Making Appeals to the IRS: What You Need to Know

How to Make an Appeal to the IRS: What You Need To Know

irs appeals are made at their headquarters. The Internal Revenue Service in washington d.c.Tax cases fall into two categories: 

First, where there is no dispute over the amount of tax that is due, the only remaining question is how the taxpayer will satisfy the outstanding liability. The taxpayer can pay the amount in full, enter into an Installment Agreement or submit an Offer in Compromise. Where the taxpayer is suffering from financial hardship, it may be possible to be placed in uncollectible status.

The second type of tax case involves a dispute between the IRS and the taxpayer. A taxpayer, with the assistance of an attorney, should consider each of the various methods for resolving a tax dispute and select the method that makes most sense. The Appeals process is one such method for handling disputes with the IRS, but by no means the exclusive method. The following is a brief discussion of the Appeals process and the basic rules of engagement.

The IRS Office of Appeals (“Appeals”) is tasked with the responsibility of resolving tax controversies without recourse to litigation. The Appeals Mission Statement provides that resolution of tax disputes should be fair and impartial both to the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service. I.R.M. (1) (10/23/07).

The cornerstone for the preservation of the integrity in the Appeals process is independence. In this regard, Congress reaffirmed its commitment to “ensure an independent appeals function” within the IRS.  RRA’98 § 1001(a) (4). In order to avoid undue influence or even the appearance of impropriety, exparte communications between Appeals and other IRS employees are prohibited.

IRS Appeals hear taxpayer disputes in a number of ways and may conduct a hearing at one of its campuses or field offices in person. Appeals may also hear taxpayer disputes by way of correspondence or telephonically.

Jurisdiction for Appeals is very broad and may cover a variety of matters, including deficiency determinations, collections, penalty abatements and trust fund recover penalties.  Taxpayer disputes are segregated into docketed and non-docketed cases.

An Appeal is typically generated in response to a proposed audit or examination adjustment. After the examiner completes the audit or consideration of a refund request, the taxpayer will be given the opportunity to file a protest with Appeals. Typically, Exam will issue what is known as a 30 day letter,”unless the statute of limitations has less than nine months to go until expiration. In such cases, Exam will not issue a 30 day letter since Appeals will not accept a case with less than six months left on the statute of limitations.  When faced with the expiration of the statute of limitations, however, it is not uncommon for Appeals to solicit Form 872 from the taxpayer as a means of extending the statute.

In most cases, the taxpayer will need to file a formal written protest with Appeals. Smaller cases involving $25,000 or less may be subject to a small case request process that does not require a formal protest letter.

In cases where there is less than nine months left on the statute of limitations and the taxpayer refuses to sign an extension of the statute of limitations (Form 872), Exam will issue a Notice of Deficiency, which is sometimes referred to as a”90 day Letter.” The issuance of a 90 day letter will toll the statute of limitations. In addition, the filing of a tax court petition with the U.S. Tax court will further toll the statute of limitations until 150 days after the Tax Court Decision is final.

If the taxpayer wants to contest a revenue agent’s proposed adjustments, the taxpayer can:

  1. File a protest, resulting in a non-docketed Appeals case;
  2. Pay the proposed deficiency, file a claim for refund and, if that claim is denied, file a protest at that time;
  3. Request early referral under Rev. Proc. 99-28;
  4. File a Tax Court petition in response to a statutory Notice of Deficiency (90 day letter) and go to Appeals in docketed status; or
  5. Request Fast Track (Rev. Proc. 2003-40 for LB&I taxpayers and Announcement 2006-61 for SB/SE taxpayers).

The protest letter is filed with the examining agent within 30 days of receipt of the 30 day letter.  If the taxpayer needs additional time, an extension may be granted, but any request by the taxpayer should be made in writing.  In response to the taxpayer’s protest letter, the Agent will prepare a written response. The Agent will send both the protest letter and the Agent’s response, together with the case file to Appeals.

Thereafter, Appeals will contact the taxpayer to schedule a conference, generally within 60-90 days of the taxpayer’s filing of the protest letter.

In preparation for the Appeals conference, the taxpayer should be prepared to discuss the factual disputes, applicable law, and any additional research or the facts that need to be developed.

Following the initial conference, Appeals will expect the taxpayer to make the first settlement offer.  In developing a settlement offer the taxpayer needs to be realistic. He must determine the maximum concession he is willing to make, while at the same time gauging what Appeals would likely accept. If the taxpayer is sincerely interested in settling, the offer has to be reasonable.

Appeals will attempt to bring about a settlement based upon what the probable outcome would be if the parties were to litigate. In cases where there is substantial uncertainty as to how a court would decide the matter, the parties will be expected to make concessions to reflect the strength or weakness of each position. In some cases, the parties will agree on a split issue settlement, where the parties stipulate to a percentage or dollar amount of the adjustment or the tax that is due.

There are certain instances where filing an Appeal may not be advisable, particularly where there are sensitive issues and where there is a possibility that Appeal may uncover additional issues.

If the parties are unable to successfully negotiate a settlement, the taxpayer, in non-docketed cases, has the option of going to non-binding mediation, as an additional step in which to try and settle the case. It is important to note that mediation is not an available alternative in collection cases or in cases where the taxpayer did not act in good faith.

In addition to non-binding mediation, a taxpayer may elect to arbitrate following unsuccessful Appeals negotiations. The arbitrators are selected from an approved list of arbitrators. Unlike mediation, an arbitration decision is binding and considered final.

The takeaway here is that the Appeals process is one alternative available to the taxpayer as a means of resolving a tax dispute. It is by no means, however, the exclusive method for addressing a tax dispute. A decision to file an Appeal should only be made after thoughtful consideration and discussions with an experienced tax attorney for purposes of identifying the relevant and material facts of the case, assessing the taxpayer’s strengths and weaknesses, and developing an Appeal’s strategy designed to bring about the best possible outcome.

All or Nothing – Trust Fund Recovery Penalty under Section 6672

trust fund recovery penaltyMany business owners believe that operating as a Corporation protects them from personal liability.

While oftentimes this is true, if a corporation does not pay income tax withholding and withheld Social Security, the IRS can and will pursue the collection of those taxes from the corporation’s officers, directors, stockholders, key employees.

The IRS does this though the Trust Fund Recovery Penalty.

The Trust Fund Recovery Penalty, also known as the 100% penalty because one hundred percent of the withheld income tax and Social Security tax can be assessed against a responsible officer, employee, director or stockholder, is authorized under section 6672 of the Internal Revenue Code. The penalty applies The code provides that any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

Who is Liable?

The IRS will usually seek collection of unpaid trust fund taxes from the corporate officers, directors or stockholders of the corporate entity. Those individuals will most likely meet the two requirements of section 6672 – “willfulness” and “responsibility.”

The IRS must determine:

  1. Determining whether the person was a responsible person within the meaning of §6671(b) and
  2. Whether the person’s failures to collect, account for, and pay over the trust fund taxes was “willful” as defined by the courts.

Before the IRS can proceed with asserting the Trust Fund Recovery Penalty, they must determine who is a “reasonable” officer, employee, director or stockholder.  The definition of a reasonable person is very broad.  There are no tax regulations that define the term “responsible person.” Courts have defined the term to mean any of the following:

  • Officer or Employee of a Corporation
  • Partner or employee of a partnership
  • Corporate Director or shareholder
  • Another corporation
  • Employee of a sole proprietorship
  • Surety lender
  • Any person with sufficient status, duty and authority to avoid the default on payment.
  • Any person with ultimate authority over expenditure of funds

Most frequently the courts have held that the responsible person for TFRP purposes is the one  e one with the ability to sign checks on behalf of the corporation, or to prevent a check’s issuance or to control the disbursement of payments. Godfrey v. U.S., 748 F2d 1568 (1984); Kalb v. U.S., 505 F2d 506 (1974); Gold v. U.S., 671 F2d 492 (1981); Calderone v. U.S., 799 F2d 254 (1986).

The reasonable person must have also acted willfully to fail to collect, account for and pay over the trust fund taxes as defined by the courts. Again there is no single definition of willful in the IRC.  The courts have defined the term through their decisions as the voluntary, conscious and intentional act of preferring other creditors over the United States.

An easy solution to the 100% penalty is an Offer in Compromise. Usually, the tax liability is so large; taxpayers cannot afford to pay it. Offers are accepted to reduce tax liability, even the 100% penalty where there is doubt as to liability or doubt as to ability to pay the tax liability.  Please see a legal tax professional with any questions or concerns you may have. It is always best to approach IRS issues with the advice and guidance of a tax professional.