“In theory there is no difference between theory and practice, but in practice
there is.” Yogi Berra
Most of the publicity on Congress’ multi-year punishment program for the IRS focuses on the budget cuts for taxpayer assistance. In theory, with the complexity of the tax laws, the government agency in charge of administering the law should be accessible by the people who need help on questions like filing status, dependency exemptions, and charitable donations. In practice, most people today realize that its risky business to trust the accuracy of something as important as your federal tax return to a low ranking person at some distant call center.
Today, many people believe that even the preparation of the simplest return should be entrusted to a tax professional. Besides, you can be assured that no member of Congress has to personally waste three to five hours “on hold” waiting their turn for advice from taxpayer service. Surely our Congress people can be forgiven for overlooking the fact that severe slashes to the IRS staffing budgets does real harm to the people out there who cannot afford to spend hundreds or thousands of dollars to a return preparer and just have to muddle through on their own to figure out what they owe.
Within the tax practitioner community, it is widely-known that staffing budget shortfalls also seriously impact many other IRS functions. One of which, IRS Appeals, is seriously on the ropes and is really struggling to keep up with their work.
In theory, the idea behind IRS Appeals was to provide an informal procedure for taxpayers who disagree with the results of an audit, to seek a review of the agent’s work with an independent person who has the authority to settle or concede a case before it becomes necessary for the taxpayer to actually take the IRS to the Tax Court with the filing of a petition.
Unagreed cases in the netherworld between the examination function and the time a person must file a petition in the Tax Court are called non-docketed cases. In the past, non-docketed status was a good place to be for the taxpayer who cannot make up his mind to either give up after an audit or slug it out with the IRS in Court.
While interest continues to run on any deficiency which is ultimately agreed to or determined, as long as the taxpayer is willing to file an extension of the statute of limitations, the taxpayer can sit on the fence for months and sometimes years before anyone in the government is forced to take any action at all to get the taxpayer to pay up what should have been paid on the date the tax return was originally due.
In practice today, Appeals is so badly understaffed their worker bees simply have no time to spend on their non-docketed inventory and those cases have been left to languish. [1] As a result, Appeals’ non-docketed inventory is not being worked and millions of dollars are left on the table uncollected since it is illegal for the IRS to bill a taxpayer for a tax due until it is formally assessed, i.e., entered on the IRS’ books as a liability.
Ironically, the settlement and trial of the overwhelming majority of cases which end up with a petition filed in the Tax Court is one of the few IRS processes that have received a high mark here in my IRS Report Card. Moreover, almost all cases in which a petition is filed in the Tax Court are settled or defaulted. This is because the Tax Court is relatively current in processing its inventory and the Court keeps Appeals and IRS Counsel on their toes with frequently scheduled calendars.
Once the Court is involved in the IRS’ business, no one wants to hear about how over-worked their people are and that in turn results in a lot of pressure on the budget-starved IRS to push its Counsel organization to just do the best it can.
The IRS National Office is doing the best it can to support its leviathan field organization where the real work of the IRS is done in examinations, collections, criminal investigations and Tax Court litigation. That said, one wonders what on earth it is thinking when it starts to tinker with the protocols between Counsel and Appeals which have worked just fine for many years.
Recently, an IRS Notice[2] requested comments on a proposed Appeals/Counsel revenue procedure which is nothing new. The proposed revenue procedure merely reiterates that cases docketed in the Tax Court will generally be referred to Appeals for settlement consideration, and cases that received previous Appeals consideration will not be referred back to Appeals once docketed in the Tax Court. It is yet another iteration of a revenue procedure the IRS issued thirty three years ago, which said the same thing in one fifth the space. The message of Revenue Procedure 82-42, which was published many reorganizations ago, can be summarized in six short words: “Appeals settles cases; Counsel tries them.”[3] The longer version of a short summary would be, “Counsel and Appeals field offices are free to make any informal procedural arrangements necessary to further its joint mission to effectively administer the trial and settlement of cases docketed before the U.S. Tax Court.”
The proposed revenue procedure purports to address a problem which doesn’t exist. Many people with IRS tax problems go into denial and stop cooperating with the government once they are told by a revenue agent or a service center representative that the government is not buying their lack of substantiation or strained interpretation of the Internal Revenue Code on issues where the law is well-settled in the government’s favor.
Just last August, the IRS said in a little-noticed announcement that docketed cases originating with Appeals issued statutory notices of deficiency will go straight to Counsel for handling. [4]
IRS Appeals is one of several IRS units authorized to issue tickets to the Tax Court.[5]
In theory, a taxpayer who loses interest in a case after making it all the way to Appeals is often not likely to somehow develop a desire to meet with an Appeals Officer. Also in theory, if Appeals has already seen the IRS file, why bother?
More importantly, under the proposed procedure, the government is essentially saying here, if you have already gone through an agent as well as Appeals, your next option is to sue the IRS because if you ignore this letter, the 90 Day Letter, it will be legal for us to bill you and ultimately collect it from you.
In practice, the November 2015, proposal really has no effect on existing procedures and will impact very few cases before the Tax Court today.
Sadly, in practice, the proposed revenue procedure is likely to be ignored, (if not jeered) by the nation-wide Appeals and Counsel posts of duty where the rank and file are barely able to keep their heads above water handling the work they have while Congress stubbornly refuses to fund the agency effectively. With this new notice, yet again, a pronouncement by the IRS from the National Office will be seen by the field as irrelevant and not helpful to the people working in Appeals and Docket Attorneys who will find this as another example of “the National Office just doesn’t get it.”
“Preserv[ing] Appeals’ Independence and excluding Counsel from settlement conferences!?” Where on earth did that come from?
In practice today, the problem is not Counsel overreaching in Appeals, but rather the inability to get Counsel involved more often and earlier in the process. For the practitioner today, in practice, the problem is not so much a fear that IRS Counsel is being heavy handed with Appeals, but rather, the increasing inability on the part of practitioners to get Counsel involved in large dollar non-docketed cases where more than a few modern day Appeals Officers really have no appreciation of the term “hazards of litigation.” Rather than publishing revenue procedures which address phantom tax administration problems in docketed cases, it is fair to ask if National Office resources would be better spent addressing the fact
that most Appeals Officers really have no time to work their growing inventory of non-docketed cases because everyone is busy trying to keep up with docketed cases. Even the docketed cases are often not picked up and addressed until the eve of trial approaches.
it is the fact that most Appeals Technical Advisors also have no clue about the meaning of the term “hazards of litigation.” The term does not seem to be a part of the Technical Advisor’s vocabulary. In practice, Appeals’ use of the Technical Advisor takes away the ability of Appeals Officers to truly consider hazards of litigation. The so-called independence of Appeals disappears because once the so-called Technical Advisor weighs in on a case, most Appeals Officers won’t rock the boat by recommending a position contrary to the “all-knowing” advisor.
[1] The National Taxpayer Advocate reports that the IRS loses $450 billion annually due to taxpayer noncompliance. That includes underreporting income, overstating deductions and credits, non-filing, and nonpayment.
[2] IRS Notice 2015-72 November 2, 2015.
[3] The same can be said of Rev. Proc. 87-24, which superseded Rev. Proc. 82-42.
[4] See IRS Letter 5262 (8-2014); catalog number 65056U which we discussed in our
January 16, 2015 blog,“IRS to Issue More Tickets to the Tax Court in 2015.
[5] The ticket to the Tax Court has several names both in and out of the government. A Statutory Notice of Deficiency, or just a “Notice of Deficiency,” a
“90-Day Letter,” “The Notice,” or “Stat Notice”.
[6] Notice 2015-72, p.2.