The IRS released a memo describing Phase II of the Appeals Judicial Approach and Culture (AJAC) program. This program is intended to formalize many of the best practices of the IRS Office of Appeals (Appeals).
Tax disputes often end up in Appeals. Appeals is able to successfully resolve or settle most cases. The Appeals process is informal and cases can–and are often–settled in the taxpayer’s favor. Even seemingly trivial issues in how cases are handled by Appeals can have a dramatic impact on the outcome of cases. This is why tax practitioners spend so much time considering what the IRS has to say about its processes.
New Evidence in Appeals
One of the more interesting issues addressed the Phase II memo is the introduction of new evidence by taxpayers while they are in Appeals.
According to the memo, appeals officers are supposed to send the case back to the IRS examination function to continue the audit to consider the new evidence. This is supposed to be done by releasing jurisdiction back to Exam, rather than Appeals keeping jurisdiction of the case and simply asking Exam to consult on the appeals case.
Sending a case back to exam can result in a number of different outcomes. In some cases it may result in Exam simply rubberstamping the prior decision. These cases may then be sent back to Appeals with no new development, which may cause Appeals to favor the taxpayer’s position when deciding the case.
In other cases Exam may use the additional time to develop other issues besides the one that caused the case to be referred back to Exam. Once sent back to Appeals, this may make it harder for Appeals and the taxpayer to reach an amicable settlement–given that Appeals would then have to consider yet another issue or a more developed issue.
Taxpayers typically prefer Appeals to retain jurisdiction of the case and simply refer the case to Exam for comment. This saves time in processing and transporting the files from Appeals to Exam and from Exam back to Appeals. This can also result in Exam being less involved in the issue given the timing and less likely to really work the case, as they may not have a time code to apply their time to when working these case.
The memo goes on to say that not all new information requires cases to be sent back to Exam. For example, the memo says that evidence that does not require verification or fact finding will not require the case to be sent back to Exam.
Taxpayers need to review these rules before presenting new evidence in Appeals that was not presented to Exam. They should also factor these rules into their audit strategies.
New Theories in Appeals
The Phase II memo also addresses new issues raised by taxpayers in Appeals and raising new theories.
According to the memo, cases are to be sent back to Exam if the taxpayer raises new issues for the first time in Appeals. Cases are not to be referred back to Exam if the taxpayer presents a new theory for an issue. In the later case, Appeals is to retain jurisdiction and simply refer the new issue to Exam to comment on.
There is often a disagreement as to whether an argument is a new issue or merely a new theory. The distinction is not always easy to draw. For example, consider a case in Appeals where the matter in dispute is the availability of a deduction for a loss on worthless security. Is the issue defined broadly to be the deduction as a whole, which would mean that the taxpayer could argue about the availability, timing, or character of the loss? Or is the issue defined more narrowly, as the availability, timing, or character of the loss? Or are the availability, timing, or character of the loss just new theories?
Taxpayers will have to consider these issues in deciding how to frame their issues and arguments in Appeals.
The memo generally applies to new cases received by Appeals on or after September 2, 2014.