New Proposed IRS Appeals Office Tax Controversies Regulations

New IRS Tax Controversies Appeals Procedure Exceptions

New IRS Tax Controversies Appeals Procedure 

In mid-September 2022, the Internal Revenue Service released proposed regulations involving certain requirements and restrictions for how tax controversies will be resolved at the IRS Independent Office of Appeals. In general, the IRS seeks to resolve contested matters as quickly and expeditiously as possible — and oftentimes the IRS appeals process is one avenue Taxpayers may pursue — although the IRS began feeling the process was being exploited and becoming overall less effective, so new regulations have been proposed, with an emphasis on limitations on the matters that can be brought up on appeal. Let’s take a brief look at the important proposed exceptions to the appeals process —

Taxpayer First Act of 2019

As provided by the IRS:

• • • • The proposed regulations reflect amendments to the law made by the Taxpayer First Act of 2019. The proposed regulations apply to all persons that request to have a Federal tax controversy considered by that office. 

      • The Taxpayer First Act renames the IRS Office of Appeals as the IRS Independent Office of Appeals. This office will continue to resolve tax controversies and review administrative decisions of the IRS in an impartial manner. However, it has some new requirements.

        • • The new rules require the Independent Office of Appeals to make its referred case files available to:

          • Individuals with adjusted gross incomes of $400,000 or less for the tax year to which the dispute relates;

      • Entities with gross receipts of $5 million or less for the tax year to which the dispute relates.

        • • In addition, when the IRS or Chief Counsel has issued a notice of deficiency to a taxpayer and denies the taxpayer’s request for referral to the IRS Independent Office of Appeals, the IRS must now issue a notice to explain the reasons. It also needs to tell the taxpayer how to protest the denial.

Proposed Exceptions to IRS Office of Appeals 301.7803-2(c)(1) – (24):

There are 24 proposed exceptions to the ability to request an appeals conference. We will focus on five very common scenarios that will impact Taxpayers considering bringing an issue up on appeal —

Frivolous Positions – Proposed Regulation §301.7803-2(c)(1)

• • • Proposed §301.7803-2(c)(1) provides that Appeals consideration is not available for an administrative determination made by the IRS with respect to a particular taxpayer in which the IRS rejects a frivolous position, which includes any case solely involving the failure or refusal of the taxpayer to comply with the tax laws because of frivolous moral, religious, political, constitutional, conscientious, or similar grounds. A frivolous position includes a position the IRS has identified as frivolous for purposes of section 6702(c) of the Code (regarding listing of frivolous positions). A list of positions that the IRS has determined to be frivolous under section 6702(c) can be found in Notice 2010-33 (2010-17 I.R.B. 609 (April 26, 2010)). Proposed §?301.7803-2(c)(1) codifies the pre-TFA practice of the IRS of denying the request of a taxpayer for Appeals resolution of frivolous arguments, including cases based solely on frivolous moral, religious, political, constitutional, conscientious, or similar grounds.”

Penalties Related to Frivolous Positions and False Information – Proposed Regulation  §301.7803-2(c)(2)

• • • Proposed ?301.7803-2(c)(2) provides that Appeals consideration generally is not available regarding a penalty assessed by the IRS with respect to a particular taxpayer for asserting a frivolous position, making a frivolous submission, or for providing false information. Examples of such penalties include sections 6702 relating to frivolous tax submissions and 6682 relating to false information with respect to withholding. See IRM 8.11.8.2(1), (3) (10-28-2013) (relating to a section 6702 penalty for frivolous tax submissions); IRM 8.22.8.10.4(1) (08-26-2020) (relating to a frivolous tax submission penalty under section 6702 and a false Form W-2, “Wage and Tax Statement,” penalty under section 6682).

    • These penalties are immediately assessable. The IRS notifies the taxpayer of the penalty assessment and makes a demand for payment. See sections 6703(b), 6671(a), and 6682(c) (relating to penalty assessment). A taxpayer seeking judicial review must first pay the entire penalty and then file a claim for refund with the IRS within two years of the date of payment. These penalties are designed to deter frivolous behavior or improper conduct by a taxpayer. If Appeals does not consider the merits of the taxpayer’s frivolous position, it follows that Appeals should not consider the IRS’s assessment of the penalty with respect to the taxpayer as well.

Issues Settled by a Closing Agreement – Proposed Regulation  §301.7803-2(c)(8)

• • • Proposed §?301.7803-2(c)(8) provides that Appeals consideration is not available for any issue that the IRS and a particular taxpayer have resolved in an agreement described in section 7121 of the Code regarding closing agreements and for any decision by the IRS to enter into or not enter into such agreement. Proposed §?301.7803-2(c)(8) further provides that Appeals may consider the question of whether an item or items are covered by a closing agreement, and how the item or items are covered.

    • Closing agreements are binding on the IRS and the taxpayer in accordance with section 7121. Under section 7121(b), a closing agreement between the IRS and a taxpayer is final unless fraud, malfeasance, or misrepresentation of a material fact can be shown; the case cannot be reopened as to the matters agreed upon or the agreement modified by any officer, employee, or agent of the United States. Therefore, any issue that is resolved by a closing agreement under section 7121 is statutorily precluded from being considered by Appeals.

Criminal Prosecution Is Pending Against Taxpayer – Proposed Regulation  §301.7803-2(c)(10)

• • • Proposed §301.7803-2(c)(10) provides that Appeals consideration is not available for a Federal tax controversy with respect to a taxpayer while a criminal prosecution or a recommendation for criminal prosecution is pending against the taxpayer for a tax-related offense other than with the concurrence of Chief Counsel and the Department of Justice, as applicable. Appeals consideration therefore may be temporarily unavailable, and it may come later if the other requirements in proposed §?301.7803-2 are met.

    • This proposed exception to Appeals consideration avoids any interference or even the appearance of any interference with a criminal prosecution or an investigation that has been recommended for criminal prosecution. A similar existing exception can be found in §?601.106(a)(2)(vi) of the Statement of Procedural Rules (26 CFR part 601) (relating to the exclusion of review while a recommendation for criminal prosecution is pending).

IRS’s Automated Process of Certifying a Seriously Delinquent Tax Debt –– Proposed Regulation  §301.7803-2(c)(12)

• • • Proposed §301.7803-2(c)(12) provides that consideration by Appeals is not available for the certification or issuance of a notice of certification of a seriously delinquent Federal tax debt of a particular taxpayer to the Department of State (State Department) under section 7345 of the Code (relating to the revocation or denial of a taxpayer’s passport in the case of serious tax delinquencies). The IRS relies on automated systems to identify every electronic taxpayer record on an individual’s account with an unpaid assessed tax liability that is not statutorily excepted from the definition of seriously delinquent tax debt or otherwise in a category excluded from certification.

    • Once all eligible unpaid liabilities have been identified, the systems aggregate the amount of unpaid liabilities. If the total is more than the statutory threshold, the taxpayer is identified as having a seriously delinquent tax debt, and the relevant transaction code is posted to the electronic taxpayer records. The Commissioner of the IRS’s Small Business/Self-Employed Division then certifies that the identified individuals each have a seriously delinquent tax debt, and the IRS sends a list of all certified individuals to the State Department.

    • The taxpayer receives Notice CP508C, “Notice of certification of your seriously delinquent Federal tax debt to the State Department,” informing the taxpayer to contact the IRS at the phone number in that notice to request reversal of the certification if the taxpayer believes the certification is erroneous.

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