Note: This article was not updated to account for the Taxpayer First Act. The Taxpayer First Act basically reversed this court case.
Does the Taxpayer Bill of Rights create a legal right to have a tax dispute considered by the IRS Office of Appeals? The court recently addressed this question in Facebook, Inc. v. Internal Revenue Service, No. 17-cv-06490-LB (N.D. Calif. 2018), concluding that there is no legal right to have an administrative appeal for a tax dispute.
Facts & Procedural History
The facts and procedural history for the case is as follows: Facebook, like most large companies, is under continuous audit by the IRS. The IRS issued a 90-day letter to Facebook for the 2008-2010 audit years. Facebook filed a petition with the U.S. Tax Court in response to the 90-day letter. Instead of sending the case to the IRS Office of Appeals (“Appeals”) for settlement, the IRS sent a letter to the taxpayer stating that it would not be sending the case to Appeals. Facebook then brought suit against the IRS alleging that not sending the case to Appeals violated the Administrative Procedure Act.
About the IRS Office of Appeals
Appeals is an independent function within the IRS that is delegated authority to settle tax matters. Appeals is authorized to review and settle IRS audit disputes stemming from decisions made by IRS personnel. While Appeals hears a number of different types of matters, the majority of its work focuses on reviewing and settling adjustments proposed during income tax audits. Appeals often provides the only administrative remedy available to taxpayers for resolving IRS disputes.
Most unagreed IRS audits end with the issuance of a 30 or 90-day letter or a refund claim disallowance letter. The 30-day letter and refund claim disallowance letter give the taxpayer time to file a protest requesting an Appeals conference. The 90-day letter gives the taxpayer time to file a petition in U.S. Tax Court. With the 90-day letter, the IRS will often forward the case to Appeals at some point after the petition is filed.
IRS Guidance For Referring Cases to Appeals
For tax disputes where the taxpayer has filed a tax court petition, Revenue Procedure 87-24 sets out the rules for how and when cases will be sent to Appeals. It also specifies that Appeals has the sole settlement authority for cases that are referred to it.
Notice 2015-72 and Procedure 2016-22 clarify and add to the rules set out in Rev. Proc. 87-24.
As relevant here, in both Rev. Proc. 87-24, Notice 2015-72, and Procedure 2016-22, the IRS reserves the right to not refer cases to Appeals if they were designated for litigation. The IRS will usually designated cases for litigation if the resolution of the matter would likely result in a court opinion that would clarify the law or if they matter is of strategic importance to the IRS.
This brings us to the Taxpayer Bill of Rights. The Taxpayer Bill of Rights was enacted into law in 2015. It can be found in Sec. 7803. It sets out ten rights taxpayers have when dealing with the IRS. Included in this list is the right to appeal an IRS decision to an independent forum.
No Legal Right to an Appeal
Facebook argued that this language gave it a statutory right to have its case sent to Appeals. The court did not agree. It concluded that Sec. 7803 provided no affirmative rights. Rather, Sec. 7803 only provides instruction to the IRS to train its personnel to follow the guidelines:
what the statutory TBOR did was to impose an affirmative obligation on the Commissioner of Internal Revenue to “ensure that employees of the Internal Revenue Service are familiar with and act in accord with” preexisting taxpayer rights established in other provisions of the Internal Revenue Code. In other words, the TBOR directed the Commissioner to, for example, better manage and train IRS employees to ensure that IRS employees know what rights taxpayers have and act in a way that respects those rights.
This reading confirms that the Taxpayer Bill of Rights does not actually afford any rights to taxpayers. The court went further and explained that the reference to an “independent forum,” doesn’t necessarily mean Appeals. The court reasoned that this language could even refer to the right to go to U.S. Tax Court.
While most tax disputes are referred to Appeals, this case confirms that taxpayers do not have a right to Appeals. The IRS reserves the right to not refer some cases to Appeals.
Taxpayers who have a dispute that is likely to be designated for litigation should keep this case in mind when thinking about how to handle IRS adjustments and the audit closing process.
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