September 16, 2022
Treasury proposes regulations on review of federal tax controversies by IRS Appeals office
Treasury and the IRS have proposed regulations (REG-125693-19) concerning IRS Independent Office of Appeals (Appeals) resolution of federal tax controversies without litigation. These regulations would implement provisions in the Taxpayer First Act of 2019 making access to Appeals generally available and entitling taxpayers to a written explanation when access is denied.
A public hearing is scheduled for November 29, 2022, with public comments due by November 11.
Appeals is the IRS's independent dispute resolution forum. Congress has taken steps to codify the administratively-created office in the IRS Restructuring and Reform Act of 1998 and the TFA, specifically at IRC Section 7803(e). Subsection (e)(3) specifies that the function of Appeals is to resolve federal tax controversies without litigation, while subsection (e)(4) says that the resolution process "shall be generally available to all taxpayers" (emphasis added).
The proposed regulations define "federal tax controversy" and also confirm that Appeals may continue to consider certain other administrative determinations that are not actual federal tax controversies, such as the tax exemption or foundation classification of particular organizations. The proposed regulations also identify 24 types of cases that are excluded from Appeals consideration and ask for comments on whether Appeals should be able to consider two additional types of cases — determinations on IRC Section 9100 relief and changes of accounting method.
Exclusions and request for comment
Under the proposed regulations, Appeals would not consider appeals of (1) frivolous positions, (2) whistleblower awards, (3) issues settled by a closing agreement, (4) cases where Appeals issued the statutory notice of deficiency, (5) cases designated for litigation and (6) cases withheld on the basis of sound tax administration, among others. The proposed regulations would also exclude from Appeals consideration challenges alleging a statute is unconstitutional, a Treasury regulation is invalid, and a notice or revenue procedure is invalid. Treasury has requested comment on several of the exclusions.
The proposed regulations also specifically ask for comment on whether Appeals ought to be able to consider two exclusions listed in the Internal Revenue Manual but not in the proposed regulations — IRC Section 9100 relief and changes of accounting method. In both circumstances, the IRM currently denies Appeals consideration for a decision issued by an Associate Office where the decision is reviewable by a court under an abuse-of-discretion standard.
Denial of requests for referral to Appeals following a statutory notice of deficiency
The proposed regulations would also implement statutory language requiring the IRS to notify a taxpayer of the reasons for denying a request for referral to Appeals. The taxpayer would have to meet certain requirements to trigger the IRS's obligation, including receiving a statutory notice of deficiency and not having previously requested Appeals consideration for the same matter or issue in a tax year or period. If the taxpayer fulfills those requirements, the IRS would have to provide the taxpayer a written notice with a detailed description of the facts involved, the basis for the decision to deny the request, a detailed explanation of how the basis for the decision applies to such facts, and the procedures for protesting the decision to deny the request.
The proposed regulations would formalize what constitutes a "federal tax controversy" and clarify which cases will be excluded from going to Appeals — notably challenges to statutes and the validity of regulations and sub-regulatory guidance. This clarity should help taxpayers determine whether to appeal an IRS decision and the arguments a taxpayer might make in requesting an appeal.
The proposed regulations also identify the requirements for both the taxpayer and the IRS when a request for Appeals' consideration is denied. This added transparency into the IRS's decision-making and information concerning the basis for denial will assist taxpayers in determining whether to protest the denial.