I have written a lot about my concerns regarding Appeals’ independence over the years. Most recently, in my 2016 Annual Report to Congress, I discussed Appeals’ reluctance to collaborate with taxpayers to design a “Future State” that takes taxpayers’ and tax practitioners’ concerns into account. Now, there is another development in the continuing erosion of taxpayers’ right to appeal an IRS decision in an independent forum. (IRC § 7803(a)(3)).

Effective October 2016, Appeals implemented a number of changes to its conference procedures, including guidance in its IRM explicitly allowing Hearing Officers to invite Counsel and Compliance to participate in Appeals conferences. (IRM 8.6.1.4.4) If a Hearing Officer decides that the presence of Counsel or Compliance will improve the quality of an Appeals conference, taxpayers cannot disagree and insist upon holding a conference with Appeals alone.

The ability of Appeals to involve Counsel and Compliance in such conferences has historically existed and occasionally has been used in selected cases by Hearing Officers.  (Rev. Proc. 2012-18) The IRM changes, however, are part of “a more concerted effort” by Appeals to expand participation by IRS personnel. (Appeals Quarterly Newsletter, Vol. 3 Issue 1) Donna Hansberry, Chief of Appeals, has explained this new emphasis on the basis that “the purpose of having both parties in the room is to aid case resolution.” (2017 TNT 53-4) As the Chief, Appeals, recently explained to me, at the conference Compliance would explain its understanding of the facts and the law, and the taxpayer would do the same.  The Appeals Officer would ensure that everyone understands the other partys’ position. Compliance would not be present at settlement discussions between Appeals and the taxpayer.

Mutual understanding is, of course, a laudable goal. The problem with the proposed approach, however, is that it ignores the reality of what often transpires between the taxpayer and Compliance in the pre-Appeals phase of a dispute. First, for the vast majority of taxpayers whose disputes are in Correspondence Examination or the Automated Collection System, they have virtually no contact with Compliance personnel. They receive poorly worded, poorly explained letters; they never talk to the same employee twice; they often submit documentation only to have it ignored. For these taxpayers, they choose to come to Appeals precisely because there is no one in Compliance who has personally paid attention to them, and their negative feelings about their Compliance experience does not bode well for a conversation. It is not even clear who in Compliance would show up at an Appeals conference, since no one employee is accountable for the taxpayer’s case.

Second, with respect to cases involving sophisticated or large-entity taxpayers, by the time a case reaches Appeals, it is clear to everyone what Compliance’s and the taxpayer’s respective positions are. The taxpayer is coming to Appeals for a fresh look. Under Appeals Judicial Approach and Culture (AJAC), Appeals should receive a fully-developed case file from Compliance. If that isn’t happening, well, that’s a different sort of problem. The solution to that problem is not granting Compliance the opportunity to make an oral argument before an Appeals Office at the conference. If Compliance makes its oral argument, then the taxpayer’s representative will want to present his or her oral argument at the conference, and all this will increase the time and cost of Appeals.

Thus, this change in conference procedures could well have far-reaching negative consequences for Appeals’ effectiveness in resolving cases with taxpayers. Among other things, Appeals’ emphasis on expanding participation of Counsel and Compliance in Appeals conferences will fundamentally change the nature of conferences in which this approach is adopted. According to one tax practitioner, “Adding IRS employees to the Appeals conference turns the Appeals conference into more of a trial setting as opposed to the historic conduct of most Appeals conferences.” (2017 TNT 53-4)

Further, inviting Counsel and Compliance to join in on Appeals proceedings jeopardizes Appeals’ independence, both real and perceived, and likely will generate additional costs for the government and taxpayers in the form of fewer case resolutions, increased litigation, and reduced long-term compliance. I am aware of taxpayer and tax practitioner concerns that “…allowing Compliance to be present during the Appeals conference could upset the dynamic of the discussion between the taxpayer and Appeals.” (www.Law360.com, Oct. 26, 2016) These problems are magnified with unrepresented taxpayers, who may not know the distinction between Compliance and Appeals, and will see the presence of Compliance (who ignored them) as a sign that Appeals is all one and the same as Compliance. Or, it could be seen as favoritism toward Compliance, which gets two bites at the apple. These circumstances undermine the core independence and mission of Appeals.

The entire purpose of Appeals is to provide a taxpayer with a venue for obtaining an independent review of an IRS decision. The inability to obtain such a review without the presence of Counsel and Compliance makes the deck look stacked against the taxpayer—three IRS functions versus one taxpayer. This presence of additional IRS personnel when their attendance is unwanted by taxpayers effectively aligns Appeals with the IRS and is not conducive to settlement, only to intimidation and more litigation. Independence is an essential aspect of an effective decision-maker, and Appeals has undermined its independence over the last few years—first, by becoming more bureaucratic through the AJAC project, and second, by putting barriers up between it and the taxpayer via reducing opportunities for face-to-face meetings and eliminating its presence in at least twelve states.

The new approaches being put into place by Appeals make it appear as though Appeals no longer trusts its own Hearing Officers and that these Hearing Officers require the guidance and oversight of Counsel and Compliance to reach the correct determinations. As a former practitioner, I would think long and hard before bringing a case to Appeals under these new rules. This attempt to be more “quasi-judicial” makes going to Appeals more like going to court, so, if my client could afford it, I would ask, “Why not just go straight to court?” Of course, all those taxpayers who cannot afford to go to court or who do not want to go court and just want an independent administrative appeal will be forced into a trial-like setting—three against one.

My concerns have been echoed by a number of practitioner groups, including the American Bar Association. (2017 TNT 89-10) The IRS has acknowledged many of these issues, but has not yet committed to make any meaningful changes in the policy it has adopted. (2017 TNT 114-3)

I am very troubled by this effort on the part of Appeals and fear that, in the long run, it will harm both taxpayers and the government. A taxpayer’s right to appeal an IRS decision in an independent forum should be available in a non-adversarial environment that encourages negotiated case resolutions free from the involvement of IRS personnel who have already formed and expressed a view regarding the taxpayer’s case. (IRC § 7803(a)(3)) There are other ways to achieve the mutual understanding Appeals desires, starting with letting the taxpayer decide whether it would be helpful to have Compliance participate in the conference. Placing the decision in the hands of the taxpayer respects the taxpayer’s right to an appeal and to a fair and just tax system. It signals trust of the taxpayer, and may actually result in the taxpayer’s willingness to meet with Compliance. Thus, under my suggested approach, Appeals’ independence is strengthened, taxpayers are treated like adults and with respect, Compliance provides fully-developed case files, and tax administration is improved. It’s a win-win for everyone.

At any rate, the Taxpayer Advocate Service will continue to carefully monitor the expanded participation of these personnel in Appeals conferences, paying particularly close attention to the impact it has on case resolutions and taxpayer rights. We will inform both taxpayers and Congress about our findings.