There have been rumblings of the Appeals Judicial Approach and Culture Project (AJAC), but until recently there were no written statements about how the program would be implemented and how it would really impact taxpayers. On July 18th, Appeals issued a memorandum, found here, outlining the program and indicating where the Internal Revenue Manual will be updated.
The thrust of the memo is that AJAC will be “returning Appeals to a quasi-judicial approach in the way it handles cases,” and away from fact finding and raising new issues and legal arguments. The new policy specifically states that Appeals will not raise new issues and will not open closed issues. The new policies apply to all Appeals review, including collections review and compliance review of both docketed and non-docketed cases.
Chapter 6 of Effectively Representing discusses Appeals, and Saltzman and Book, ¶ 9.07[4], discusses this issue. The prior position was that Appeals should not “casually” raise new issues, and not to do so for bargaining position. When raising a new issue, it also had to have a material effect on tax liability. Practitioners were able to inform Appeals that raising the issue was contrary to the Manual, but such a determination was subjective and often nothing was done.
read more...Practitioners and taxpayers often viewed the threat of new issues being raised or issues being reopened as a substantial risk of going to Appeals. To reduce this risk, taxpayers would forgo appeals (giving up any chance at administrative costs) or go to Appeals only after the case had been docketed hoping that Appeals would not spend as much time reviewing before returning to Counsel. In my practice, Appeals rarely brought up a completely new issue under the old policy, but would often suggest new reasons for why the issue in question would be decided in the Service’s favor (also frustrating). Under the new policy, that is still allowed.
In docket cases, the updated IRM provides that a “new issue” is any adjustment to or change to an item that affects the petitioner’s tax liability that was not included in the notice of deficiency. Appeals is directed not to raise a new issue. A new issue is not a new theory or alternative argument on the same issue. Further, Appeals can consider new issues raised in pleadings and new evidence developed by compliance or counsel. The IRM notes that the government has the burden of proof on the new issue raised by the government.
Cases previously closed by Appeals that were mutually agreed upon will continue to only be reopened due to fraud, malfeasance, concealment or misrepresentation of material fact, or an important mistake.
This is a wonderful reaffirmation of Appeals actual role in tax administration, and will hopefully assist in the perception that Appeals is independent from exam and collections. Although the policy change does not seem substantial, it does move the policy in the right direction and it is good to remind the Appeals employees of Appeals mission.
What constitutes a new issue compared to a new theory will continue to be problematic, and it will be interesting to see how far Appeals is willing to stretch “new theory”. It will also be interesting to see how internally Appeals will deal with Appeals employees raising new issues that result in tax. The memorandum does not provide a framework for taxpayers to seek supervisor review when the taxpayer believes the Appeals employee is not following AJAC. It will also be interesting to see if practitioners will try to challenge Appeals raising new issues before the courts, arguing that AJAC creates substantive rights that are relied on when the taxpayer went to Appeals. As the Service moves away from formal guidance, such as regulations, and more towards other written information, this is going to be an increasingly important issue in tax procedure. I am sure we will be blogging on this in the near future and the post will likely touch on the (somewhat) recent Kearney Partners holding, which discussed substantive rights being created in informal guidance.
Keith also informed me that the Director of Appeals, Sheldon Kay, recently resigned. Mr. Kay was overseeing Appeals when this memo was issued, and was a huge proponent of AJAC. It might also be interesting to see if the incoming Director embraces AJAC and continues to champion the cause, or if he or she places less emphasis on this initiative. Obviously, we hope continued emphasis is placed on AJAC, and perhaps more steps are taken to reduce new issues from being raised. Appeals actual and perceived independence is incredibly important to tax administration (Saltzman and Book, ¶ 9.01[4], discusses Appeals independence in general).
Jack Townsend also blogged this in July, when the memorandum was issued. You can find his post here.
About Stephen Olsen
It is amusing to read intelligent and informative analysis of organizations that are incompetent and incoherent. For example, my client signed an agreement with Appeals on January 3, 2013, to settle a Section 6672 case for $3,000. (The revenue officer had proposed $13,000 in October 2011.) For eight months, we heard nothing. Now we have just received a letter from the Appeals Team Manager stating that “we are returning your case file to Compliance for assessment. They will notify you in writing within 60 days of the assessment.” The federal debt limit soon approaches, so the Appeals Office has searched under the cushions for money that might have slipped out its pockets.
My client was not a “responsible party,” but at a certain point the costs of litigation exceed the benefits of buying a settlement. I estimate that Appeals spent twice as much on negotiating this matter as it may eventually collect if the paperwork ever gets processed. (Meanwhile, interest does not accrue on TFP cases, until the assessment is made.)
For a moment, let’s stop pretending these people know what they are doing.
Bob, thanks for the compliment about my writing. I have found the Service increasingly difficult to deal with over the last year. Longer wait times, under-trained employees, overworked employees, more constraints, and the list goes on. This all leads to at least the perception (if not the reality) of organizational disarray.
I still feel, though, that the vast majority of folks in Appeals are knowledgeable and responsive. I do not deal as much with Compliance, but I suspect the same is true. I also believe that the hiring freeze, forced time off, and the related consequences are harming the Service and the results it is able to obtain. Should the Service be scaled back is a different question, but, as constituted, the current level of staffing appears to be inadequate.
I may be naive, but I do not think the notice from Appeals was an effort to dig through the car ashtray to pay the toll because of the debt ceiling. My suspicion would be that the letter was stuck on the back burner for too long because of current under staffing.
I also agree with you at some level that the cost of collection must be considered, but Appeals stated job is to be an impartial arbiter of disagreements between taxpayers and Compliance/Collections. The correct amount of tax due is what should be sought. Further, if Compliance and Appeals didn’t spend time on matters that didn’t “make money”, there would probably be a negative effect on voluntary compliance. A difficult balance. That also gets to a bigger question about how and on whom taxes are imposed and enforced.
Thanks for the comments! We hope you keep them coming.
congress failure to properly fund IRS is causing all kinds of problems for representatives and taxpayers alike. 2 hour waits on phone, months wait on penalty abate issues, collections issues put on hold, low audit rates. Cheaters and non-payers win, honest tax payers lose.