17 January 2025

Treasury finalizes regulations on review of federal tax controversies by IRS Appeals office

  • The final regulations largely adopt the proposed regulations after considering taxpayer comments.
  • The final regulations apply to all requests for consideration by the IRS Independent Office of Appeals that are received on or after February 14, 2025.
  • The final regulations clarify that determinations on IRC Section 9100 relief and changes of accounting method are excluded from Appeals consideration.
 

Treasury and the IRS have issued final regulations (TD 10030) on federal tax controversies that can be resolved by the IRS Independent Office of Appeals (Appeals) without litigation, as well as which controversies are specifically excluded. The final regulations adopt the proposed regulations with few modifications (see Tax Alert 2022-1395).

The final regulations apply to all requests for consideration by Appeals that are received on or after February 14, 2025.

Federal tax controversies

Under IRC Section 7803(e)(3), 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 final 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. As in the proposed regulations, the final regulations identify 24 types of controversies that are excluded from Appeals consideration (the exceptions).

Exclusions from consideration

The final regulations follow the proposed regulations in specifying that Appeals cannot 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 greatest number of comments covered Exceptions 18 through 20, which cover challenges to various authorities. The final regulations adopt one comment on Exception 18, which states that "Appeals consideration is not available for any issue based on a taxpayer's argument that a statute violates the [US] Constitution unless there is an unreviewable decision from a [f]ederal court holding that the cited statute is unconstitutional." The final regulations clarify that an "unreviewable decision" means a decision from any federal court regardless of where a taxpayer resides. For all three exceptions (Exception 19 for challenging the validity of Treasury regulations and Exception 20 for challenging the validity of a notice or revenue procedure published in the Internal Revenue Bulletin), Treasury and IRS disagreed with comments arguing those challenges should not be excluded, saying generally that it is inappropriate for Appeals to consider challenges to decisions made in the highest levels of the government without an unreviewable federal court decision. The proposed regulations had requested 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. The final regulations clarify that these two types of determinations are excluded under Exception 17 for Associate Office decisions.

Procedure

The final regulations also implement statutory language requiring the IRS to notify a taxpayer of the reasons for denying a request for referral to Appeals. The taxpayer must 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 must 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 final regulations make clarifying edits to these provisions.

Implications

The final regulations retain the broad definition of what constitutes a "federal tax controversy" and clarify which cases will be excluded from Appeals' consideration. The exceptions are generally long-standing in practice but are now brought together more formally by the regulations. Treasury and the IRS have confirmed that Appeals will not consider a statute's constitutionality and the validity of regulations and sub-regulatory guidance without the existence of an unreviewable federal court decision. This clarity should help taxpayers determine whether to appeal an IRS decision and the arguments a taxpayer might make in requesting an appeal.

The final regulations also outline 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 basis for denial will assist taxpayers in determining whether to protest the denial.

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Contact Information

For additional information concerning this Alert, please contact:

Tax Policy and Controversy

National Tax Department, International Tax and Transactions Services, Transfer Pricing

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor

Document ID: 2025-0269