit the exception as the Commissioner suggests, it could have used more exacting language and given different textual and structural clues. The facts of this case fall well within the bounds of the exception Congress provided, and we must therefore decline the Commissioner’s invitation to impose stricter requirements.

Id. at 26.

Notably, Judge Toro’s reviewed opinion was joined by 15 other judges, one did not participate, and there were no concurring or dissenting opinions. Further, on the due date of the comments to these Proposed Regulations, the D.C. Cir. is hearing oral arguments in Michael Lissack v. Commissioner of Internal Revenue Service, Dkt. No. 21-1268, and this issue is also implicated in that case. If the Tax Court can see that this hurdle is both surmountable and minimal, Appeals can easily review the denial of a whistleblower award.

       5.  Designated cases or issues

Designation of cases for litigation is supposed to be rare. [15] It is not. Often, the designation is by category and not by the specific facts of the case. The Proposed Regulations provide a catch-all as relates to access to Appeals:

Also, Chief Counsel will withhold from Appeals a Tax Court case or one or more issues in a Tax Court case if Chief Counsel determines referral is not in the interest of sound tax administration. For example, Chief Counsel may decide not to refer a Tax Court case to Appeals when the Tax Court case involves a significant issue common to other cases in litigation for which it is important that the IRS maintains a consistent position

While cases the IRS has designated for litigation do currently have access to Appeals, none appear to have settled except for those with full taxpayer concession outside of the Appeals process. [16] This author is unaware of any case designated for litigation which has settled at Appeals. Whether such a result is because Chief Counsel’s position requires that it offer no settlement terms or because Appeals simply accepts Chief Counsel’s directive that there are no hazards of litigation, the result is the same: Appeals offers no settlement terms to taxpayers. The IRS currently understands that the TFA requires that all taxpayers generally have access to Appeals, even if in name only.  The Proposed Regulations would completely remove access to Appeals for cases designated for litigation.

In many cases designated for litigation, the IRS is not arguing in Tax Court that there was fraud. Instead, the IRS is merely arguing that the amount (of income, basis, deduction, etc.) claimed by the taxpayer is incorrect. Accordingly, trials and opinions are about value and any related penalties. This evaluation by the Tax Court is exactly the type of evaluation that takes place at Appeals for every other type of case. The issue, then, is not Appeals’ competence; it is about control.  While the IRS may be designating issues for litigation in order to find more clarity in the law, it is preventing “sound tax administration” by refusing to even try to get to the right amount of tax or a deduction in thousands of cases while simultaneously denying access to Appeals who could also get to the right amount of tax or a deduction.

This approach would be practical if the IRS actually selected test cases and sent the remaining cases to Appeals for consideration, but that is not what it is doing.  Hanging its hat on consistency, the IRS offers “settlement” only if taxpayers concede all issues, including all penalties. As a result, and by selecting for examination every case it can shoehorn into the designated-for-litigation list, the IRS has created a backlog in the Examination Division and the Tax Court. Then, by refusing any settlement at any stage and preventing access to Appeals, no taxpayer receives any consideration of its particular facts and circumstances until it pays for trial in the Tax Court, and potentially the Court of Appeals (and then potentially in the Tax Court again) many years after the IRS initiates any examination. The Proposed Regulations indicate that the IRS wants this expensive and lengthy process to be the rule going forward for any issue Chief Counsel seeks to add to its ever-increasing list of expansive exceptions to the Appeals process.

Of course, settlements at Appeals are not binding on any other taxpayer or on Chief Counsel’s litigation position. There is no whipsaw at issue if Appeals settles any of the cases or issues outlined in the 24 exceptions. One wonders why Chief Counsel is concerned by Appeals’ settlements at all.  Should the IRS decide to offer settlements in the future, it would provide them on a consistent basis based on the applicable facts and circumstances of the case. Doing so has nothing to do with Appeals’ function. Until the IRS decides to offer settlement terms other than full concession by the taxpayer, Appeals should continue to be “generally available to all taxpayers” as outlined in Section 7803(e)(4).

     6.  Any defense based on a challenge to IRS regulations or other levels of published guidance

The Proposed Regulations exclude issues and cases involving challenges to various levels of IRS published guidance from Appeals consideration.  Once again, these exceptions are not narrowly tailored—they literally encompass any challenge to almost any level of published guidance, [17] which only expands the vast list of cases ineligible for Appeals consideration.

The IRS is increasingly hostile to any taxpayer questioning public guidance, making Appeals access more important, not less. [18] Challenges to published guidance, however, do not always spring spontaneously from the taxpayer.  In many cases the challenge results from the IRS shifting its position and applying published guidance differently, even where there is no change to the language of the published guidance. The IRS would exclude all such cases and issues from Appeals consideration under the Proposed Regulations. 

Rather than risk liability after a transaction, some Taxpayers are seeking reassurance that their transaction falls within the guidance. But even that avenue has now been cut off. The IRS has now taken the position that requests for guidance will first be considered with the assumption that any reduction of Federal tax in the transaction may, in and of itself, make the request ineligible for guidance; the IRS therefore may not even consider the substantive request. [19]

Since Mayo, [20] most current cases challenging regulations and other published guidance are based on Administrative Procedures Act (“APA”) arguments.  In these cases, the IRS continues to take the position that various guidance is either not subject to the APA or that the IRS complied with the APA in issuing the guidance.  These are neither a small number of cases, nor are the issues frivolous.  On November 9, 2022, the Tax Court issued a reviewed opinion, Green Valley Investors, LLC v. Comm’r, 159 T.C. No. 5 (2022), striking down Notice 2017-10 for failure to follow the APA.  Even assuming Treasury and IRS internally reviewed the published guidance does not mean Appeals lacks the ability to review APA challenges to regulations and assign hazards of litigation.  Nonetheless, the Proposed Regulations provide:

In light of the extensive review and approval procedures at senior levels in both the Treasury Department and the IRS, we believe that it would be inappropriate for Appeals to consider arguments regarding the validity of Treasury regulations in the absence of an unreviewable Federal judicial decision holding the regulation invalid.

Furthermore, the idea that there must be an ‘unreviewable Federal judicial decision holding the regulation invalid’ ignores that the Proposed Regulations appear to require an opinion, in the taxpayer’s own circuit, on the specific portion of the published guidance challenged, and that such opinion be unreviewable. This is nonsense. Treasury and IRS have no basis to hold Appeals to a different, and higher, standard than that of the Department of Justice or the Solicitor General appearing on behalf of the IRS before the Courts of Appeals or the Supreme Court.