Specific Types of Representation · Representing a taxpayer before Appeals

Settlement function of the Appeals process

The rule

Appeals exists to settle. IRC § 7803(e)(3) states the function as resolving federal tax controversies without litigation, on a basis that is fair and impartial to both the Government and the taxpayer, promotes consistent application of the tax laws and voluntary compliance, and enhances public confidence in the integrity and efficiency of the Service. That is a settlement mandate, and it is the reason Appeals can do things an examiner cannot.

The standard it settles on is stated in Reg. § 601.106(f), Rule II, and every representative should be able to quote the substance of it. Appeals will ordinarily give serious consideration to an offer to settle on a basis which fairly reflects the relative merits of the opposing views in light of the hazards which would exist if the case were litigated. That phrase — hazards of litigation — is the whole of the settlement authority. An Appeals officer is not asking whether the examiner was right. The officer is asking what would probably happen in court, and pricing the case accordingly.

Rule II carries two limits in the same breath. No settlement will be made based upon nuisance value of the case to either party. A taxpayer cannot buy a discount by being expensive to deal with, and the Government cannot extract one by making litigation unaffordable. And Appeals may defer action on or decline to settle some cases or issues — the regulation’s example is issues on which action has been suspended nationwide — in order to achieve greater uniformity and enhance overall voluntary compliance.

Rule II also contains an obligation running toward the taxpayer that is easy to miss. Where a taxpayer makes an unacceptable settlement proposal in circumstances indicating a good faith attempt to reach an agreed disposition fair to both sides, the Appeals official generally should evaluate the case in a way that enables the taxpayer to work out what settlement would be recommended for acceptance. A serious proposal is entitled to a usable counter-signal, not a bare refusal.

Rule I sits underneath all of it: the Appeals officer must hew to the law and the recognised standards of legal construction, and determine the correct amount of tax with strict impartiality as between the taxpayer and the Government, without favouritism or discrimination between taxpayers.

How it works in practice

Appeals is bounded by the case it received. Reg. § 601.106(d)(1) provides that during consideration of a case, Appeals should neither reopen an issue on which the taxpayer and the examining function are in agreement, nor raise a new issue, unless the ground for doing so is substantial and the potential effect on the tax liability is material. Where Appeals does raise a new issue, the taxpayer or representative must be advised and offered an opportunity for discussion before any formal action such as the issuance of a statutory notice of deficiency. In practice this makes Appeals a comparatively safe forum: the downside risk of going there is bounded, and a representative can tell a client so with the regulation in hand.

Agreement is recorded on a form, and which form matters. Where a satisfactory settlement of some or all issues is reached, the taxpayer is asked to sign Form 870-AD, Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and of Acceptance of Overassessment, or another appropriate agreement form, waiving the restrictions on assessment and collection and accepting any overassessment. In a partially unagreed case, a statutory notice of deficiency is prepared and issued for the unagreed issues, so a partial settlement does not extinguish the Tax Court route on what remains.

Form 870-AD is not a closing agreement. A closing agreement under IRC § 7121 is final and conclusive by statute; Form 870-AD is a mutual-concession settlement that the regulation treats as significant but that does not carry the statutory finality of § 7121. The practical consequence appears in Reg. § 601.106(f), Rule IX: technical advice may not be requested for a taxable period where a prior Appeals disposition of the same period for the same taxpayer was based on mutual concessions — ordinarily a Form 870-AD. Where the prior disposition was not based on mutual concessions, technical advice may be requested with the concurrence of the Appeals office that had the case. A settlement recorded on Form 870-AD therefore does more than close the file; it closes off a route by which the Service could otherwise revisit the period.

Appeals also issues the notice. Where a case cannot be agreed, Appeals officers with the relevant authority prepare, sign on behalf of the Commissioner, and mail the statutory notice of deficiency (Reg. § 601.106(d)(2)(ii)). The same office that has been discussing settlement is the office that starts the 90-day clock — one reason the settlement discussion should be conducted with the petition date already calculated.

Docketed cases still settle, and Appeals has a window. Where a deficiency notice in a Tax Court case was not issued by Appeals and no criminal prosecution recommendation is pending, Counsel refers the case to Appeals for settlement as soon as it is at issue. Appeals then has exclusive settlement jurisdiction for four months, commencing when it receives the case, and is directed to arrange settlement conferences within forty-five days of receipt. Appeals may settle fewer than all issues and refer the rest to Counsel. At the end of the four months — or earlier if Appeals concludes the case is not susceptible of settlement — the case returns to Counsel, who then has exclusive authority, with a limited extension available where a full settlement is substantially likely and a trial calendar has not been received.

Some cases are outside Appeals’ settlement authority in docketed status. Appeals may not negotiate or settle a docketed case where the notice of deficiency, liability or other determination was itself issued by Appeals officials, or in the other categories listed in Reg. § 601.106(a)(2). A representative who was in Appeals before the notice issued should not expect a second bite from the same office after petitioning.

How this has changed

The settlement standard has been remarkably stable. Rule II’s formulation — the relative merits of the opposing views in light of the hazards which would exist if the case were litigated, with no settlement on nuisance value — has been in the Statement of Procedural Rules for decades and is still how Appeals describes its own work.

What changed is the standing of the function stating it. Until 2019 the settlement mandate rested on a regulation and on administrative practice. The Taxpayer First Act put the mission into the Code at IRC § 7803(e)(3), in language Publication 5 now recites almost verbatim, and made the resolution process generally available to all taxpayers by statute. The independence that makes hazards-based settlement credible was likewise given statutory content: personnel reporting to the Chief of Appeals, the Chief reporting directly to the Commissioner, and legal advice coming so far as practicable from Chief Counsel staff not involved in the case or in preparing it for litigation.

The regulation’s institutional vocabulary — district directors, regional commissioners, four-month jurisdiction commencing on receipt from Counsel — reflects an organisation that was restructured in 1998. The settlement rules it states survived that restructuring and are restated in IRM Part 8; read past the job titles.

Exam focus

The reliable point is the settlement standard: Appeals settles on the hazards of litigation and may not settle on the nuisance value of a case to either party. Know that Appeals should not reopen an agreed issue or raise a new one unless the ground is substantial and the effect material, and that the taxpayer must be told and offered discussion if it does. Know that a settlement is recorded on Form 870-AD, that a partially unagreed case produces a statutory notice for the unagreed issues, and that Appeals itself issues that notice. Distinguish Form 870-AD from a closing agreement under IRC § 7121.

Check yourself

1. On what basis does Appeals settle a tax controversy?

A. The examiner’s recommendation, adjusted for the taxpayer’s ability to pay B. The relative merits of the opposing views in light of the hazards of litigation C. A fixed percentage of the proposed deficiency D. Whatever amount the taxpayer offers in good faith

Answer: B. Appeals prices the case by what would probably happen in court, not by re-auditing it.

2. A representative proposes a small payment on the footing that litigating would cost the Government more than the deficiency. How should Appeals respond?

A. Accept, since the analysis is economically sound B. Refuse; no settlement may be based on the nuisance value of the case to either party C. Refer the case to Counsel for a litigation cost estimate D. Accept, but only with the examining function’s consent

Answer: B. The prohibition is symmetrical and protects taxpayers as well as the Government.

3. May Appeals raise an issue the examination never considered?

A. Never B. Only with the taxpayer’s written consent C. Yes, if the ground is substantial and the effect on liability is material, after advising the taxpayer and offering discussion D. Yes, without restriction

Answer: C. Appeals should also not reopen an issue on which the taxpayer and the examining function agreed, on the same test.

4. Appeals settles two of four issues in a case. What happens to the other two?

A. They are deemed conceded by the taxpayer B. They are deemed conceded by the Government C. A statutory notice of deficiency is prepared and issued for the unagreed issues D. The whole case must go to the Tax Court

Answer: C. The agreed issues are recorded on Form 870-AD and the unagreed issues carry a fresh 90-day petition period.

5. Which statement about Form 870-AD is correct?

A. It is a closing agreement under IRC § 7121 and is final and conclusive by statute B. It waives restrictions on assessment and collection under an agreed settlement, and reflects mutual concessions C. It preserves the right to petition the Tax Court on the issues it covers D. It may be signed only by an attorney

Answer: B. It is not a § 7121 closing agreement, though a disposition based on mutual concessions does bar a later technical advice request for that period.