We welcome guest blogger Daniel N. Price. Dan is in the process of opening his own law offices in San Antonio, Texas as he completes a year of pro bono work as in-house counsel with a nonprofit. Before his recent pro bono stint, he served as an attorney for the Office of Chief Counsel of the Internal Revenue Service for over 19 years. Dan’s prior government service included extensive work in the arena of international enforcement and included assisting the IRS in completely revising the Voluntary Disclosure Practice. Dan’s government experience also extended to the OVDPs, the Streamlined Filing Compliance Procedures, foreign bank account reporting, Bank Secrecy Act investigations, various LB&I compliance campaigns, expatriation issues, international collection of taxes, and much more. Today, Dan discusses the role of Appeals in FOIA disputes and exception 21 of the proposed regulations, which he writes provide far too much deference to the Office of Chief Counsel.
On September 13, 2022, the Department of the Treasury and the IRS requested public comments on proposed regulations relating to the Independent Office of Appeals’ resolution of Federal tax controversies. The comment public comment period expired November 14, 2022. Only twelve comments in response to the request for public comments have been posted to regulations.gov. I’m surprised by the low number of public comments that are available on regulations.gov. Perhaps some practitioners did not upload their comments to regulations.gov and simply mailed comments to the IRS. Uploading comments to regulations.gov certainly makes it easier for the tax press and general public to access and creates a nice public record that the agency cannot ignore.
Tax Notes and other media have extensively written on many of the comments already. Rather than rehash other coverage, this blog briefly discusses comments by the National Federation of Independent Businesses’ (NFIB) about Appeals role in FOIA disputes and an overlooked subset of comments focusing on exception 21 and the role of Rev. Proc. 2016-22.
NFIB Comments
The NFIB comments focus on the role of Appeals in FOIA disputes. NIFB proposes carving out FOIA disputes from Appeals’ jurisdiction to save resources. I disagree with that suggestion because without having Appeals consider FOIA matters, practitioners will be left in the lurch without FOIA review. Although Appeals perhaps is not the most well equipped body within the IRS to handle FOIA disputes, there is no other competent part of the IRS to handle the work. Appeals certainly can improve in its handling of FOIA disputes because at times Appeals simply rubberstamps IRS FOIA determinations.
For example, in the high profile pending criminal case involving Mark Gyetvay, his attorneys made FOIA requests and appealed the IRS production to Appeals on May 24, 2022. Appeals acknowledged the appeal on June 2, 2022, and on June 14, 2022 Appeals sustained the IRS FOIA production. The FOIA complaint in the matter alleged: “[T]he June 14, 2022 decision of IRS Appeals similarly failed to respond to the requests in any meaningful way, and again failed to describe the nature of the withheld responsive records or identify which FOIA exemptions or exceptions applied to specific documents withheld from Mr. Gyetvay.” ¶ 21.
About the same time as the events outlined in the Gyetvay FOIA case, I experienced similar rubberstamping by Appeals of a FOIA matter. I submitted my FOIA appeal letter to Appeals on May 18, 2022 and quickly received a final determination dated June 8, 2022 rubberstamping the IRS’ FOIA production. After I received the June 8, 2022 letter from Appeals, I called and begged the Appeals Team Manager (ATM) for an opportunity to discuss Appeals’ FOIA determinations. But the ATM refused to even entertain a ten-minute phone call with the Appeals Officer who “handled” the case.
Even though Appeals may at times struggle with conducting meaningful FOIA review, the simple fact remains that no other alternative exists for FOIA review within the IRS. Some may assert that the Office of Government Information Services (OGIS) could fulfill Appeals’ role since OGIS’ “mission also includes resolving FOIA disputes between Federal agencies and requesters.” From my personal experience with OGIS’ in attempting to mediate a FOIA dispute with the IRS, mediation with OGIS is a complete waste of time.
FOIA is an integral part of tax controversy work. If there is no review process for the IRS’ often inadequate and ill-informed FOIA determinations, taxpayers will ultimately be burdened with even more costly district court litigation. From my perspective in the tax controversy trenches relying on FOIA to piece together IRS actions, the NFIB suggestion to eliminate Appeals from FOIA matters doesn’t help taxpayers at all. Appeals, notwithstanding its occasional struggles with FOIA matters, is still best suited to handle FOIA appeals because of Appeals’ independence and structure within the agency.
Exception 21
Exception 21 of the proposed regs provides far too much deference to Chief Counsel in depriving taxpayers of their right to present their tax controversies to Appeals. If Appeals is truly independent and Congress intended for the TFA to expand taxpayer access to Appeals, then proposed exception 21 in the draft regulations must be amended. Specifically, only cases designated for litigation should be included in exception 21.
Exception 21 reads as follows:
Any case or issue designated for litigation, or withheld from Appeals in accordance with guidance regarding designating or withholding a case or issue. For purposes of this section, designation for litigation means that the Federal tax controversy, comprising an issue or issues in a case, will not be resolved without a full concession by the taxpayer or by decision of the court.
At first blush, exception 21 seems narrowly tailored and focuses on cases designated for litigation. Designating a case for litigation is a very formal process that culminates in the Chief Counsel making that decision. See generally CCDM 33.3.6. The formal process has various levels of review and because the process must be approved by the Chief Counsel, that ensures that only the most serious issues are actually designated for litigation. But another clause of exception 21 builds on authorization by lower level Chief Counsel personnel to deprive taxpayers of their statutory right to Appeals.
The following portion of exception 21 must be deleted to protect taxpayer rights: “or withheld from Appeals consideration in a Tax Court case in accordance with guidance regarding designating or withholding a case or issue.” The portion of this phrase – “in accordance with guidance regarding designating or withholding a case or issue” relates to the long-standing deference to Chief Counsel to withhold cases from Appeals consideration based on procedures in Rev. Proc. 2016-22.
Put simply, Rev. Proc. 2016-22 provides too many opportunities for Chief Counsel to withhold cases (or materially delay cases) from Appeals. Rev. Proc. 2016-22 sec. 3.03 provides an exception to Appeals’ consideration for cases not designated for litigation where “Division Counsel or a higher level Counsel official determines that referral is not in the interest of sound tax administration.” This exception too easily allows Division Counsels to withhold access to Appeals. Division Counsels generally defer to the judgment of their lower level attorney managers and the line attorneys making the recommendations.
Further, Rev. Proc. 2016-22 sec. 3.04 grants significant discretion to materially delay providing access to Appeals under the guise of trial preparation or filing dispositive motions (most commonly motions for partial summary judgment). Delay in this context is tantamount to denying access to Appeals. Delaying access to Appeals while Chief Counsel pursues dispositive motions can be used to improperly force taxpayers into settlements based on cost-benefit analysis of the attorney’s fees required for early motions practice. That tactic is inappropriate and degrades taxpayer rights under the TFA.
Chief Counsel has exercised its ability to restrict access to Appeals in cases large and small for decades. Recently in a small dollar pro bono case I handled in Tax Court involving a withheld refundable credit, the Chief Counsel attorney and his manager (an associate area counsel) refused to send the case to Appeals and refused to put their reasons in writing. The Chief Counsel attorney and manager are both in the Boston office. The case did not involve any frivolous legal arguments or otherwise meet any known criteria which would prohibit consideration by Appeals. I cited the TFA and requested a written position from them for their refusal to promptly send the case to Appeals after Chief Counsel filed its answer. But the Chief Counsel attorney and his manager refused to provide any written position. The attorney simply stated orally over the phone that he was planning on filing a dispositive motion and would only send the case to Appeals if he lost the motion. This type of conduct by Chief Counsel in withholding a small, non-frivolous case from Appeals is a type of situation the TFA was passed to stop. And from my nearly two decades as an attorney and manager in Chief Counsel, I observed other times where Chief Counsel attorneys refused to forward cases to Appeals where they saw opportunities to pursue motions for summary judgment (or partial summary judgment) or they justified not sending cases to Appeals on other grounds.
Although Chief Counsel attorneys generally don’t rely on Rev. Proc. 2016-22 sec. 3.04 to withhold Tax Court cases from Appeals based on trial preparation or filing dispositive motions, the fact remains they have discretion to do so under Rev. Proc. 2016-22. The status quo of Rev. Proc. 2016-22 is not sufficient to implement Congress’ desire to expand access to Appeals under the TFA. If the legislative history and purpose of the TFA have any meaning whatsoever, then the discretion provided to Chief Counsel in Rev. Proc. 2016-22 must be curtailed, and exception 21 in the proposed regulations must be redrafted. Let’s see if Chief Counsel and Treasury listen to the written comments submitted on this point.