One of the many interesting charts in the National Taxpayer Advocate’s 2021 annual report displays who settled the case before Tax Court trial, Appeals or Counsel. The trends are not good for Appeals. They show that more and more settlements occur at Counsel. What the chart does not show is why. I would be very interested in a study of the cases that settled at Counsel and why they settled there instead of Appeals. I suspect the Chief Counsel would be interested in this as well as it reflects resource shifting.
read more...At page 196 of the NTA’s annual report it states that 82% of petitioned cases settled in FY 2021. That’s a little higher than the average of cases in the prior decade because the percentage of dismissals was down in FY 2021 (something I will address in a subsequent post) but not far outside the norm. This post is not about the overall percentage of settled cases but the breakdown of where the cases settled between Counsel and Appeals. The report has a nice graph for that which you can see here:
Notice that starting in 2018, a pre-pandemic year, the percentage began to shift with more cases being settled at Counsel as a percentage of the total. In each of the past 10 years Appeals has settled the most cases, but why is it settling less cases in recent years as a percentage of the total? Is it resources? Is it training? Is it a change in culture? Did more cases go through Appeals pre-petition? Are taxpayers less willing to work with Appeals? Is it some other factor or a combination of factors? The NTA’s report does not discuss the why question. It only addresses the who.
The obvious consequence within the IRS is that having more cases settle at Counsel puts more pressure on the resources at Counsel and probably a little more pressure on the resources at the Tax Court since settlement at Counsel usually, but not always, means a settlement closer to trial with more opportunity for some interaction with the Court. To understand the why question, it would be logical to do a study of the cases settled at Counsel after going to Appeals and learn what caused the taxpayer to forego the opportunity to settle with Appeals and wait to settle with Counsel. I have not seen such a study. It seems it would be useful to appeals because it would allow Appeals to learn why Appeals Officers failed to settle cases that ultimately settled without trial. In learning the answer, Appeals would then be better equipped to evaluate the litigation hazards of the next case.
I complained about the ability of the Appeals Officers I encountered to judge the hazards of litigation in a blog post several years ago. The thesis behind my complaint with Appeals Officers was that most did not have a good grasp of evidence and litigation hazards. I could supply a number of anecdotal stories on that point where an Appeals Officer declined to settle because my client could not produce some written proof of a point the AO thought needed to be proved by a piece of paper, but anecdotes are not what is needed to understand if Appeals is functioning optimally. I had a case last year where the AO totally misunderstood the statute regarding dependency exemptions. After a failed attempt to explain it to her, I gave up and sent her a qualified offer which she also did not understand. The case settled immediately upon arrival in the Counsel office. Everyone who handles a decent volume of Tax Court cases has some story of the misguided AO but the trends in the NTA report show that something is happening beyond just the complaints of a grumpy old man.
Shelly Kay, a former colleague of mine at Chief Counsel who went on to become the head of Appeals, wrote a rejoinder to my 2015 post pointing out that Appeals did properly train its employees on litigation hazards and that actually going to court was not important to understanding how to settle a case. [One of my complaints was that AOs located in Service Centers had no idea about the dynamics of a Tax Court case and some who worked in field offices had also never seen or closely followed a case in the Tax Court process after it left their hands.]
I certainly don’t dismiss Shelly’s response, but I continue to feel that Appeals officers need to build a system that tracks what happens to docketed cases after it leaves their hands unsettled in order to learn about the case and build on that knowledge for future cases. In my prior post I referenced the movie Groundhog Day because of my concern that by not learning what happened to their case after it went to Counsel, AOs were destined to repeat the same mistakes. If they followed the cases and learned why Counsel settled each case that Appeals did not, they could better handle the next case.
I recognize that some petitioners do not work with AOs just as they did not work with the examiner and that only the imminent threat of trial brings the necessary focus. I do not mean to suggest that AOs as a group or individually don’t do their job, but I find more often than I feel I should that AOs do not understand the dynamics of what will happen to a case if it goes to trial and therefore cannot properly assess the settlement hazards. The chart from the NTA report suggests a trend in pushing settlements downstream from Appeals. It would be nice to have a report from TIGTA or GAO or Appeals and Counsel that took a hard look at settlement trends and how settlement could be accomplished more often and more efficiently at Appeals.
Keep in mind that I am representing low income taxpayers who make up the bulk of the taxpayers the IRS audits but that I have no recent experience with AOs handling large and mid-size cases.
Besides questions about Appeals, we should also question the culture of counsel at a given time. I thought my job was to try cases where Appeals had not been able to settle, although I would settle if I thought it was appropriate. I knew counsel attorneys who proud of their ability to settle, as well as counsel attorneys who would get physically sick before trial. This was in the days we did all three functions. Charlie Baer.
Of late, in dealing with CP2000 cases, it appears resource shifting may be going on. The taxpayer responses to CP2000 do not seem to be reviewed and taxpayer gets 90 day letter. To resolve, taxpayers end up filing a petition in Taxcourt. This trend is not good and need to be investigated and IRS should try to resolve CP2000 at Service Center level. Would like to hear the recent experience of others in dealing with CP2000.
Is there any difference between the authority that Appeals and Counsel have to settle a case where the issue is what the words of a statute mean or whether a regulation is not valid?
I served as a grade 12, 13, 14 and 15 Appeals Officer and retired as the Chief of the Appeals Offices in Virginia and West Virginia.
The lack of ability (or willingness) to negotiate, settle cases, and consider the hazards of litigation by Appeals Officers has been very disappointing. I am convinced that there is a major lack of training, oversight, experience, and skill within the current Appeals Division of the IRS.
In one recent case, a client timely provided all of his records to an Attorney/CPA to prepare his tax return. The sole proprietor Attorney/CPA had a heart attack and then a stroke. He was in the hospital and then in a rehab facility for an extended period of time and he never returned to work. The client made numerous efforts to get his records back without sucess. The client hired another CPA firm which, after considerable effort secured the records, and the tax return was filed late. The IRS imposed late filing penalties which we disputed with a Penalty Appeals Coordinator and Appeals. The Appeals Officer would not make any concessions and concluded that the client should have made copies of his records before giving them to his preparer so he could file timely if the preparer did not file timely. Clearly, the Appeals Officer has no concept of real life. No taxpayers keep copies of records they give to their accountant. The Internal Revenue Manual provides that the inability to secure records is a basis for reasonable cause and the case should have, at least, been settled. The Appeals Officer refused to make any concession to resolve the case.
In another recent case, the taxpayer provided records to a CPA who filed the return timely. The electronic filing was, however, rejected, and the CPA’s internal records noted that a paper return was then filed prior to the due date although it was not sent via certified mail. The CPA told the taxpayer he did not have to do anything else because a paper return was timely filed. The Service sent a notice that no return had been received, the CPA sent in a second paper return, and the IRS asserted failure to timely file penalties. We argued that the CPA would testify that a paper return had been timely filed (there is case law where such testimony is accepted in not asserting penalties) and we argued that the Boyle, Supreme Court, case supported non-assertion of penalties because the taxpayer was told that no return was due because a paper return had been timely filed. At first the Appeals Officer simply sent a letter rejecting our arguments with no contact and no discussion. We called. The Appeals Officer did not see any reasonable cause or hazard in litigating the case. In fact, he seemed to have no interest in negotiating anything.
In other cases I have had in Appeals, it seems to me there is too much reliance on a “decision tree” and too little use of individual judgement, the facts, and common sense.
It is no wonder that Counsel is having to settle more cases than Appeals. Dealing with an organization of which I have been so proud is so very disappointing.
George Gretes
If what you are saying is true generally of what Appeals has become, then it is worse than useless because having to go through that process knowing that the end result will be no movement just adds cost and delay. What may be needed is to tie bonuses and advancement to performance, not how many cases get processed but net dollars saved or lost by the fisc, as measured by the differences in amounts between settlement offers and later settlements by counsel or Tax Court determinations (adjusted for costs of further proceedings). Little can sharpen the mind of an AO better than knowing that if he rejects a settlement offer of $100 made by the taxpayer and the government ultimately collects, say, $120 or less, he will be dinged. Similarly for AOs who give the IRS a bad reputation by being unreasonable, as with the clients you described. That is the way people in private practice in service industries are judged.
They changed their name to Independent Office of Appeals. This is just their way of showing that they are independent of Counsel.
My sense of Appeals is that the AOs are simply looking to close a case, regardless of the outcome. Some of them find reasons, no matter how arbitrary, to tell you “no.” Litigation hazards? Very few are familiar with the concept.
I no longer work with Appeals. It’s a complete waste of time. Even where a settlement is reached, counsel (and ultimately the judge) would have given the taxpayer a much better deal.
During the pandemic we got several notices of deficiency from AUR that were silly and that anyone who wasn’t a computer could see were bogus. We couldn’t call the IRS so we docketed the cases. As soon as It got assigned to a chief counsel attorney, I would call them up and settle thee case after about 5 minutes on the phone. I guess I could have waited for appeals to contact us but it just seemed easier to do it that way. These simple cases can just skip appeals and that might be one explanation.