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IRS Alternative Dispute Resolution Strategies

Evaluating and Leveraging ADR Options in Tax Disputes

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, MARCH 24, 2011

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

David Blair Member Miller & Chevalier Washington D C David Blair, Member, Miller & Chevalier, Washington, D.C. Todd Welty, Partner, SNR Denton, Dallas Elizabeth Erickson, Partner, McDermott Will & Emery, Washington, D.C. David Click, Tax Director, McGladrey, Denver

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IRS Alt ti Di t R l ti IRS Alternative Dispute Resolution Strategies Seminar

March 24, 2011 David Blair, Miller & Chevalier dblair@milchev.com David Click, McGladrey david.click@mcgladrey.com Todd Welty, SNR Denton todd.welty@snrdenton.com Elizabeth Erickson, McDermott Will & Emery eerickson@mwe.com

Today’s Program

Background On IRS And ADR Offerings

[David Click]

Slide 7 – Slide 17 Pre-Filing ADR Options

[David Blair]

Slide 18 – Slide 38 ADR Options Before The Audit Closes

[Elizabet h Erickson]

Slide 39 – Slide 59 ADR Options After The Audit Is Finished

[Todd Welt y]

Slide 60 – Slide 82

BACKGROUND ON IRS AND

David Click, McGladrey

BACKGROUND ON IRS AND ADR OFFERINGS

Evolution Of Alternative Dispute Resolution In Tax

IRS Appeals: Traditional dispute resolution P t 30 d l tt Pre-assessment cases: 30-day letter process Appeals has jurisdiction over cases for which the IRS has not made an assessment of tax. Typical cases include: yp

• Income tax, estate, gift and excise tax before or after a

notice of deficiency

• Employment tax liabilities
• Additions to tax (penalties)

8

Evolution Of Alternative Dispute Resolution In Tax (Cont.)

Limited jurisdiction in docketed cases Appeals has limited jurisdiction in cases that are docketed before the Tax Court. Generally, Appeals will not consider a case if Appeals issued the stat notice. The case is considered by Appeals but is in counsel’s jurisdiction subject to being put on a trial calendar by the Tax Court. Counsel may start trial preparation but allow Appeals to continue negotiating. Pre-trial order of the Tax Court: 60 days – meet to resolve case 30 days – Joint case status report 20 days – Trial memos due to Tax Court y Other dispute resolution approaches Private letter rulings D t i ti l tt Determination letters Technical advice memorandum

9

Genesis Of Alternative Dispute Resolution With The IRS Resolution With The IRS

Administrative Issues in the 1980s ― Implementation of IRS large case program TEFRA t hi d 1982 ― TEFRA partnership procedures – 1982 ― Tax Court dockets – Tax shelters 1988: Office of Management and Budget recommends arbitration 1988: Office of Management and Budget recommends arbitration process for Tax Court cases. 1990: Administrative dispute resolution encouraged all federal agencies to use alternative dispute techniques to resolve disputes. 1991: Tax Court Rule 124 on use of arbitration in docketed cases 1991: Tax Court Rule 124 on use of arbitration in docketed cases, supervised by Tax Court

10

IRS: First Steps In Alternative i l i Dispute Resolution

Delegation Order 236 (1991): Delegates authority to Exam Delegation Order 236 (1991): Delegates authority to Exam managers to settle issues consistent with an Appeals settlement Advanced pricing agreements and Rev. Proc. 91-22: Allow taxpayers and IRS to agree on transfer pricing methodology and a range of transfer pricing results Competent authority and Appeals: Rev Proc 91-23 and Rev Proc Competent authority and Appeals: Rev. Proc. 91-23 and Rev. Proc. 2002 -52 Accelerated issue resolution and Rev. Proc. 94-67: Allow accelerated resolution of an issue affecting more than one tax year

11

Expanded Appeals Settlements

Early referral to appeals and Rev. Proc. 99-28: Allow issues at Exam level to be elevated to Appeals for resolution Mediation and arbitration: Pilot program in IRS Announcement 2000-4; made permanent in Rev. Proc. ; p 2002-44 (mediation) and Rev. Proc. 2006-44 (arbitration)

12

IRS Restructuring And Reform Act Of 1998 g

Substantially expanded Appeals jurisdiction over matters handled by the IRS

• Administrative due process review of a jeopardy assessment

d st at ve due p ocess ev ew o a jeopa dy assess e t

• Requests for administrative costs
• Due process review in collection cases
• Administrative review in the rejection of an offer in

compromise

• Appeals of denial of interest abatement under Sect. 6404(e)

pp ( )

• Alternative dispute resolution

13

Reorganization Of IRS Business Units

Large and medium sized business division: Becomes operational June 2000

• Pre-filing agreements: Notice 2000-12 – made permanent in Rev.
• Proc. 2005-15
• Comprehensive case resolution: Notice 2000-43
• Industry issue resolution: Notice 2000-65
• Continuous audit program: 2005

Continuous audit program: 2005 LMSB appeals: Operational in August 2000

• Fast-track dispute resolution: Notice 2001-67. Program was

expended and made permanent in Rev. Proc. 2003-40.

14

Industry Issue Focus (IIF) And Tiered Issues

2007: IRS unveils its industry issue focus (IIF) approach to examination issues. The stated goals of the approach are:

• Consistency of resolution across industry lines

Co s ste cy o esolut o ac oss dust y l es

• Improved currency
• Increased coverage of non-compliant taxpayers by

maximizing limited resources

• Greater oversight on and accountability for important

issues D l i b E d A l Develops issue management teams between Exam and Appeals

15

Is Appeals Independent?

Tiered issues are managed by a team and require sign-off before the issue is resolved at Exam or Appeals. Both Exam and Appeals are involved in issue management teams and develop settlement guidelines. IRS industry specialists

• ften advise both Exam and Appeals
• ften advise both Exam and Appeals.

Treasury Inspector General for Tax Administration report in 2005 raises independence concerns.

16

A ADR S P A d C An ADR Strategy: Pros And Cons

Benefits of ADR Benefits of ADR

• Resolution of uncertain tax positions (UTPs)
• Cooperative use of resources
• Improved relationship with IRS
• Manage tax risk

Risks of using ADR

• Some issues may not be capable of resolution through

ADR. ADR.

• Participation of both Exam and Appeals
• Waiver of ex part e rules

p

• Resource allocation for piecemeal ADR process

17

PRE FILING ADR OPTIONS

David Blair, Miller & Chevalier

PRE‐FILING ADR OPTIONS

Pre-Filing ADR Options

• IRS programs provide the opportunity to resolve issues prior to filing

return. Pre filing agreements/CAP

• Pre-filing agreements/CAP
• Advance pricing agreements

19

Pre-Filing ADR Options (Cont.)

• Benefits of resolving issues at pre-filing stage
• Eliminate tax uncertainty
• Avoid FIN 48 and Schedule UTP disclosures
• Avoid “hot interest” under Code § 6621(c)
• Resolution is non-public

p

• Reduce costs relative to appeals, litigation

20

Pre-Filing Agreements: History

• PFAs provide a means for taxpayers and the IRS to resolve the tax

treatment of a transaction or event that has already occurred, but for y , which the return is neither due nor filed.

• LB&I (then LMSB) introduced pilot PFA program in 2000; see Notice

2000-12.

• PFA program was formally introduced in 2001; see Rev. Proc. 2001-

22.

• Modifications to PFA program in 2005 allow PFAs to resolve issues
• Modifications to PFA program in 2005 allow PFAs to resolve issues

for up to four years beyond current year; see Rev. Proc. 2005-12.

• PFA program was renewed in 2007 and became permanent in

2009; see Rev Procs 2005-12 2009-14 2009; see Rev. Procs. 2005-12, 2009-14.

• In 2009, IRS received 28 PFA applications, accepted 21 and

reached closing agreements in 15.

21

Pre-Filing Agreements: Overview

• Essentially a pre-return examination of a factual issue to secure closing

Essentially, a pre return examination of a factual issue to secure closing agreement (or functional equivalent)

• Eligible taxpayers: LB&I taxpayers
• Eligible taxpayers: LB&I taxpayers
• Eligible years: Current year, prior years for which return is not due or

filed, plus up to four years beyond current year

• Fee = $50,000

ee $50,000

22

Pre-Filing Agreements: Eligible Issues

• Factual issues appropriate for resolution by exam
• Issue should involve determination of facts or application of well-

Issue should involve determination of facts or application of well established law to known facts

 PFA also may validate taxpayer’s methodology for determining

amount of an item of income allowance deduction or credit amount of an item of income, allowance, deduction or credit.

 Generally may not be used to change method of accounting,

accounting period

• E

l d d i li t E t f i i ti th d / i d

• Excluded issues list: E.g., transfer pricing, accounting methods/periods,

penalties, issues in controversy for other years

• Exam has discretion to refuse to accept application, and must

di t ith l t i t hi f l (ACC) i t coordinate with relevant associate chief counsel (ACC) prior to accepting issue into program/

• IRS prefers legal issues to go through PLR or TAM processes.

23

Pre-Filing Agreements: Eligible Issues (Cont.)

• International Issues may be eligible

International Issues may be eligible

• Potential international issues list: QBU status, U.S. trade or

business, ECI gross income and deductions, P/E International issues require concurrence of deputy commissioner

• International issues require concurrence of deputy commissioner

(international) of LB&I and the ACC (international) on: (i) acceptance into program, and (ii) execution of the PFA. N t PFA t fil bj t t t t i f ti

• Note: PFA agreements, files are subject to treaty information

exchanges

• IRS encourages taxpayers seeking PFAs to coordinate with

t t th it competent authority.

24

Pre-Filing Agreements: Procedures

• Taxpayer files request for PFA; see Rev. Proc. 2009-14, §4 for required

information, statements and waivers. ,

• Early submission of PFA request helps; IRS seeks to complete PFA

prior to return-filing deadline.

• If accepted taxpayer and exam will develop plan for examining issue

If accepted, taxpayer and exam will develop plan for examining issue and completing PFA prior to return filing deadline.

• PFA examination is collaborative. Throughout PFA process, taxpayer

must: must:

• Provide information and assist exam in a timely manner
• Notify exam of any changes in facts, assumptions, etc.
• Exam continues to coordinate with relevant Associate Chief Counsel

Office.

25

Pre-Filing Agreements: Procedures (Cont.)

• Following factual development Exam and taxpayer meet to discuss

Following factual development, Exam and taxpayer meet to discuss terms of PFA.

• Either side can withdraw prior to signing PFA.
• Taxpayer and exam work together on drafting PFA
• Taxpayer and exam work together on drafting PFA.
• Exam may consult with chief counsel, etc.
• For international Issues only, ACC (international) must give final

approval before IRS signs PFA.

• Non-international Issues are reported to relevant ACC Office.

26

Pre-Filing Agreements: Review And Comments

• Resolve disputes before return is filed

Resolve disputes before return is filed

• Factual issues and well-established law
• Joint planning for factual development
• Success results in closing agreement
• Allows certainty earlier than otherwise attainable
• Entering the PFA process tees up the issue for the IRS.

g p p

• Some taxpayers like this because they want the control.
• Target may be there after Form UTP is filed.

27

Advance Pricing Agreements:

Overview And History

• In an APA, a taxpayer and the IRS agree on the appropriate transfer

pricing method (TPM) to be applied to one or more related-party p g ( ) pp p y transactions (the “covered transactions”) before filing their returns. APAs may be unilateral (i.e., TP-IRS) or bilateral (i.e., TP-IRS-foreign government).

• The APA program also provides a process whereby the IRS and

taxpayers may resolve other issues for which transfer pricing principles may be relevant (e.g., ECI, P/E income).

• The APA program is part of IRS Chief Counsel. The APA director has

immediate supervisory authority over the program; the APA director reports to the associate chief counsel (international), who in turn reports to the chief counsel of the IRS.

28

Advance Pricing Agreements: Overview And History (Cont.)

• The IRS began the APA program in 1991; see Rev. Proc. 1991-22.
• Current APA guidance is Rev. Proc. 2006-9, as modified by Rev. Proc.

2008-31; user Fee = $50,000 ($22,500 for small business).

• In 2009, the APA program received 127 applications (39 unilateral, 88

bilateral), and completed 63 APAs (21 unilateral and 42 bilateral).

• Many countries have followed the United States’ lead and created APA

programs of their own; see, e.g., OECD TP guidelines.

29

Advance Pricing Agreements: Overview

• An APA covers a specified term, typically five years or longer. In theory,

the APA is prospective in nature, so that neither side can use hindsight. p p , g In practice, typically two or three years pass before an APA is finalized.

• APAs may be renewed for future terms.
• The taxpayer may request application of the TPM to tax years prior to

The taxpayer may request application of the TPM to tax years prior to those covered by the APA (“rollback”), thereby making the APA program a viable forum for resolving disputes in the examination process. p

• The IRS favors bilateral APAs; a taxpayer requesting a unilateral APA

involving transactions with a related party in a treaty jurisdiction must provide an explanation for why the request is not bilateral. p o de a e p a at o

• y t e equest s
• t b ate a

30

Advance Pricing Agreements: Procedure

• Rev Proc 2006-9 as modified by Rev Proc 2008-31
• Rev. Proc. 2006 9, as modified by Rev. Proc. 2008 31
• Pre-filing conference

 Can be anonymous  Pre-conference submission outlines issues to discuss  IRS and taxpayer discuss suitability of case for APA, proposed

covered transactions, potential TP methods, contents of APA request, potential for competent authority agreement, and timeline.

31

Advance Pricing Agreements: Procedure (Cont.)

• Contents of APA request: An APA submission may fill several volumes
• r more.
• An APA request includes detailed descriptions of the proposed covered

transactions, the members of taxpayer’s affiliated group, their functions and risks, the proposed terms for the APA, critical assumptions, etc. see Rev. Proc. 2006-9, § 4 for detailed requirements.

• The APA request must propose a TP method and provide data to show

that it is an appropriate application of the “best method rule.” It should provide information for the IRS to evaluate the proposed TP method, including in particular:

• Sect. 6662(e) documentation with respect to the covered

transactions

• Past and projected financial results for the business line under

consideration

32

Advance Pricing Agreements: Procedure (Cont.)

• In the APA request, or any time before execution of APA, TP may request a

q , y , y q rollback of agreed TP method.

• A rollback request brings the taxpayer’s exam team into the process, but

the substantive decision-making authority rests with the APA program.

• A rollback request can be an effective means of removing issues from an

unreasonable exam team.

• When the IRS receives an APA request, the APA director assigns a team

l d t it Th t l d i t i ll hi f l tt ith leader to oversee it. The team leader is typically a chief counsel attorney with significant expertise in international tax and transfer pricing.

• The APA team typically includes an IRS economist, international examiner,

attorney from the taxpayer’s Chief Counsel Office (e g LB&I counsel) A attorney from the taxpayer s Chief Counsel Office (e.g., LB&I counsel). A competent authority analyst is assigned to bilateral or multi-lateral APA requests.

33

Advance Pricing Agreements: Procedure (Cont.)

• The IRS APA team evaluates the APA request by analyzing all relevant

data and information submitted and discussing it with the taxpayer. g p y

• Initial meeting between taxpayer and APA team
• Usually held within 45 days

High level discussion of proposed APA taxpayer’s business

• High-level discussion of proposed APA, taxpayer’s business,

proposed covered transactions and proposed TP method

• Agreement to timeline for completing APA, or “case plan” – Critical
• Follow-up requests: In all but the simplest cases, APA team will have

additional questions as it evaluates the APA request; the APA team will

• ften issue written information requests.
• It is critical that the taxpayer timely respond to information requests,

so that APA team cannot blame TP for departures from case plan.

34

Advance Pricing Agreements: Procedure (Cont.)

• For bilateral APAs, the APA team develops a “recommended

negotiating position” (RNP) for the U.S. competent authority. The APA team should give the taxpayer an opportunity to comment

• The APA team should give the taxpayer an opportunity to comment
• n the draft RNP, before submitting it to competent authority. After

all, why negotiate an APA that the taxpayer will not accept?

35

Advance Pricing Agreements: Procedure (Cont.)

• Competent authority process
• The U.S. competent authority may change RNP as he or she deems

p y y g necessary, before meeting with the foreign counterpart.

• The competent authorities may exchange position papers in advance of

meeting.

• They then conduct one or more face-to-face negotiating sessions, either in

Washington or the foreign country.

• Finally, the competent authorities agree on terms for the APA (MAP

t) agreement).

• Competent authorities present proposed MAP terms to the taxpayer.
• If taxpayer agrees, competent authorities finalize MAP agreement.
• Competent authority negotiations do not include the taxpayer. It is therefore

critical to foster open communication with the competent authorities of both countries, to ensure proper presentation/reception of TP’s position.

36

Advance Pricing Agreements: Procedure (Cont.)

• U S competent authority then informs APA office of MAP agreement

U.S. competent authority then informs APA office of MAP agreement terms, and APA office drafts the actual APA for the taxpayer.

• In the U.S., this is the actual “advance pricing agreement” in which

the U S taxpayer agrees to file returns reporting income from the the U.S. taxpayer agrees to file returns reporting income from the covered transactions in accordance with the agreed TPM, and the IRS agrees to forgo making adjustments to with respect to the covered transactions under Code §482. The director of the APA § program signs the agreement on behalf of the IRS.

• The foreign taxing authority typically sign a similar “implementation

agreement” with the taxpayer. ag ee e t t t e ta paye

37

Advance Pricing Agreements: Review And Comments

• The APA process offers taxpayers tax certainty for a period of years

and avoids potentially expensive, drawn-out transfer pricing p y p , p g controversies.

• Getting an APA is itself expensive.
• The APA process requires patience; on average APA requests take

The APA process requires patience; on average, APA requests take three to four years to complete.

• The APA process requires diligence in keeping the process moving

forward forward.

• The APA program is voluntary, and the taxpayer may withdraw.

However, the taxpayer will have highlighted to IRS the transfer pricing issue and disclosed sensitive information and data that could make a issue and disclosed sensitive information and data that could make a later audit more difficult.

38

ADR OPTIONS BEFORE THE

Elizabeth Erickson, McDermott Will & Emery

AUDIT CLOSES

IRS ADR I i i i P A d C IRS ADR Initiatives: Pros And Cons

• Fast-track settlement (at exam)
• Fast track settlement (at exam)
• Early referral to appeals (at appeals)

40

F T k S l Fast‐Track Settlement

• Rev. Proc. 2003-40
• “Appeals at exam” settlement program (still at exam)
• Working with both Exam and Appeals, taxpayers can use the

settlement authority and mediation skills of Appeals to shorten th i ll i ith th IRS their overall experience with the IRS.

41

F T k S l (C ) Fast‐Track Settlement (Cont.)

• How does this work?
• Allows the taxpayer and Exam to resolve issues with an Appeals
• fficer acting as a neutral party
• fficer acting as a neutral party

― Exam stays involved. ― Referred to as a “mediation opportunity” ― Provides taxpayers with resolution of an issue earlier than the traditional Appeals process ― Provides Exam an avenue to resolve audit issues utilizing Provides Exam an avenue to resolve audit issues utilizing Appeals settlement authority (based on the hazards of litigation)

42

F T k S l (C ) Fast‐Track Settlement (Cont.)

• How fast? How successful?
• Specifically, fast-track:

Is a way to resolve audit issues during the examination ― Is a way to resolve audit issues during the examination process in fewer than 120 days (average time is actually less) ― Reduces the combined Exam-Appeals process time by two years (!!) ― Highly successful; resolution rate quoted at 85% Highly successful; resolution rate quoted at 85%

43

F T k S l A il bili Fast‐Track Settlement: Availability

• Available for most factual and legal issues
• Available for listed transactions coordinated issues
• Available for listed transactions, coordinated issues
• Available for issues requiring hazards of litigation settlement
• Not available for issues that are designated for litigation or

under consideration for designation for litigation under consideration for designation for litigation

44

F T k S l P d Fast‐Track Settlement: Procedures

• Either party can initiate an idea, but both parties must agree.
• Fast-track should be initiated after the issuance of a NOPA and

the taxpayer’s response, but before the 30-day letter. O li ti NOPA t NOPA f l

• One-page application, NOPA, response to NOPA, no formal

protest

• Issue will be accepted into fast-track only if fast-track program

managers (Appeals and Exam) believe the issue is sufficiently managers (Appeals and Exam) believe the issue is sufficiently developed to permit resolution within the framework of fast- track.

• If a decision is not accepted by fast-track program managers,

p y p g g , then there is no appeal process.

45

Fast‐Track Settlement: Procedures (Cont.)

If t d ti ill t j t d l ti d t

• If accepted, parties will agree to projected completion date

and preferred conference site.

• Appeals team case leader trained in mediation will mediate

and not act as a “traditional” Appeals officer. pp ― Will set agenda, establish ground rules, pose questions to clarify issues, guide meetings ― May propose settlement terms If t t t d E j t th t it ― If taxpayer accepts terms and Exam rejects, the territory manager must review the rejection.

• Decision-makers should be present.
• Taxpayer should make and prove arguments.

Taxpayer should make and prove arguments.

46

Fast‐Track Settlement: Recent Developments

• IRS recently announced that fast-track time will not count

against the estimated closing date deadline for an audit. aga st t e est ated clos g date deadl e o a aud t. ― May make agents more comfortable with the process and encourage IRS Exam team managers to agree to fast-track in situations when it would have caused them to miss a in situations when it would have caused them to miss a deadline. ― Irony is that some managers would not agree to fast-track before because they were worried about currency!

47

F T k S l P Fast‐Track Settlement: Pros

• Avoid “hot” interest
• No need for a formal protest (but you need to make your case)
• One page application
• One-page application
• Take issue “up the chain” and test your case
• Hear an articulation of the IRS position
• More than one bite at the apple: Retain all traditional appeal

More than one bite at the apple: Retain all traditional appeal rights for unresolved issues

• Most cases settled
• A resolution can be reduced to closing agreement or included

d i i RAR as an agreed issue in RAR.

48

k l d Fast‐Track Settlement: Pros And Cons

• More than a hundred closed cases every year
• Cons? None, really

― Need to be prepared to present your case! Need to be prepared to present your case! ― Subject to same “coordination” rules; probably can’t get a better deal at fast-track than you could get at Appeals ―

Ex part e rules do not apply, and the Appeals team case

leader can talk to Exam. ― Either side can withdraw at any time. y

49

E l R f l T A l Early Referral To Appeals

• Rev. Proc. 99-28
• “Appeals at Exam” settlement program (at appeals)
• Allows taxpayer to request early referral to Appeals of a fully
• Allows taxpayer to request early referral to Appeals of a fully

developed issue, while Exam continues to develop other issues.

• In other words, one issue goes to Appeals before the audit is

l t complete.

• Idea: The early resolution of a key issue may encourage

taxpayers and Exam to agree on the other issues.

50

Early Referral To Appeals: Restrictions

• Purpose is to expedite resolution of entire case

― “Appealed” issue must be fully developed. ― The state of the audit must be such that Appeals would be The state of the audit must be such that Appeals would be expected to resolve the referred issue before Exam completes the taxpayer’s audit. B th i ht t b ibl d th f l f l ― Both might not be possible, and therefore early referral will not be an option.

• Cannot be used for issue that is designated for litigation
• Special procedures for: IRS initiated change in MOA,

employment tax, collection, employee plan/exempt

• rganizations

51

• rganizations

Early Referral To Appeals: Procedures

Th t t t l f l i iti t th

• The taxpayer must request an early referral in writing to the

case manager.

• Request should include:

― Taxpayer, related persons (if applicable), tax periods ― Each issue for which early referral is requested ― A description of the taxpayer’s position, including a brief A description of the taxpayer s position, including a brief discussion of the material facts and an analysis of the facts/law P j t t t ― Perjury statement

• Case manager should notify taxpayer of acceptance/rejection

within 14 days.

52

Early Referral To Appeals: Procedures (Cont.)

• The IRS has the discretion to accept or reject the taxpayer’s

early referral request. ― If the taxpayer’s request is denied, there are no formal appeal procedures appeal procedures. ― But, the taxpayer can request a conference with the case manager’s supervisor who denied the request. ― If denied the taxpayer retains the right to pursue a normal If denied, the taxpayer retains the right to pursue a normal administrative appeal for that issue and all other un-agreed issues at the conclusion of the audit.

• If the taxpayer’s request is accepted, Exam will issue a NOPA

p y q p , (usually within 30 days).

• The taxpayer then has 30 days to file a statement similar to a

formal protest with respect to the early referral issue.

53

Early Referral To Appeals: Procedures (Cont.)

• For “appealed” issue, normal Appeals rules apply

― No ex part e communications ― Written brief (“protest”) required Written brief ( protest ) required ― Taxpayers can request an extension of time beyond the 30 days to file the protest.

• Follow normal “protest” rules and judgment
• This IS your appeal of this issue.

54

l f l l “ ” Early Referral To Appeals: “Protest”

• Protest should:

― Present complete factual and legal analysis establishing correctness of taxpayer’s position for each adjustment Add th i i th di t ― Address the core issue causing the disagreement ― Challenge the revenue agent’s conclusions and authorities

• Be persuasive (but respectful!)
• Common errors

― Personal, aggressive attacks on Exam personnel (attack the position, not the person) St t t f f t t d l d t t t ’ ― Statement of facts not developed to support taxpayer’s position ― No legal authority cited Does not stand alone

55

― Does not stand alone ― Is disorganized

Early Referral To Appeals: Procedures

• If an agreement is reached, a closing agreement is prepared.
• If an agreement is not reached:

― Appeals will not reconsider an un-agreed early referral Appeals will not reconsider an un agreed early referral issue if the entire case is later protested to Appeals, unless there has been a substantial change in the circumstances regarding the early referral issue (different from fast regarding the early referral issue (different from fast- track). [Con!] ― If the early referral issue is the only un-agreed issue remaining, no 30-day letter will be issued; rather, a 90-day letter will be issued.

• Taxpayer withdrawal from early referral is treated as not

56

p y y reaching an agreement.

E l R f l T A l P Early Referral To Appeals: Pros

• May be able to settle tough issue before 30-day letter and

“hot” interest rules kick in S ttli t h i i ht “ki k t t” dit

• Settling tough issue might “kick-start” audit
• Allows settlement negotiations without Exam sitting at the

table (different from fast track) table (different from fast-track)

• If audit concludes while early referral issue still under appeals

discussion case converts to normal Appeals case discussion, case converts to normal Appeals case.

57

O h Id A d I i i i Other Ideas And Initiatives

• Quality examination process: Set your stage
• Limited-issue, focused examination
• Delegation Order 4-25 (at exam)
• Delegation Order 4 25 (at exam)

― Authorizes Exam to use appeals settlement authority for coordinated issues ― Based on specific issues analysis and perimeters

• Willingness of taxpayers to give formal presentations to Exam
• n issues and transactions
• Possibility of getting a TAM

58

59

ADR OPTIONS AFTER THE

Todd Welty, SNR Denton

AUDIT IS FINISHED

Outline For This Section

• Recent emphasis on ADR in tax cases
• Recent emphasis on ADR in tax cases
• Benefits and challenges of ADR
• Pre-docketing and post-docketing appeals
• Post-appeals mediation
• Binding arbitration

61

Recent Emphasis On ADR In Tax Cases

• Dec 20 2010: Tax Court proposed changes to its rules in order
• Dec. 20, 2010: Tax Court proposed changes to its rules in order

to emphasize ADR – Proposed Rule 124 C t l l id f l t bi di bit ti

• Current rule only provides for voluntary binding arbitration.
• Revised rule provides for voluntary binding arbitration, non-

binding mediation and “other methods of dispute resolution.”

• IRS test programs for mediation and arbitration in certain cases

– E.g., IRS announced extension of test program in offer and E.g., IRS announced extension of test program in offer and compromise and trust fund recovery cases in Appeals, through

• Dec. 31, 2012 (in certain locations).

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Challenges Of ADR

• Certain ADR procedures may be more useful at different stages

in the proceedings and throughout litigation.

• Cases involving multiple issues and multiple years can present

difficulties in obtaining an agreed-upon resolution.

• Choosing the appropriate ADR methods for the case is crucial;

each case is unique.

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Post-Audit Appeals

• Out of every exam, the taxpayer has the right to go to Appeals, if

sufficient time on the statute of limitations remains. T ill i th t’ t d 30 d – Taxpayer will receive the revenue agent’s report and 30-day notice to file an appeal upon close of the audit (60 days in TEFRA partnerships). T h th ti t l – Taxpayer has the option to appeal. – If taxpayer does not appeal, then the appropriate statutory notice (FPAA in TEFRA partnerships) is issued. – The taxpayer can then decide to either pay the tax and seek a refund, or file a petition in Tax Court.

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Post-Audit Appeals (Cont.)

• Mission of Appeals

“T l t t i ith t liti ti b i – “To resolve tax controversies, without litigation, on a basis which 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 compliance and public confidence in the integrity and efficiency

• f the Service.” IRS.gov
• In most cases docketed or non docketed the taxpayer should
• In most cases, docketed or non-docketed, the taxpayer should

utilize Appeals – Appeals provides an opportunity to reach a settlement on the tax liability settle certain issues and if nothing else gather tax liability, settle certain issues, and if nothing else, gather information from the IRS.

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Pre-Docketing Appeals

• Benefits of pre-docketed appeals
• Benefits of pre-docketed appeals

–Taxpayer can wait to choose the appropriate court, i.e., whether to pay and seek a refund or to petition the Tax Court. T h t it t th b f it i –Taxpayer has an opportunity to prepare the case before it is filed. –Taxpayer can obtain information about the IRS position that he did t bt i f th t (t i titl d t did not obtain from the revenue agent (taxpayer is entitled to information under Freedom of Information Act). –Provides an opportunity to tell the taxpayer’s story –Appeals submissions can be binding.

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Pre-Docketing Appeals (Cont.)

• Extending the statute of limitations
• Extending the statute of limitations

– Appeals agents often seek an extension of the statute in order to continue settlement negotiations and hold the case in Appeals before issuing the statutory notices Appeals before issuing the statutory notices. – Extension may be appropriate in certain cases. – Taxpayer can negotiate an agreed-upon extension or, in th t i li it d t t i i theory, an extension limited to certain issues. – The downside is there is little pressure on Appeals; docketed cases often receive priority.

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Post-Docketing Appeals

• Docketed cases that have not previously been considered by

Appeals are automatically referred to Appeals. pp y pp – Unless area counsel, chief counsel and Appeals believe the case should not be considered by Appeals - Rev. Proc. 87-24; I.R.M. 8.4.1.1

• If the parties are able to reach an agreed-upon settlement in

Appeals the settlement is effected by a stipulation and is ordered Appeals, the settlement is effected by a stipulation and is ordered by the court. – Neither party can appeal the order. Case can be partially settled; Appeals and counsel will prepare – Case can be partially settled; Appeals and counsel will prepare agreed issues for filing in court.

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Cases Involving Tier I Or Tier II Issues

• LB&I adopted the issue-tiering system in 2006 to ensure uniform

treatment of high-risk compliance issues. – A list of tiers I, II and III issues can be found at http://www.irs.gov/businesses/corporations/article/0,,id=2005 67,00.html.

• Tier I issues are of “high strategic importance” and have a

significant impact on one or more industries, e.g.: – All abusive and listed transactions, – Foreign tax credit-generators, and – Research credit claims. Ti II i i l l b f t i ifi t

• Tier II issues involve a large number of taxpayers, a significant

dollar amount and emerging issues; or pose a substantial compliance risk or high visibility.

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Tier I And Tier II Issues At Appeals

• In Tier I cases Appeals has no authority to settle the case or a
• In Tier I cases, Appeals has no authority to settle the case or a

particular issue in any manner other than pursuant to the proscribed guidance. – One-size-fits-all approach – One-size-fits-all approach – Little discretion; strict compliance with guidelines

• In Tier II cases, Appeals apparently has more discretion than Tier

I, but still limited

• Appeals will designate a technical guidance coordinator to

represent Appeals with respect to a tiered issue.

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Technical Guidance Coordinator

• Technical guidance coordinator

– Evaluates the hazards of litigation and helps reach settlement – Evaluates the hazards of litigation and helps reach settlement – Must approve any settlement agreement – Ensures that settlement offers nationwide are comparable – Works under standardized settlement guidelines and IRS settlement position, which can create inflexible and untailored

• ffers

– Works under an undisclosed cap on concession

• Cases where issues can be severed may be easier to settle.

Cases where issues can be severed may be easier to settle.

• Related issues can be challenging.

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Cases Involving UTP Issues

• In late 2010, the IRS significantly broadened taxpayer reporting

requirements by issuing Schedule UTP to require certain q y g q corporations to report uncertain tax positions.

• There is no provision for ADR for UTP issues
• There is no provision for ADR for UTP issues.

– Several comments received requested the IRS reserve programs like CAP and ADR forums for taxpayers that comply in good faith with Schedule UTP requirements in good faith with Schedule UTP requirements.

• It is possible ADR will be entirely unavailable in UTP cases.

– ADR is unavailable in voluntary disclosure cases. – Officers have no discretion to concede in voluntary disclosure cases.

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Settling A Case At Appeals

• Understand the IRS position related to the issues
• Know your facts (and the implications)
• Know your facts (and the implications)
• Prepare adequate documentation to support facts
• Run the numbers; know your bottom line
• Provide all relevant law necessary for the appeals officer to make

a favorable determination

• A face-to-face conference is preferred

– Decide attendees – Client should be accessible (via phone)

• Discuss the strengths and weaknesses of case
• Discuss the strengths and weaknesses of case
• Prepare closing agreement quickly thereafter

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Settling Tier I Or Tier II Case At Appeals

• Additionally if the case involves a Tier I or Tier II issue:
• Additionally, if the case involves a Tier I or Tier II issue:

– Understand the IRS position related to the tiered issue

• Settlement guidelines may be less established for newer

i ti fl ibilit issues, creating more flexibility. – Review recent settlements in similar cases, to get a feel for possible concessions – Distinguish your facts – Avoid presenting new legal authorities, if possible – Highlight litigation hazards Highlight litigation hazards – Consider other issues, e.g., future years and Joint Committee review

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Post-Appeals Mediation

• Either the taxpayer or Appeals may request post-appeals

mediation on any unresolved issue: At th l f l – At the close of appeals, – When closing agreements are unsuccessful, or – When a compromise is unsuccessful.

• Rev. Proc. 2002-44

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Post-Appeals Mediation (Cont.)

• Non-binding
• Non-binding
• Mediator helps parties compromise to reach a settlement.
• Mediator

–Parties can agree on an appointment Parties can agree on an appointment –IRS can appoint a trained appeals officer –Taxpayer can elect to have a non-IRS mediator as co-mediator.

• IRS is advised not to mediate when it would delay discovery or

trial.

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Post-Appeals Mediation Availability

• Not available in every case
• Not available in every case
• Generally available in cases in which a limited number of legal

and factual issues remain unresolved following settlement discussions in Appeals discussions in Appeals.

• Only available for factual issues not covered by specific

procedures, including technical advisor and appeals technical guidance programs (tiered issues) guidance programs (tiered issues) – E.g., Appeals recently denied in case where taxpayer claimed a Sect. 6404(g) good faith exception for listed transactions.

• Only one shot: Unavailable if previously attempted
• Only one shot: Unavailable if previously attempted

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Post-Appeals Mediation Availability (Cont.)

• Available in Tax Court docketed cases:

– If parties can reach an agreement on all or some of issues

• Counsel will draft a stipulation of agreed, issues or the

decision document to be submitted to the court. – If parties cannot reach an agreement, they prepare for trial. – NOTE: Although the proposed Rule 124 providing for mediation is not yet adopted, the Tax Court has long allowed for mediation in docketed cases.

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Post-Appeals Mediation Unavailable

• Unavailable in certain types of cases, including:

– Cases involving issues which have been designated for – Cases involving issues which have been designated for litigation – Collection issues I f hi h di ti ld t b i t t ith d – Issues for which mediation would not be consistent with sound tax administration – Where resolution with respect to one party would result in i i t t t t t i th b f ti i ti b inconsistent treatment in the absence of participation by another party – Cases where the taxpayer did not act in good faith during settlement agreements settlement agreements – Other issues identified by the IRS as excluded

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Outcome Of Post-Appeals Mediation

• If the parties can agree on all or some of the issues, Appeals will

generally use a specific closing agreement to close mediation.

• If the parties cannot reach an agreement:

– Request binding arbitration (if the issues meet the requirements), or – Pursue litigation of case.

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Binding Arbitration

• Parties agree to have a third party make a decision about factual
• Parties agree to have a third party make a decision about factual

issues. – Must be approved by Appeals P ti j i tl l t A bit t ith l ffi

• Parties jointly select an Arbitrator — either appeals officer or non-

IRS.

• Procedure and findings are confidential.
• Can be utilized by parties during appeals to settle a severable

issue

• Case is closed under normal Appeals procedures

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Drawbacks Of Binding Arbitration

• BINDING
• BINDING

– Non-preferred method of ADR – Taxpayers and their representatives are generally opposed to bi di d t i ti a binding determination.

• Unpredictable results
• Not available for all issues

Not for issues designated for litigation or concerning the – Not for issues designated for litigation or concerning the technical advisor program (tiered issues) Fi di t d t

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• Findings are not precedent