IRS Appeals by Gibson & Perkins, PC

YOUR APPEAL RIGHTS BEFORE THE IRS Prepared by EDWARD L. PERKINS, JD, LLM (TAX), CPA GIBSON & PERKINS, PC Suite 204 100 W. Sixth Street, Media, PA 19063 610-565-1708 www.gibperk.com

INTRODUCTION This Course is designed to provide the tax practitioner with a basic understanding of the appeal process before the IRS, and ultimately in the courts. This Course will first review the examination process followed by a discussion of the appeals procedure within the IRS, including payment options, alternate resolution procedures and collection appeals. Also, to be discussed is the appeal of both prepayment and refund tax cases in the federal courts, including Tax Court, Court of Federal Claims, the District Court and the US Bankruptcy Court. Overall, the course is designed to enable tax preparers to navigate the IRS appeal process with knowledge and confidence. Among the topics examined in the IRS Appeals Course are: ›

Examination of Returns

›

Procedures within the IRS

›

Alternative Resolution Procedures

›

Settlement Agreements

›

Payment Alternatives

›

Appeals to the Courts

›

Collection Appeals

INSTRUCTIONAL DELIVERY METHOD: Self-study. PROGRAM KNOWLEDGE LEVEL: The course is basic. PREREQUISITE EDUCATION AND EXPERIENCE: This course is aimed primarily towards professionals with a basic understanding of tax preparation. RECOMMENDED CPE CREDIT AND FIELD OF STUDY: 2.0 CPE credit hour—Tax ADVANCE PREPARATION: None required. COURSE REGISTRATION REQUIREMENTS: To receive credit for this course, please complete all Review Questions and the Final Examination located at the end of these materials. Instructions on requesting course credit are provided with the Final Examination. REFUND POLICY /CANCELLATION POLICY: It is the policy of YourOnlineProfessor.net to satisfy participants and purchasers in a reasonable manner. Refunds to dissatisfied participants will be given in order to maintain good will. However, the reason for a participant's dissatisfaction 2

and any resulting refund must be clearly indicated. A refund is always given if a course does not qualify for CPE credit in the state in which the purchaser seeks to apply it for credit. YourOnlineProfessor.net will refund any customer who cancels a Group Live or Live Webinar program prior to the start of the program. Notice of Cancellation must be sent to yop@youronlineprofessor.net. Refunds are not offered to customers who do not provide notice of cancellation prior to the start of the program. Full refunds will be provided if a program is cancelled by YourOnlineProfessor.net.

COMPLAINT RESOLUTION AND PROGRAM EVALUATION POLICY: All evaluations will be reviewed by Edward Perkins. Grievance complaints should be directed to Mr. Perkins at (610) 565-1708 ext.102 or via email to yop@youronlineprofessor.net. It is the policy of YourOnlineProfessor.net to respond to every grievance complaint. Such response shall include when appropriate: reviewing the grievance complaint in conjunction with other participant evaluations and discussion of the grievance complaint with the course instructor or other employees.

CONTRIBUTORS: Contributing Editor: Edward Perkins JD, LLM (Tax) Preparation Date: These materials were originally prepared July 1, 2014 and revised and updated August 15, 2015, and updated again February 3, 2020. Technical Reviewer: Stephen Loester JD, LLM (Tax) Review Date: These materials were technically reviewed August 18, 2015.

OFFICIAL NASBA SPONSOR STATEMENT: YourOnlineProfessor.net is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org

COURSE OBJECTIVES Upon completion of this course, you will be able to: >

Identify the examination selection criteria.

Determine the criteria in regard to who may represent the taxpayer during the examination process and the nature of confidential communication between the taxpayer and his or her representative

List the steps in the examination process from the initial interview to what happens if the taxpayer agrees or does not agree with the IRS determination

Identify the limitations on certain IRS actions during the examination process.

Identify the steps required to initiate the appeals process within the IRS to the IRS Office of Appeals.

> >

Identify which cases require a written protest and which allow for small case requests. Recognize the required content of both the written protest and a small case request.

Differentiate between the various alternative resolution procedures available from the IRS, as well as how they are initiated and processed.

Identify which cases may be eligible for alternative resolution.

Identify which alternative resolution procedure may be best for a specific client based on the objectives needed to be achieved.

Identify what role the National Tax Advocate plays in alternative resolution and what factors are used in determining whether a “significant hardship” exists.

Differentiate between the various types of agreements used by the IRS in order to settle tax matters.

Recognize the nature and effect of the settlement reflected by execution of a Form 870 or Form 870-AD.

Specify when the IRS will settle a tax matter by execution of a Closing Agreement.

Identify in what cases a Collateral Agreement will be utilized by the IRS.

Identify the various payment alternatives and the advantages and disadvantages of each.

Specify what steps a taxpayer may take to suspend interest; how to prevent interest from accruing; and when a reduction or abatement of interest may be realized.

Identify the trial level courts which may hear a federal tax case in the United States

Identify which tax cases can be heard by any tax forum, which tax cases can only be heard by the Tax Court, and which tax cases can only be heard by the District Court.

Define the various factors which should be considered when choosing the appropriate tax forum in which to litigate a taxpayer’s appeal.

Define the nature of a taxpayer’s collections appeal rights.

Differentiate between the two options for collection appeals, i.e. Collection Due Process and Collection Appeals Program.

Identify what matters are appealable, the process of appeal, and the ramifications of appeal under both Collection Due Process and Collection Appeals Program.

Identify the ways in which to appeal collection actions of the IRS, including the filing of a Notice of Federal Tax Lien and a proposed levy of the taxpayer’s property.

TABLE OF CONTENTS 4

Section One:

Examinations

Examination of Returns

II.

If a Tax Return is Examined

III.

The Examination Process

Section Two:

Appeals Procedures Within The IRS

In General

II.

Protests and Small Case Requests

Section Three: Alternative Resolution Procedures I.

In General

II.

The National Tax Advocate

13 30

Section Four: Settlement Agreements I.

In General

II.

Forms 870 and 870-AD

Section Five: Payment Alternatives I.

Overview

II.

Suspension of Interest and Penalties

III.

Reduction of Interest

Section Six: Appeal to the Courts I.

Overview

II.

Choice of Forum

Section Seven: Collection Appeals I.

Overview

II.

Collection Actions

III.

Collection of Employment Tax

Index of Definitions

Answers to Review Questions

REVIEW QUESTIONS 5

Throughout the course you will find Review Questions to help you test your knowledge and comments that are vital to understanding a particular strategy or idea. Answers to the Review Questions with feedback on both correct and incorrect responses are provided in a special section beginning on page 107.

INDEX To assist you in your later reference and research, a detailed topical index has been included for this course beginning on page 105.

FINAL EXAM This course is divided into 7 sections. Take your time and review all course sections. When you feel confident that you thoroughly understand the material, turn to the Final Exam on page 111 and complete it. Once completed, submit the Final Exam using the instructions found on page 110 to receive CPE credit.

SECTION ONE – Examinations Learning Objectives. 6

Upon completion of this section, you will be able to: > Identify the examination selection criteria. > Determine the criteria in regard to who may represent the taxpayer during the examination process and the nature of confidential communication between the taxpayer and his or her representative > List the steps in the examination process from the initial interview to what happens if the taxpayer agrees or does not agree with the IRS determination > Identify the limitations on certain IRS actions during the examination process. I.

Examination of Returns A.

In General

1. A tax return may be examined for a variety of reasons, and the examination may take place in any one of several ways. 1 2. After the examination, if any changes to the tax return are proposed, the taxpayer can either agree with those changes or pay any additional tax the taxpayer may owe, or the taxpayer can disagree with the changes and appeal the decision.2 B.

Examination Selection Criteria 1.

DIF System

a. A tax return may be selected for examination on the basis of computer scoring known as the Discriminant Index Function or “DIF”.3 b. DIF is mathematical technique used by the IRS to rate individual income tax returns and some corporate returns for examination potential. 4 c.

As a rule, the higher DIF score the greater potential that the return will be audited. 5

d. The formulas used to rate the returns are confidential and developed by the Service through data obtained through its National Research Program 6. e. The potential is high that an examination of the tax return will result in a change to the taxpayer income tax liability.7 2.

Third Party Communication

a. A tax return may also be selected for examination on the basis of information received from third-party documentation, such as Forms 1099 and W-2 that does not match the information reported on the tax return.8 b. The tax return may also be selected to address both the questionable treatment of an item and to study the behavior of similar taxpayers (a market segment) in handling a tax issue 9. c. In addition, the returns may also be referred to Examinations from the following sources, among others: 1 IRS Publication 556 page 2 2 Id. 3 IRM 4.1.3.2(3) (08-10-2012). 4 Id. 5 Id. 6 Id. 7 IRS Publication 556 page 2 8 Id. 9 Id. 7

(1) By a state department of taxation through the Governmental Liaison Data Exchange Program.10 (2) By governmental agencies that administer certain activities which are subsidized by tax credits or deductions, such as the low-income housing credit (state housing administrations) or the historic rehabilitation credit the National Park Service Office of Historic Preservation) 11;

(3)

As the result of an Offer in Compromise based on doubt as to collectability; 12

(4)

As the result of an employee audit; 13

(5)

By referral from the Department of Justice, in criminal cases. 14

Other Sources

a. In addition, the tax return may be selected as a result of information received from other sources on potential noncompliance with the tax laws or inaccurate filing. 15 b. This information can come from a number of sources, including newspapers, public records, and individuals.16 c. The information is evaluated for reliability and accuracy before it is used as the basis of an examination or investigation.17 C.

Notice of IRS Contact of Third Parties

1. Sec. 7602(c) provides that the Internal Revenue Service may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of the taxpayer reasonable notice in advance.18 2. The IRS must also give the taxpayer notice of post-contact reports disclosing specific third-party contacts on both a periodic basis and upon the taxpayer request. 19 3.

This provision does not apply: a.

To any pending criminal investigation,20

When providing notice would jeopardize collection of any tax liability, 21

Where providing notice may result in reprisal against any person 22, or

When the taxpayer authorized the contact. 23

10 IRM 4.1.4.2.4 (09-10-2013) 11 IRM 4.1.4.2.5 – 6 (09-10-2013) 12 IRM 4.1.4.2.8 (09-10-2013) 13 IRM 4.1.4.2.10 (09-10-2013) 14 IRM 4.1.4.2.11 (09-10-2013) 15 IRS Publication 556 Page 2 16 IRS Publication 556 Pages 2-3 17 IRS Publication 556 Page 3 18 Reg §301.7602-2 (a) 19 Reg. §301.7602-2 (e) 20 Reg. §301.7602-2 (f)(4) 21 Reg. §301.7602-2(f)(2) 22 Reg. §301.7602-2(f)(3) 23 Reg. §301.7602-2(f)(1) 8

II.

If a Tax Return Is Examined A.

Overview 1.

Some examinations are handled entirely by mail. 24

2. Examinations not handled by mail can take place in the taxpayer’s home, the taxpayer’s place of business, an Internal Revenue office, or the office of the taxpayer’s attorney, accountant, or enrolled agent. 25 B.

Representation. 1.

In General

a. Throughout the examination, the taxpayer can act on the taxpayer’s own behalf or have someone represent the taxpayer or accompany the taxpayer.26 b. Any attorney, certified public accountant, enrolled agent, enrolled actuary, or any other person permitted to represent the taxpayer before the Internal Revenue Service who is not disbarred or suspended from practice before the Internal Revenue Service may represent the taxpayer. 27 c. If the taxpayer filed a joint return, either the taxpayer or the taxpayer’s spouse, or both, can meet with the IRS.28 2.

Form 2848

a. A power of attorney is required by the Internal Revenue Service when the taxpayer wishes to authorize a recognized representative to represent the taxpayer in the taxpayer’s absence. 29 b.

The taxpayer can use Form 2848 or any other properly written authorization. 30

c. Under the 2012 revision of Form 2848, taxpayers filing joint returns must each complete and submit a separate Form 2848.31 d. If the taxpayer wants to consult with an attorney, a certified public accountant, an enrolled agent, or any other person permitted to represent a taxpayer during an interview for examining a tax return or collecting tax, the taxpayer should make arrangements with that person to be available for the interview.32 e. If the taxpayer clearly states to an officer or employee of the Internal Revenue Service at any time during any interview (other than an interview initiated by an administrative summons) that the taxpayer wishes to consult with an attorney, certified public accountant, enrolled agent, enrolled actuary, or any other person permitted to represent the taxpayer before the Internal Revenue Service, such officer or employee must suspend the interview.33 24 IRS Publication 556 Page 3 25 Id. 26 IRS Publication 556 Page 9 27 IRC §7521(c) 28 IRS Publication 556 Page 3 29 Reg §601.504 30 IRM 4.19.13.7 (01-01-2015) 31 Id. 32 IRC §7521(c) 33 IRC §7521(b)(2) 9

Third party authorization

a. A taxpayer who has checked the box in the signature area of the taxpayer income tax return (Form 1040, Form 1040A, or Form 1040EZ) to allow the IRS to discuss the tax return with another person (a third party designee), must still complete and file Form 2848 with the IRS. 34 b. The box the taxpayer checked on the tax return only authorizes the other person to receive information about the processing of the tax return and the status of the taxpayer refund during the period the tax return is being processed. 35 C.

Confidentiality privilege

1. Communications between the taxpayer and his or her attorney can be protected as privileged confidential communication.36 2. With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney also apply to a communication between a taxpayer and any federally authorized tax practitioner.37 3.

Confidential communications are those that

a. Advise the taxpayer on tax matters within the scope of the practitioner's authority to practice before the IRS,38 b. c. States.40 D.

Relate to noncriminal tax matters before the IRS 39, or Relate to noncriminal tax proceedings brought in federal court by or against the United

Recordings 1.

The taxpayer may upon advance request make an audio recording of the examination interview. 41

2. The IRS can also record an interview described if such officer or employee (a) informs the taxpayer of such recording prior to the interview, and (b) upon request of the taxpayer, provides the taxpayer with a transcript or copy of such recording but only if the taxpayer provides reimbursement for the cost of the transcription and reproduction of such transcript or copy.42 E.

Transfers to another Area 1.

Generally, the tax return is examined in the area where the taxpayer lives. 43

34 IRS Publication 556 Page 3 35 IRC § 7521(b)(2) 36 Com. v. Schwarz, Kathryn M., (1957, CA Dist Col) 52 AFTR 46, 247 F2d 70, 57-1 USTC ¶9622. 37 IRC §7525(a) 38 IRC §7525(a)(3)(B) 39 IRC §7525(a)(2)(A) 40 IRC §7525(a)(2)(B) 41IRC §7521(a)(1) 42 IRC §7521(a)(2) 43 IRS Publication 556 Page 3 10

2. But if the tax return can be examined more quickly and conveniently in another area, such as where the taxpayer’s books and records are located, the taxpayer can ask to have the case transferred to that area.44 3. Notwithstanding these considerations, the IRC § 7605 (a) provides that the time and place of examination shall be such time and place as may be fixed by the Secretary and as are reasonable under the circumstances.45 F.

Repeat examinations.

1. IRC§ 7605(b) provides a taxpayer shall not be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.46 2. In applying section 7605(b) in any particular case, the threshold question is whether the action at issue is an examination or an investigation. 47 III.

The Examination Process A.

Overview

1. selected.48 2. 3. interview.50

An examination usually begins when the taxpayer is notified that the tax return has been The IRS will tell the taxpayer which records the taxpayer will need. 49 The examination can proceed more easily if the taxpayer gathers the taxpayer’s records before any

4. Any proposed changes to the tax return will be explained to the taxpayer or the taxpayer authorized representative.51

It is important that the taxpayer understand the reasons for any proposed changes. 52

The taxpayer should not hesitate to ask about anything that is unclear to the taxpayer. 53

Explanation of the Process 1.

Before the initial interview the IRS must provide to the taxpayer:

a. In the case of an in-person interview with the taxpayer relating to the determination of any tax, an explanation of the audit process and the taxpayer's rights under such process 54, or 44 Id. 45 IRC § 7605(a) 46 IRC § 7605(b) 47 Chief Counsel Advice 200322021 48 IRS Publication 556 Page 4 49 Id. 50 Id. 51 Id. 52 Id. 53 Id. 54 IRC § 7521(b)(1)(A) 11

b. In the case of an in-person interview with the taxpayer relating to the collection of any tax, an explanation of the collection process and the taxpayer's rights under such process. 55 2. C.

IRS may distribute IRS Pub No. 1 (“Your Rights as a Taxpayer”) as the statement 56

IRS Must Follow 1.

The IRS must follow the tax laws set forth by Congress in the Internal Revenue Code. 57

2. The IRS also follows Treasury Regulations 58, other rules, and procedures59 that were written to administer the tax laws. 3.

The IRS also follows court decisions.60

4. However, the IRS can lose cases that involve taxpayers with the same issue and still apply its interpretation of the law to the taxpayer situation. 61 D.

If Taxpayer Agrees

1. If the taxpayer agrees with the proposed changes, the taxpayer can sign an agreement form and pay any additional tax the taxpayer may owe. 62 2.

The taxpayer must pay interest on any additional tax. 63

3. If the taxpayer pays when the taxpayer signs the agreement, the interest is generally figured from the due date of the tax return to the date of the taxpayer’s payment. 64 4. If the taxpayer does not pay the additional tax when the taxpayer signs the agreement, the taxpayer will receive a bill that includes interest. 65 5. If the taxpayer pays the amount due within 10 business days of the billing date, the taxpayer will not have to pay more interest or penalties. This period is extended to 21 calendar days if the amount due is less than $100,000.66 6. If the taxpayer is due a refund, the taxpayer will receive it sooner if the taxpayer signs the agreement form. The taxpayer will be paid interest on the refund. 67 7. If the IRS accepts the taxpayer’s tax return as filed, the taxpayer will receive a letter in a few weeks stating that the examiner proposed no changes to the tax return. The taxpayer should keep this letter with the taxpayer’s tax records.68 E.

If Taxpayer Does Not Agree

55 IRC § 7521(b)(1)(B) 56 Conf Rept No. 100-1104 Vol II (PL 100-647) pp. II-212 57 IRS Publication 556 Page 4 58 IRM 4.10.7.2.3.4 (01-01-2006) 59 IRM 4.10.7.2.6 (01-01-2006) 60 IRS Publication 556 Page 4 61 Id.; Conf Rept No. 100-1104 Vol II (PL 100-647) pp. II-212 62 IRS Publication 556 Page 4 63 Id. 64 Id. 65 Id. 66 Id. 67 Id. 68 Id. 12

If the taxpayer does not agree with the proposed changes, the examiner will explain the taxpayer’s appeal rights.

1. If the taxpayer examination takes place in an IRS office, the taxpayer can request an immediate meeting with the examiner's supervisor to explain the taxpayer position. If an agreement is reached, the taxpayer’s case will be closed.70 2. If the taxpayer cannot reach an agreement with the supervisor at this meeting, or if the examination took place outside of an IRS office, the examiner will write up the taxpayer’s case explaining the taxpayer’s position and the IRS's position. The examiner will forward the taxpayer’s case for processing. 71

69 Id. 70 Id. 71 IRS Publication 556 Page 4 13

SECTION TWO APPEALS – Procedures Within The IRS Learning Objectives. Upon completion of this section, you will be able to: > Identify the steps required to initiate the appeals process within the IRS to the IRS Office of Appeals. > Identify which cases require a written protest and which allow for small case requests. > Recognize the required content of both the written protest and a small case request. I.

In General

A. The taxpayer can appeal an IRS tax decision to a local IRS Office of Appeals, which is separate from and independent of Examinations.72 B.

The Appeals Office is the only level of appeal within the IRS. 73

C. Conferences with Appeals Office personnel are held in an informal manner by correspondence, by telephone, or at a personal conference.74 D. If the taxpayer wants an appeals conference, the taxpayer’s request should be sent to the Appeals Office to arrange a conference at a convenient time and place. 75 E. The taxpayer or the taxpayer’s representative should be prepared to discuss all disputed issues at the conference. Most differences are settled at this level. 76 F. If agreement is not reached at the taxpayer’s appeals conference, the taxpayer may be eligible to take the taxpayer’s case to court. See Appeals to the Courts, later.77 II.

Protests and Small Case Requests A.

In General

1. When the taxpayer requests an Appeals conference, the taxpayer may also need to file either a formal written protest or a small case request with the office named in the letter the taxpayer received. 78 2. In addition, for the appeal procedures for a spouse or former spouse of a taxpayer seeking relief from joint and several liability on a joint return. 79 B.

Protest - 30-day letter

72 IRS Pub No. 556 (9/2013), p. 8 73 Id. 74 IRM 8.1.1.1 (02-10-2012) 75 IRS Pub No. 556 (9/2013), p. 8 76 Id. 77 Id. 78 IRS Publication 5 Page 1 79 See Rev. Proc. 2003-19, which is on page 371 of the Internal Revenue Bulletin 2003-5 at www.irs.gov/pub/irs-irbs/irb03-05.pdf. 14

1. Within a few weeks after the taxpayer’s closing conference with the examiner and/or supervisor, the taxpayer will receive a package with: a. A letter (known as a 30-day letter) notifying the taxpayer of their rights to appeal the proposed changes within 30 days; 80 b.

A copy of the examination report explaining the examiner’s proposed changes; 81

An agreement or waiver form; and82

A copy of IRS Publication 5.83

2. The taxpayer generally has 30 days from the date of the 30-day letter to notify the IRS whether the taxpayer will accept or appeal the proposed changes. 84 3. The 30-day letter explains what steps the taxpayer should take, depending on which action the taxpayer chooses.85 Appeal Rights are explained later. C.

Written protest 1.

The taxpayer needs to file a written protest in the following cases: a.

All employee plan and exempt organization cases without regard to the dollar amount at

All partnership and S corporation cases without regard to the dollar amount at issue. 87

issue.86

c. All other cases, unless the taxpayer qualifies for the small case request procedure, or other special appeal procedures such as requesting Appeals consideration of liens, levies, seizures, or installment agreements.88 2. If the taxpayer submits a written protest, pursuant IRS Publication 5, the taxpayer needs to provide the following information: a.

name and address, and a daytime telephone number,89

A statement that you want to appeal the IRS findings to the Appeals Office, 90

c. A copy of the letter showing the proposed changes and findings you don’t agree with (or the date and symbols from the letter), 91 d.

The tax periods or years involved,92

80 IRS Publication 556 Page 5 81 Rev. Proc. 74-4, 1974-1 CB 414 82 IRS Publication 556 Page 5 83 Id. 84 Reg. § 601.105(c)(2)(i) 85 Id. 86 Prop. Reg. § 601.106(b)(4)(iii)(C) 87 Id. 88 IRS Publication 5 Page 1 89 Id. 90 Id. 91 Id. 92 Id. 15

agree.

A list of the changes that the taxpayer doesn’t agree with, and why the taxpayer doesn’t

The facts supporting your position on any issue that you don’t agree with, 94

The law or authority, if any, on which you are relying. 95

The taxpayer must sign the written protest, stating that it is true, under the penalties of perjury as

follows: “Under the penalties of perjury, I declare that I examined the facts stated in this protest, including any accompanying documents, and, to the best of my knowledge and belief, they are true, correct, and complete.” 96 4. If the taxpayer’s representative prepares and signs the protest for the taxpayer, he or she must substitute a declaration stating: a.

That he or she submitted the protest and accompanying documents 97 and

b. Whether he or she knows personally that the facts stated in the protest and accompanying documents are true and correct. 98 D.

Small Case Request

1. If the total amount for any tax period is not more than $25,000, the taxpayer may make a small case request instead of filing a formal written protest. 99 2. In figuring the total amount, include a proposed increase or decrease in tax (including penalties), or claimed refund. If the taxpayer is making an offer in compromise, include total unpaid tax, penalties, and interest due.100 3.

For a small case request, the taxpayer should send a letter requesting Appeals consideration, a.

Indicating the changes, the taxpayer does not agree with, 101 and

Indicating the reasons why the taxpayer does not agree. 102

93 Id. 94 Id. 95 Id. 96 Id. 97 Id. 98 Id. 99 Prop. Reg. § 601.106(b)(4)(iii)(A) 100 Prop. Reg. § 601.106(b)(4)(iii)(B)(1), Prop. Reg. § 601.106(b)(4)(iii)(B)(2) 101 Prop. Reg. § 601.106(b)(4)(iii)(A) 102 Id. 16

Review Question—One If the taxpayer does not agree with the examiner’s proposed changes to the tax return, the taxpayer can appeal the examiner’s decision to the local Appeals Office. The taxpayer will need to file either a written protest or a small case request. Written protests are required for all but the following cases: A.

All employee plan cases

All partnership and S corporation cases.

All C corporation cases.

All exempt organization cases.

SECTION THREE – Alternative Resolution Procedures Learning Objectives. Upon completion of this section, you will be able to: > Differentiate between the various alternative resolution procedures available from the IRS, as well as how they are initiated and processed. > Identify which cases may be eligible for alternative resolution. > Identify which alternative resolution procedure may be best for a specific client based on the objectives needed to be achieved. .> Identify what role the National Tax Advocate plays in alternative resolution and what factors are used in determining whether a “significant hardship” exists. I.

In General A.

IRC §7123 – 1.

The IRS is required to develop appeals dispute resolution procedures under IRC §7123. 103

2. Accordingly, the IRS has established procedures under which any taxpayer may request early referral of issues from the examination or collection division to the Office of Appeals (see Early Referral Procedure, following).104 3. Additionally, procedures under which either the taxpayer or the Office of Appeals may request nonbinding mediation of any unresolved issues at the conclusion of the appeals procedure, or an unsuccessful attempt to enter into closing agreement, or an offer in compromise. 105 4. Also, an appeals arbitration process under which the Office of Appeals and the taxpayer may jointly enter into binding arbitration has been established. 106 5. The Office of the Taxpayer Advocate, also called the Taxpayer Advocate Service, is an independent office within the Internal Revenue Service. 107 6. The TAS assists taxpayers in resolving problems with the IRS and has authority to issue a taxpayer assistance order where the taxpayer is suffering or is about to suffer significant hardship as the result of the IRS’s action.108 B.

Fast Track Mediation 1.

Qualifications a.

The Internal Revenue Service offers fast track mediation services (“FTS”) to help

103 IRC § 7123(a) 104 Id. 105 IRC § 7123(b)(1) 106 IRC § 7123(b)(2) 107 IRM 13.1.7.2 (02-04-2015) 108 IRC § 7811(a) 18

taxpayers resolve many disputes109 b.

Such disputes involving the following: (1)

Examinations110

(2)

Offers in compromise111

(3)

Trust fund recovery penalties112

(4) cases)113 c. 2.

Most cases that are not docketed in any court qualify for fast track mediation. 114

Advantages a.

b. 3.

Other collection actions (for example, certain qualifying collection due process

Fast Track Mediation offers: (1)

An expedited process115

(2)

A trained mediator116

(3)

A neutral setting117

The taxpayer doesn’t have to file a written protest to request fast track mediation. 118

Excluded Cases / Issues. a.

Certain cases are excluded from fast track mediation; they include: (1)

Issues in a taxpayer's case designated for litigation; 119

(2)

Issues in a taxpayer's case under consideration for designation for litigation; 120

(3) assistance;121

Issues for which the taxpayer has submitted a request for competent authority

(4) Issues for which the taxpayer has requested the simultaneous Appeals/Competent Authority procedure described in section 8 of Rev. Proc. 2002-52, 2002-31 I.R.B. 242, or the corresponding provision of any successor guidance; 122 109 News Release 2002-80, 06/26/2002, IRC Sec(s). 7802 110 IRS Publication 3605 111 Rev. Proc. 2003-41 Sec. 3.01, 2003-1 CB 1047 112 Id. 113 IRS Publication 3605 114 Rev. Proc. 2003-41 Sec. 3.01 115 IRS Publication 3605 116 Id. 117 Id. 118 Id. 119 Rev. Proc. 2003-41 Sec. 3.02 120 Id. 121 Id. 122 Id. 19

(5) “Whipsaw” issues, i.e., issues for which resolution with respect to one party might result in inconsistent treatment in the absence of the participation of another party; 123 (6) Issues for which mediation would not be consistent with sound tax administration, e.g., issues governed by closing agreements, by res judicata, or by controlling precedent; 124 and (7) Issues that have been identified in a Chief Counsel Notice, or equivalent publication, as excluded from the Fast Track Settlement process. 125 b. If an issue is determined not to be eligible for the FTS program, all issues in the case shall not be eligible for the FTS program.126 4.

Starting the Process

a. If the taxpayer doesn’t agree with any or all of the IRS findings either the taxpayer or the Audit Manager may suggest participation in the FTS program. 127 b. If the other party agrees, the parties may contact the Appeals Fast Track Program Managers who will assist the parties in determining whether the issue is appropriate for the FTS program. 128 c. If the parties determine that the issue is appropriate for FTS, the parties must apply to the program by completing and executing a LMSB Fast Track Agreement form. 129 d. The parties must include the Notice of Proposed Adjustment (Form 5701) and the written response from the taxpayer with the LMSB Fast Track Agreement to complete the package. 130 e. f. package.132 5.

Taxpayers do not need to submit a formal protest for FTS. 131 The LMSB Team Manager will coordinate preparation and submission of the application

Approval of the Application

a. All applications to the FTS program require the approval of the Fast Track Program Managers before acceptance into FTS.133 b. If the Fast Track Program Managers approve the application, the FTS Appeals Official will notify the taxpayer and the Manager.134 c. If the Fast Track Program Managers do not approve the application, the Appeals Fast Track Program Manager will notify the Team Manager within ten days of receipt of the application. 135

123 Id. 124 Id. 125 Rev. Proc. 2003-40, 2003-1 CB 1044 Sec. 3.03, 126 Id. 127 Id. Sec. 4.01 128 Id. 129 Id. 130 Id. 131 Id. 132 Id. 133 Id. Sec. 4.02 134 Id. 135 Id. 20

The Team Manager will, in turn, notify the taxpayer.136

e. The decision not to approve an application for the FTS program is final and not subject to administrative appeal or judicial review.137 6.

Mediation Process

a. The parties and the FTS Appeals Official will agree to and document a projected completion date on the LMSB Fast Track Agreement form. 138 b.

The goal of the FTS program is to complete the entire FTS process in approximately 120

days.139 c. The Team Manager and the taxpayer will also identify a preferred conference site; the taxpayer has the right to request a conference with the manager of the person who issued the findings. 140 7.

The Mediator

a. The process involves an Appeals Officer who has been trained in mediation. The goal of mediation is to help the taxpayer and the IRS resolve the dispute. 141 b. The mediator’s role is to facilitate communication. The mediator will work with the taxpayer and the IRS to obtain the information necessary to understand the nature of the dispute. 142 c.

This includes the issues involved and the positions of both parties. 143

d. The mediator may conduct both separate and joint discussions with the taxpayer and the Internal Revenue Service representative. The purpose is to help the two reach a mutually satisfactory resolution that is consistent with the applicable law.144 e. 8.

The mediator has no authority to require either party to accept any resolution. 145

Representation

a. The taxpayer may represent himself during the mediation session, or someone else can act as the taxpayer representative.146 b. For mediation to succeed, those who have the authority to make a decision must be present. If the taxpayer decides to have someone represent the taxpayer, that person must have the proper authorization to act on the taxpayer’s behalf and to receive confidential information. 147 c.

The taxpayer may use Form 2848, Power of Attorney and Declaration of Representative

136 Id. 137 Id. 138 Id. Sec. 4.03 139 Id. 140 Id. 141 Id. Sec. 5.01 142 IRS Publication 3605 143 Id. 144 Id. 145 IRM 8.26.3.1 (12-05-2014) 146 IRS Publication 3605 147 Id. 21

for this purpose.148 d. The taxpayer can bring anyone else the taxpayer chooses with the taxpayer to support the taxpayer position.149 9.

Post-Session Procedure

a. Unless specific conditions warrant altering the agreement, e.g., a subsequent authoritative decision that materially alters the basis for the agreement, the basis of settlement shall not be modified after the FTS Session Report is signed.150 (1) Nor may either party raise a new issue for FTS consideration after the FTS Session Report is signed unless both parties and the FTS Appeals Official agree. 151 (2) New issues not accepted for consideration under FTS may still be raised and considered outside the FTS program.152 b. After the parties and the FTS Appeals Official sign the FTS Session Report acknowledging a basis of settlement, the FTS Appeals Official will draft the appropriate settlement document to reflect the agreed upon treatment of the issue.153 (1) The FTS Appeals Official may use delegated settlement authority to enter into and approve any Fast Track settlement agreement (e.g., specific matter closing agreement or Form 870-AD)154. (2) Alternatively, LMSB and the taxpayer may resolve an issue using LMSB resolution authority and LMSB will include the issue as an agreed issue in the Revenue Agents Report. 155 (3)

LMSB will then close the case using established case closing procedures. 156

c. If one or more issues remain unsettled at the end of FTS, the FTS Appeals Official will send a letter to both the taxpayer and LMSB, stating who participated in the program, listing any unresolved issues, and explaining the taxpayer’s rights to appeal unresolved issues. 157 10.

General Provisions

a. A resolution reached by the parties through FTS will not bind the parties for taxable years not covered by the FTS Session Report. 158 b. Except as provided in the Fast Track settlement agreement or Delegation Order 236, any such resolution shall not be used as precedent. 159 c.

With respect to FTS cases that are returned for traditional Appeals consideration, ex parte

148 Id. 149 Id. 150 Rev. Proc. 2003-40 Sec. 6.01 151 Id. 152 Id. 153 Id. Sec. 6.02 154 Id. 155 Id. 156 Id. 157 Id. Sec. 6.03 158 Id. Sec. 7.01 159 Id. 22

restrictions will not be imposed on intra-Appeals communications. 160 d. Appeals management will take appropriate measures to ensure these cases are handled fairly and impartially.161 11.

Appeals a.

The taxpayer may withdraw from the mediation process anytime. 162

If any issues remain unresolved, the taxpayer will retain all the usual appeal rights. 163

The Early Referral Procedure

1. The Code provides that the IRS is required to establish procedures by which any taxpayer may request early referral of one or more unresolved issues from the examination or collection division to the Internal Revenue Service Office of Appeals.164 2. This procedure known as the “Early Referral Procedure” is designed to resolve cases more expeditiously by Examinations and Appeals working simultaneously.165 D.

Rev. Procedure 99-28, 1999-129 IRB 1 Rev. Proc. 99-28, is the implementation of IRC §7123. 166

2. This revenue procedure describes the method by which a taxpayer may request an early referral of one or more unresolved issues from the Examination or Collection Division to the Office of Appeals (“Appeals”). 167 The process is optional and may be requested by any taxpayer.168

3. E.

Procedures under Rev. Proc. 99-28 1.

In general.

a. Except as otherwise provided in Rev. Procedure, a taxpayer may request early referral to Appeals of any developed, unagreed issue arising from an audit. 169 b. 2.

Appropriate issues for early referral - Appropriate issues for early referral are limited to those that: a.

case;

Examinations will continue to develop issues that have not been referred to Appeals. 170

If resolved, can reasonably be expected to result in a quicker resolution of the entire

171

160 Id. Sec. 7.02 161 Id. 162 Id. Sec. 2.02; IRM 8.26.3.7 (12-05-2014) 163 Rev. Proc. 2003-40 Sec. 2.02 164 IRC §7123 (a) 165 BNA Portfolio 623-3rd”IRS Procedures ; Examinations and Appeals. 166 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 167 Rev. Proc. 99-28, 1999-2 CB 109 Sec. 1 168 Id. 169 Id. Sec. 2.01 170 Id. 171 Id. Sec. 2.02 23

Both the taxpayer and Examinations agree should be referred to Appeals early; 172

Are fully developed;173 and

d. Are part of a case where the remaining issues are not expected to be completed before Appeals could resolve the early referral issue. 174 3.

Issues excluded from early referral - Early referral does not include an issue: a.

With respect to which a 30-day letter has been issued; 175

That is not fully developed;176

c. When the remaining issues in the case are expected to be completed before Appeals could resolve the early referral issue; 177 d.

That is designated for litigation by the Office of Chief Counsel; 178

e. For which the taxpayer has filed a request for Competent Authority assistance, or issues for which the taxpayer intends to seek Competent Authority assistance; 179 or, f. That is part of a whipsaw transaction. The term "whipsaw" refers to the situation produced when the government is subjected to conflicting claims of taxpayers. A potential whipsaw situation exists whenever there is a transaction between two parties and differing characteristics of transactions will benefit one and hurt the other for tax purposes.180 4.

Initiating the early referral request

a. manager.181 b. 5.

A request for early referral must be submitted in writing by the taxpayer to the case/group The case/group manager may suggest that a taxpayer make such a request. 182

Statement of issues and position - The taxpayer's early referral request must:

a. Identify the taxpayer (and, where applicable, all related persons involved in the issues) and the tax periods to which those issues relate; 183 b.

State each issue for which early referral is requested; 184 and

172 Id. 173 Id. 174 Id.; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 175 Rev. Proc. 99-28 Sec. 2.03 176 Id. 177 Id. 178 Id. 179 Id. 180 Id.; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 181 Rev. Proc. 99-28 Sec. 2.04 182 Id.; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 183 Rev. Proc. 99-28 Sec. 2.05 184 Id. 24

c. Describe the taxpayer's position with regard to the relevant early referral issues. This statement must contain a brief discussion of the material facts and an analysis of the facts and law as they apply to each early referral issue.185 6.

Perjury Statement

a. The early referral request, and any supplemental submission (including additional documents), must include a declaration in the following form: Under penalties of perjury, I declare that I have examined this request [or submission], including accompanying documents, and to the best of my knowledge and belief, the facts presented are true, correct, and complete.186 b. This declaration must be signed by any person currently authorized to sign the taxpayer’s federal income tax returns.187 7.

Signatures

a. The early referral request must be signed by the taxpayer or the taxpayer's authorized representative.188 b. It is preferred that Form 2848, Power of Attorney and Declaration of Representative, be used to designate an authorized representative, with regard to an early referral request under this revenue procedure.189 8. Notification of action - The case/group manager will, where feasible, notify the taxpayer of the decision to accept or reject an issue in the early referral request within 14 days of receiving the request. 190 9.

Appeal of denial of early referral request

a. There is no formal taxpayer appeal if the early referral request is denied in whole or in part; however, the taxpayer can request a conference with the Internal Revenue Service supervisor of the case/group manager who denied the early referral request. 191 b. If the case/group manager does not approve the early referral request with respect to any issue, the taxpayer retains the right to pursue the administrative appeal of any proposed deficiency related to that issue at a later time.192 10.

Issuance of notice of proposed adjustment or explanation of adjustment

a. Examination will complete a Form 5701, Notice of Proposed Adjustment, or an equivalent form (the Notification Form) for each early referral issue approved pursuant to this revenue procedure. 193 b. Examination will send the Notification Form to the taxpayer generally within 30 days from the date the early referral request was accepted. 194 185 Id.; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 186 Rev. Proc. 99-28 Sec. 2.06 187 Id.; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 188 Rev. Proc. 99-28 Sec. 2.07 189 Id.; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 190 Rev. Proc. 99-28 Sec. 2.08; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 191 Rev. Proc. 99-28 Sec. 2.09 192 Id. Sec. 2.10; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 193 Rev. Proc. 99-28 Sec. 2.11 194 Id. 25

c. The Notification Form will describe the issue and explain the Examination's proposed 195 adjustment. 11.

Taxpayer response to Notification Form

a. The taxpayer must respond in writing to each of Examination's proposed adjustments set forth in the Notification Form.196 b. issues.197

The response must contain an explanation of the taxpayer's position regarding the

c. The response shall be submitted to the case/group manager within 30 days (unless extended by the case/group manager) from the date that the proposed adjustment (the Notification Form) is sent to the taxpayer.198 d. If a response is not received for any issue within the time provided, the taxpayer’s early referral request will be considered withdrawn regarding that particular issue without prejudice to the taxpayer’s right to an administrative appeal at a later date. 199 12.

Early referral file sent to Appeals

a. Once the taxpayer has responded to the Notification Form, Examination will send the early referral file to Appeals.200 b.

Appeals will then take jurisdiction over the issues accepted for early referral. 201

All other issues in the case remain in Examination's jurisdiction. 202

The early referral file should include copies of: (1)

Applicable portions of tax returns and work papers; 203

(2)

The approved early referral request;204

(3)

The Notification Form;205

(4)

The taxpayer's written response to the Notification Form; 206

(5)

Examination's response to the taxpayer's position, if any; 207 and

(6)

An estimate of the potential tax effect of the proposed adjustment. 208

195 Id.; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 196 Rev. Proc. 99-28 Sec. 2.12 197 Id. 198 Id. 199 Id.; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 200 Rev. Proc. 99-28 Sec. 2.13 201 Id. 202 Id. 203 Id. 204 Id. 205 Id. 206 Id. 207 Id. 208 Id.; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 26

12.

Resolving the early referral issues

a. The taxpayer’s written response to the Notification Form generally serves the same purpose as an Appeals protest. b. Established Appeals procedures, including those governing submissions and taxpayer conferences, apply to early referral issues.209 13.

Agreement reached

a. If an agreement is reached with respect to an early referral issue generally, a Form 906, Closing Agreement is needed.210 b. The closing agreement is used to compute the corrected tax as a partial agreement prior to or concurrently with the resolution of any other issues in the case. 211 14. Agreement not reached - If early referral negotiations are unsuccessful and an agreement is not reached with respect to an early referral issue: a. Taxpayers may then request mediation for the issue, provided the early referral issue meets the requirements for mediation.212 b.

If mediation is not requested, Appeals will close the early referral . 213

c. The withdrawal request must be communicated in writing to the Appeals Officer assigned the early referral.214 D.

Binding Arbitration. 1.

Background

a. IRC § 7123(b)(2), as enacted by § 3465 of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 685, provides that the Secretary had to establish a pilot program under which a taxpayer and Appeals may jointly request binding arbitration on certain unresolved issues.215 b. c. procedure217. 2.

On January 18, 2000, Appeals began a two-year test of an initial arbitration procedure. 216 On July 1, 2003, Appeals completed an additional one-year test of its arbitration

Rev. Proc. 2006-44

a. Rev. Proc. 2006-44, formally established the Appeals arbitration program, which is designed to improve tax administration, provide customer service and reduce taxpayer burden. 218 209 Rev. Proc. 99-28 Sec. 2.14 210 Id. Sec. 2.15 211 Id.; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 212 Rev. Proc. 99-28 Sec. 2.16 213 Id. 214 Id. Sec. 2.19; 1999-29 I.R.B. 109, superseding Rev. Proc. 96-9, 1996-2 I.R.B. 15. 215 IRC § 7123(b)(2) 216 See Announcement 2000-4, 2000-1 COB. 317. 217 See Announcement 2002-60, 2002-2 C.B. 28. 218 Rev. Proc. 2006-44, 2006-2 CB 800 27

b. Arbitration is available for cases within Appeals jurisdiction that meet the operational requirements of the program.219 c. Generally, this program is available for cases in which a limited number of factual issues remain unresolved following settlement discussions in Appeals. 220 d. Within Appeals, the Office of Tax Policy and Procedure will be responsible for the management of the Appeals arbitration program. 221 3.

Scope of the Arbitration

a. The arbitration procedure may be used to resolve issues while a case is in Appeals, after settlement discussions are unsuccessful and, generally, when all other issues are resolved but for the specific factual issue(s) for which arbitration is being requested. 222 b. The arbitration procedure does not create any special authority for settlement by Appeals. During the arbitration process, Appeals is still subject to the procedures that would be applicable if the issue were being considered by Appeals, including procedures in the Internal Revenue Manual and existing published guidance. 223 c.

Arbitration is available: (1)

Only for factual issues;224

(2) For factual issues for which a request for competent authority assistance has not 225 yet been filed; and (3) For factual issues unresolved at the conclusion of unsuccessful attempts to enter into a closing agreement under I.R.C. § 7121.226 d.

Arbitration will not be available for: (1)

Legal issues;227

(2) Cases in which arbitration is not appropriate under either 5 U.S.C. § 572 or 5 U.S.C. § 575, which provide the general authority and guidelines for the use of alternative of dispute resolution in the administrative process; 228 (3)

Issues docketed in any court;229

(4)

Issues in a taxpayer’s case designated for litigation; 230

219 Id. Sec. 1 220 Id. 221 Id. 222 Id. Sec. 3.01 223 Id. Sec. 3.02 224 Id. Sec. 3.03 225 Id. 226 Id. 227 Id. Sec. 3.04 228 Id. 229 Id. 230 Id. 28

(5) Compliance Coordinated (formerly Industry Specialization Program) Issues (CCI) or Appeals Coordinated Issues (ACI) listed at http://www.irs.gov/individuals/article/0,,id=128327,00.html; see §§ 8.7.3.2.1 and 8.7.3.2.2 of the Internal Revenue Manual, found at http://www.irs.gov/irm/index.html; 231 (6) Issues for which a request for competent authority assistance has been filed under the provisions of Rev. Proc. 2002-52, or any successor guidance, including issues in cases submitted to the competent authority under the simultaneous appeals procedure. If the competent authority declines assistance, the competent authorities fail to agree, or if the taxpayer does not accept the mutual agreement reached by the competent authorities, the taxpayer is permitted to refer the unresolved issues to Appeals for further consideration and may submit a request to arbitrate unresolved factual issues under this revenue procedure; 232 (7) Collection cases, except for those involving: (i) an unsuccessful attempt to enter into a compromise under I.R.C. § 7122; and (ii) trust fund recovery penalty (TFRP) cases that involve whether a person: (a) was required to collect, truthfully account for, and pay over income, employment, or excise taxes; (b) was willful in attempting in any manner to evade or defeat any aforementioned tax or the payment thereof; and (c) is liable for the TFRP under I.R.C. § 6672; as provided for in any subsequent guidance issued by the Service; 233 (8) Issues for which arbitration would not be consistent with sound tax administration, e.g., issues governed by closing agreements, by res judicata, or controlling Supreme Court precedent;234 (9) “Whipsaw” issues, i.e., issues for which resolution with respect to one party might result in inconsistent treatment in the absence of the participation of another party; 235 (10) Frivolous issues, such as, but not limited to, those identified in Rev. Proc. 2001-41, 2001-2 C.B. 173, which defines frivolous issues and sets forth the Service’s policy against making technical rulings on such issues. 236 (11) Cases in which the taxpayer did not act in good faith during Appeals settlement negotiations, e.g., failure to respond to document requests, failure to respond timely to offers to settle, failure to address arguments and precedents raised by Appeals; 237 or (12) program. 238 4.

Issues that have been otherwise identified as excluded from the arbitration

Application Process

a. Arbitration is optional for both the taxpayer and Appeals. Either the taxpayer or Appeals may submit a request to arbitrate after consulting with the other party.239

231 Id. 232 Id. 233 Id. 234 Id. 235 Id. 236 Id. 237 Id. 238 Id. 239 Id Sec. 4.01 29

b. A taxpayer may submit a request to arbitrate by sending a written request to the appropriate Appeals Team Manager and a copy to the Chief, Appeals, 1099 14th Street, NW, Suite 4200 East, Washington, DC 20005, Attn: Office of Tax Policy and Procedure. 240 The request to arbitrate should: (1) Provide the taxpayer’s name, TIN, address, and the name, title, address and telephone number of a person to contact;241 (2) Provide the Appeals Team Case Leader’s, Appeals Officer’s, or Settlement Officer’s name;242 (3)

Identify the taxable period(s) involved;243

(4) Describe the issue for which the taxpayer is requesting arbitration, including the dollar amount of the adjustment in dispute; 244 and (5)

Contain a representation that the issue is not an excluded issue listed above. 245

c. The Appeals Team Manager will respond to the taxpayer and the Appeals Team Case Leader, Appeals Officer, or Settlement Officer, generally, within two weeks after the Appeals Team Manager receives the taxpayer’s request for arbitration. 246 d. The Appeals Team Manager will secure the concurrence of the Chief, Appeals — Office of Tax Policy and Procedure, prior to notifying the taxpayer and the Appeals Team Case Leader, Appeals Officer, or Settlement Officer of the decision.247 (1) If Appeals approves the request to arbitrate, the Appeals Team Manager will schedule a conference or conference call that will include a representative from the Chief, Appeals — Office of Tax Policy and Procedure.248 (2) This representative will act as the Administrator to manage and supervise the arbitration proceeding and to act as liaison between the taxpayer and Appeals (the Parties) and between the Parties and the Arbitrator. At a later date, the Parties may select another Administrator, including non-IRS persons.249 (3) Although no formal appeal procedure exists for the denial of a request to arbitrate, a taxpayer may request a conference with the Appeals Team Manager to discuss the denial. The denial of a request to arbitrate is not subject to judicial review. 250 5. Agreement to Arbitrate - Upon approval of the request to arbitrate, the Parties will enter into a written agreement to arbitrate.251 6.

The Arbitration Process

240 Id. Sec. 4.02 241 Id. 242 Id. 243 Id. 244 Id. 245 Id. 246 Id. Sec. 4.03 247 Id. 248 Id. 249 Id. 250 Id. 251 Id. Sec. 5.01 30

a. A Party must notify the other Party and the Administrator, in a signed writing, not later than thirty (30) days before the arbitration session, of any change to the initial list of Participants contained in the agreement to arbitrate.252 (1) The Parties, by mutual agreement, may modify the list of Participants at any time up to and including the date of the arbitration session. The Administrator will forward each Party’s list(s) to the Arbitrator. Appeals reserves the right to have an observer attend any arbitration. 253 (2) If a taxpayer does not accept observers, the taxpayer’s request for arbitration may be denied. Taxpayers may also have an observer attend any arbitration session. 254 (3) The identity and affiliation of all observers will be established in the agreement to arbitrate signed prior to the arbitration session. 255 (4) All observers affiliated with Appeals will be bound by the confidentiality provisions of the Internal Revenue Code.256 (5) Appeals also reserves the right to have the Office of Chief Counsel assist and participate in the arbitration proceeding. 257 b. The Parties, by mutual agreement, may select an Arbitrator from Appeals, or from any local or national organization that provides a roster of neutrals. 258 (1) In the event such local or national organization provides an Arbitrator, this organization may also provide the Administrator for the arbitration, in lieu of the Administrator from the Chief, Appeals — Office of Tax Policy and Procedure. 259 (2) In obtaining the services of a non-IRS Arbitrator, the IRS will follow all applicable provisions of the Federal Acquisition Regulation. 260 (3) An Arbitrator shall have no official, financial, or personal conflict of interest with respect to the Parties, unless such interest is fully disclosed in writing to the taxpayer and the Appeals Team Manager and they agree that the Arbitrator may serve. See 5 U.S.C. § 573.261 c. If the Parties select a non-IRS Arbitrator, the Parties will share equally the compensation, expenses, and related fees and costs of the Arbitrator, as well as any reasonable costs for the services of a non-IRS Administrator subject to applicable rules and regulations for Government procurement. The nonIRS Arbitrator and non-IRS Administrator will be contractors subject to the disclosure restrictions of I.R.C. § 6103(n).262 d. If the Parties select an Appeals Arbitrator, the Arbitrator shall be from another Appeals office, or from the office of the Chief, Appeals. 263 252 Id. Sec. 6.01 253 Id. 254 Id. 255 Id. 256 Id. 257 Id. 258 Id. Sec. 6.02 259 Id. 260 Id. 261 Id. 262 Id. Sec. 6.03 263 Id. Sec. 6.04 31

(1)

Appeals will pay all expenses associated with an Appeals Arbitrator. 264

(2) Due to the inherent conflict that results because the Appeals Arbitrator is an employee of the IRS, the Appeals Arbitrator will provide to the taxpayer a statement confirming the proposed service as an Arbitrator and status as a current employee of the IRS, and that a conflict results from the continued status as an IRS employee. 265 e. Criteria for selecting an Arbitrator may include some or all of the following: completion of arbitration training, previous arbitration experience, a substantive knowledge of tax law and knowledge of industry practices.266 (1) The Arbitrator’s qualifications and potential conflicts of interest should be thoroughly reviewed prior to selection. 267 (2) The projected travel costs, hourly fees and other expenses of a non-IRS Arbitrator are subject to the applicable rules and regulations for Government procurement. 268 (3) The non-IRS Arbitrator shall look solely to each Party for one-half of the compensation, expenses and related reasonable fees and costs. 269 7.

Arbitration Session

a. Each Party will prepare a summary of its position for consideration by the Arbitrator. The Parties should submit their summaries to the Administrator no later than thirty (30) days before the scheduled arbitration session. 270 b. The Arbitrator will look solely to the legal guidance identified by the Parties. If the Arbitrator desires further legal guidance, both Parties must agree to provide the guidance and the manner in which it is to be communicated to the Arbitrator.271 c. The arbitration process is confidential. Therefore, all information concerning any dispute resolution communication related to the arbitration proceeding is confidential and may not be disclosed by any Party, Participant, or Arbitrator, except as provided under 5 U.S.C § 574. A dispute resolution communication includes all oral or written communications prepared for purposes of a dispute resolution proceeding. See 5 U.S.C. § 571(5). 272 d. The Parties agree that there shall be no ex parte communications between the Arbitrator and either Party or agent for a Party. In addition, the Arbitrator may not have contact with any other individuals, including Participants, outside the arbitration session, concerning the arbitration matter without the express approval of the Parties. 273

264 Id. 265 Id. 266 Id. Sec. 6.05 267 Id. 268 Id. 269 Id. 270 Id. Sec. 7.01 271 Id. Sec. 7.02 272 Id. Sec. 7.03 273 Id. Sec. 7.04 32

(1) Any contact with the Arbitrator by either Party must be in the presence of the other Party and the Administrator. Written submissions should be sent simultaneously to the Administrator and the other Party.274 (2) The Administrator will in turn send the submissions to the Arbitrator. See section 6 of Exhibit 1. Should the Parties require additional information or clarification regarding the arbitration process, they shall contact the Administrator.275 e. By mutual agreement, the Parties may withdraw from the arbitration process to reach a final Appeals settlement at any time prior to the date of the arbitration session. Postponements for good cause shall be determined by agreement between the Parties. 276 8.

Post Arbitration

a. Generally, no later than thirty (30) days after completion of the arbitration proceeding, the Arbitrator will prepare a written report and submit a copy to the Administrator. 277 (1) Because the Arbitrator is limited to the task of finding facts, the report will not provide any decision or reasoning that represents an interpretation of the law. 278 (2) Neither Party may appeal the decision of the Arbitrator or contest the decision in any judicial proceeding, including, but not limited to, the Tax Court, United States Court of Federal Claims or a federal district or appellate court. 279 b. Once the Arbitrator renders a decision on all or some issues through the arbitration process, Appeals will use established procedures to close the case, including preparation of a specific matters closing agreement (Form 906). Delegation Order 236 (Rev. 3), or any successor delegation order, may apply to settlements resulting from the arbitration process. 280 c. If applicable, Appeals will report a settlement reached as a result of the arbitration process to the Joint Committee on Taxation in accordance with I.R.C. § 6405.281 II.

The National Tax Advocate

A. The National Taxpayer Advocate assists taxpayers in resolving problems with the IRS and has the authority to issue a taxpayer assistance order where the taxpayer is suffering, or is about to suffer, significant hardship as a result of the IRS’s actions 282 B.

In general. It shall be the function of the Office of Taxpayer Advocate to 1.

Assist taxpayers in resolving problems with the Internal Revenue Service; 283

Identify areas in which taxpayers have problems in dealings with the Internal Revenue Service; 284

274 Id. 275 Id. 276 Id. Sec. 7.05 277 Id. Sec. 8.01 278 Id. 279 Id. 280 Id. Sec. 8.02 281 Id. Sec. 8.03 282 IRC §§ 7803(c) and 7811; Reg. §301.7811-1. 283 IRC § 7803(c)(2)(i) 284 IRC § 7803(c)(2)(ii) 33

3. To the extent possible, propose changes in the administrative practices of the Internal Revenue Service to mitigate problems identified under subparagraph 2., 285 and 4. C.

Identify potential legislative changes which may be appropriate to mitigate such problems. 286

“Significant hardship” means 1.

An immediate threat of adverse action;287

A delay of more than 30 days in resolving taxpayer account problems; 288

3. The incurring by the taxpayer of significant costs (including fees for professional representation) if relief is not granted;289 or 4.

Irreparable injury to, or a long-term adverse impact on, the taxpayer if relief is not granted. 290

285 IRC § 7803(c)(2)(iii) 286 IRC § 7803(c)(2)(iv) 287 IRC § 7811(a)(2)(A) 288 IRC § 7811(a)(2)(B) 289 IRC § 7811(a)(2)(C) 290 IRC § 7811(a)(2)(D) 34

Review Question—Two Appropriate issues for early referral are limited to those except which of the following: A.

If resolved, can reasonably be expected to result in a quicker resolution of the entire case;

Both the taxpayer and Examinations agree should be referred to Appeals early;

Still need to be more thoroughly developed;

Are part of a case where the remaining issues are not expected to be completed before Appeals could resolve the early referral. Review Question—Three

Arbitration may be used to resolve the following issues: A.

Factual issues.

Legal issues.

Issues docketed in any court.

“Whipsaw” issues.

SECTION FOUR – Settlement Agreements Learning Objectives. Upon completion of this section, you will be able to: > Differentiate between the various types of agreements used by the IRS in order to settle tax matters. > Recognize the nature and effect of the settlement reflected by execution of a Form 870 or Form 870-AD. > Specify when the IRS will settle a tax matter by execution of a Closing Agreement. > Identify in what cases a Collateral Agreement will be utilized by the IRS.

Overview

A. It is Appeals stated mission to resolve tax controversies, without litigation, on a basis which is fair and impartial to both 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. 291 B.

Settlements with Appeals fall within one of the following categories:

1. Mutual-Concession Settlements -Case dispositions involving concessions by both the Government and the taxpayer for the purpose of settlement where there is substantial uncertainty in event of litigation as to how the courts would interpret and apply the law, or as to what facts the courts would find, are designated as mutualconcession settlements.292 2.

Split-Issue Settlements –

a. A “split-issue” settlement is a form of mutual-concession settlement of an issue which, if litigated, would result in a decision completely for the Government or the taxpayer. The distinguishing feature of a split-issue settlement is that the agreed result would not be reached, if tried. 293 b. It is IRS policy that Appeals may enter into settlements based on a percentage or stipulated amount of the tax in controversy, but such settlement, identified as a "split-issue" settlement, is only used when no other method of settlement is appropriate. 294 3.

Nuisance Value Settlements

a. It is against IRS policy to settle a case based on nuisance value to either party. Nuisance value is any concession made solely to eliminate the inconvenience or cost of further negotiations or litigation and is unrelated to the merits of the issues. 295 b. Appeals neither exacts a concession nor grants a concession solely to relieve either party of such inconvenience or cost.296 291 IRM 8.6.4.1 (10-26-07) 292 IRM 8.6.4.1.1 (10-26-07) 293 IRM 8.6.4.1.2 (10-26-07) 294 Id. 295 IRM 8.6.4.1.3 (10-26-07) 296 Id. 36

Form of Agreements

Appeals uses four types of agreement forms: (1) the usual waiver of restrictions on assessment, Form 870; (2) the special-purpose waiver form used in the Appeals Office, Form 870-AD; (3) a closing agreement; and (4) a collateral agreement. 297 D.

Settlement of Docketed Cases

1. Settlement of a docketed Tax Court case is reflected not on an IRS form but in a stipulated decision, which, when signed and filed by the presiding judge, becomes the judgment of the Tax Court. 298 Cant find cite 2. The stipulated decision generally states that a taxpayer owes a deficiency in a specific amount or that the taxpayer is entitled to an overpayment in some specific amount. 299 CANT FIND THIS IN CITE II.

Forms 870 and 870-AD A.

Overview

1. In nondocketed cases, the settlement of the parties is reflected in agreement forms of the 870 and 870-AD series.300 2.

The Form 870 and Form 870-AD series differ in a number of important respects.

a. does not.301

The AD agreement contains pledges against reopening, whereas the usual 870 agreement

b. In general, this means that once an AD agreement is executed, the Service may not make an additional assessment, and the taxpayer may not sue for refund. 302 NEED CITE c. If the normal Form 870 is executed, the Service may make a further assessment, and the taxpayer may sue for refund.303 d. Another difference between the two forms is that the 870 agreement becomes effective as a waiver of restrictions on assessment when the Service receives it, but the special AD agreement form becomes effective only on acceptance by or on behalf of the Commissioner. 304 e. The suspension of interest provided by Section 6601(d) is controlled by the date the special AD agreement becomes effective. The date the form is received is controlling for an 870 agreement.305 3. In general, Form 870 series agreement forms are used when a mutual concession settlement is not involved or when the amount of tax involved in a mutual concession settlement is not material enough to require the finality of the Form 870-AD.306. 297 IRM 8.6.4.4 (10-26-07), IRM 8.6.4.5 (10-15-2005) 298 FIND CITE 299 IRM 8.4.1 300 IRM 8.6.4.1.3 (10-26-07)-8.6.4.3??? 301 IRM 8.6.4.3.1 (10-26-07) 302 CITE 303 CITE 304 Id.----(IRM 8.6.4.3.1) 305 Id. 306 IRM 8.6.4.3.2. (06-19-2008) 37

4. Both the Form 870 and the Form 870-AD may be modified, for example, when agreement can be reached on some but not all issues. 307 5. If there are mutual concessions, a Form 870-AD is required, but modifications limiting the pledges against reopening are limited to the settled issues, and those issues are identified on the back of the form. 308 6. The agreement form, Form 870-AD, is used when there is a settlement with reservations, a term that applies to a nondocketed case when settlement is reached but the taxpayer or the Service wishes to reserve one or more issues, and no weight was given to the reserved issue in arriving at the settlement. 309 a.

For example, the back of the Form 870-AD might provide,

“The taxpayer reserves the right to timely file a claim for or credit or prosecute a timely claim solely on the grounds,” which are then described.” 310 b. However, the Service Manual instructs Appeals officers to add to the reservation the following language, “This offer of restrictions is not to be construed as a claim for refund or credit, formal or informal, concerning the matters for which the right to file a claim is reserved.” 311 7. The Form 870-AD is also modified to reflect carrybacks given effect in the settlement 312, overpayments used to offset deficiencies in related cases, 313 prepayment credit adjustments,314 and unverified estate tax credits. 315 B.

Finality of Forms 870 and 870-AD

1. As noted previously, the execution of a Form 870 by a taxpayer does not preclude the taxpayer from later filing a claim for refund of the paid deficiency after the statutory period of assessment has run. 316 2.

The Form 870 is merely a waiver of the restrictions on assessment and states:

“Your consent will not prevent you from filing a claim for refund (after you have paid the tax) if you later believe you are so entitled.317” 3. The form does note that by signing the waiver, the taxpayer will not be able to contest the deficiencies in the Tax Court.318 4. In addition to leaving open the possibility of a taxpayer's filing a refund claim, the form also states in cautionary terms that execution of the waiver does not prevent the Service “from later determining, if necessary, that (the taxpayer) owe(s) additional tax....” 319 307 IRM 8.6.4.4 (10-26-2007) 308 IRM 8.6.4.4.1 (10-26-2007) 309 IRM 8.6.4.4.2 (10-26-2007) 310 Id. 311 Id. 312 IRM 8.6.4.4.3 (10-26-2007) 313 IRM 8.6.4.4.4 (10-26-2007) 314 IRM 8.6.4.4.5 (10-26-2007) 315 IRM 8.6.4.4.3.c-----DIDN’T SEE THIS AT CITE 316 BNA Portfolio 623-3rd: Procedures: Examinations and Appeals, IV.H.1.a 317 Instructions to Form 870, Page 2 318 Id. 319 Id. 38

5. However, Form 870 does not extend the assessment period. 320 Because the language of the form permits reopening of the issues, a taxpayer's request to sign a Form 870 puts the Appeals Office on notice that finality is not contemplated. C.

Appeals Office Preference

1. The Appeals Office prefers to use Form 870-AD, which states that “no claim for refund or credit shall be filed or prosecuted” for the years involved. 321 2. For its part, the Service promises in the Form 870-AD that the case will not be reopened by the Commissioner “in the absence of fraud, malfeasance, concealment or misrepresentation of a material fact, an important mistake in mathematical calculation, or excessive tentative allowances of (net operating loss) carrybacks.” 3. III.

Even in such instances, the case will not be reopened without high-level approval. 322

Closing Agreements A.

Overview

1. IRC § 7121, provides the only statutorily basis for entering into an agreement binding on both the Service and a taxpayer is a closing agreement. 323 2. Under that Code Section if such agreement is approved by the Secretary the agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact: a. The case will not be reopened as to the matters agreed upon or the agreement modified by any officer, employee, or agent of the United States, 324 and b. In any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith, shall not be annulled, modified, set aside, or disregarded. 325 3. B.

A Closing Agreement will only bind the parties in regard to matters specifically agreed to. 326

Finality

Because of the finality of Closing Agreements, the Service's practice is to discourage the use of a closing agreement in the settlement of an Appeals Office case. 327 1. The Service Manual instructs Appeals officers to explain the Service's policy on reopening to a taxpayer who requests greater finality and to persuade the taxpayer that a Form 870 or Form 870-AD type of agreement is adequate.328

320 Id. 321IRM 8.6.4.3.3 (10-26-07). 322 Regs. §601.106(h)(2); Prop. Regs. §601.106(h)(1)(ii). See Policy Statement 8-3 (Formerly P-8-50) (1-5-07) at IRM 1.2.17.1.3. 323 IRC§7121(a) 324 IRC§7121(b)(1) 325 IRC§7121(b)(2) 326 See Estate of Magarian v. Commissioner, 97 T.C. 1 (1991); Zaentz v. Commissioner, 90 T.C. 753 (1988). 327 IRM 8.6.4.3.3 (10-26-2007) 328 Id. 39

2. However, a closing agreement may be used if the taxpayer still insists on finality and the government will sustain no disadvantage. 329 C.

Appeals Request

1. The Appeals officer may request a closing agreement when there is doubt that a taxpayer or taxpayer's representative will abide by the finality provisions of the Form 870-AD agreement. 330 2. A closing agreement is also used in (i) certain settlements of fraud cases if the period for assessment of the tax might be barred except for fraud; (ii) related cases if there is a risk that the government might be whipsawed to its disadvantage; and (iii) continuing-issue cases if the basis of property or similar issues is involved.331 D.

Forms

1. Closing agreements may be reflected on Form 866, Agreement As to Final Determination of tax Liability; Form 906, Closing Agreement on Final Determination Covering Specific Matters; or the agreement may be drafted electronically utilizing the pattern language of Form 866 or Form 906. 2. matters.332 IV.

In addition, a combined agreement may be drafted that determines both tax liability and specific

Collateral Agreements. A.

When a Collateral Agreement is Utilized

1. Collateral agreements are utilized in compromise cases, estate tax cases and related income tax valuations, gift tax cases, and in other Appeals cases under appropriate circumstances. 333 2. Collateral agreements refer to statements secured from, and signed by or for, taxpayers or related parties to clarify, or obtain a commitment relative to, some related matter other than the amount of assessment or overassessment involved in the case disposition. 334 B.

Privity of Interests

1. Collateral agreements have often been used to commit related taxpayers where there is privity of interest (mutual or successive relationship to the same rights of property) and legal consideration involved. 335 2. For example, collateral agreements have been frequently obtained from trustees or beneficiaries who have received or will receive assets from an estate. 336 3. The signing of a collateral agreement may commit a trustee or beneficiary to use the same valuation for income tax purposes as was used for estate tax purposes. 337 C.

Distinguished from Closing Agreements

329 Id. 330 IRM 8.6.4.5. (10-15-2005) 331 NEED CITE 332 IRM 8.13.1.1.1.10 (11-09-2007) 333 IRM 8.13.1.1.3.1 (11-09-2007) 334 Id. 335 IRM 8.13.1.1.3.2 (11-09-2007) 336 Id. 337 Id. 40

1. One important distinction between collateral agreements and closing agreements is that the former do not purport to bind the Service. They are one-sided commitments. The Service does not enter into and sign these agreements.338 2. In addition, another important distinction between collateral agreements and closing agreements is that the former are administrative devices not expressly provided for by the Code while the latter are authorized by IRC 7121.339 3. Courts have pointed out that the Code provides two methods of disposing of tax matters by agreement with finality and that those methods are by offer in compromise under IRC 7122 and by closing agreement under IRC 7121.340 4. Therefore, if large amounts are involved and the government is potentially subject to a substantial loss of revenue if a taxpayer or related party should fail to comply with a contemplated disposition, a closing agreement should be secured instead of a collateral agreement. 341

338 IRM 8.13.1.1.3.3 (11-09-2007) 339 IRM 8.13.1.1.3.4 (11-09-2007) 340 Id. 341 Id. 41

Review Question—Four When may an Appeals Officer request a closing agreement? A.

When there is doubt that a taxpayer or taxpayer’s representative will abide by the finality provisions of Form 870-AD agreement.

Under any circumstances.

Unrelated cases where there is no risk of whipsaw.

Only when the taxpayer insists on finality.

SECTION FIVE – Payment Alternatives Learning Objectives. Upon completion of this section, you will be able to: > Identify the various payment alternatives and the advantages and disadvantages of each. > Specify what steps a taxpayer may take to suspend interest; how to prevent interest from accruing; and when a reduction or abatement of interest may be realized. I.

Overview A.

Installment Agreement Request

1. The taxpayer can request a monthly installment plan if the taxpayer cannot pay the full amount the 342 taxpayer owes. 2.

To be valid, the taxpayer’s request must be approved by the IRS. 343

3. However, if the taxpayer owes $10,000 or less in tax and the taxpayer meets certain other criteria, the IRS must accept the taxpayer’s request. 344 4. Before the taxpayer requests an installment agreement, the taxpayer should consider other less costly alternatives, such as a bank loan.345 5. The taxpayer will continue to be charged interest and penalties on the amount the taxpayer owes until it is paid in full.346 6. Unless the taxpayer’s income is below a certain level, the fee for an approved installment agreement has increased to $105 ($52 if the taxpayer makes the taxpayer payments by electronic funds withdrawal).347 7.

If the taxpayer’s income is below a certain level, the taxpayer may qualify to pay a reduced fee of

$43.348 8. Request. B.

For more information about installment agreements, see Form 9465, Installment Agreement

Offer in Compromise

1. In certain circumstances, the IRS will allow the taxpayer to pay less than the full amount the taxpayer owes.349 2. If the taxpayer thinks the taxpayer may qualify, the taxpayer should submit the taxpayer’s offer by filing Form 656, Offer in Compromise. 342 IRC § 6159(a) 343 Treas. Reg. § 301.6159-1(c)(1)(i) 344 IRC § 6159(c) 345 Instructions to Form 9465, page 1 346 Instructions to Form 9465, page 2 347 IRM 4.20.4.3 (02-26-2013) 348 Id. 349 IRC § 7122(a) 43

The IRS may accept the taxpayer’s offer for any of the following reasons. a.

There is doubt about the amount the taxpayer owes (or whether the taxpayer owes it). 350

b. There is doubt as to whether the taxpayer can pay the amount the taxpayer owes based on the taxpayer’s financial situation.351 c.

An economic hardship would result if the taxpayer had to pay the full amount owed. 352

d. The taxpayer’s case presents compelling reasons that the IRS determines are a sufficient basis for compromise.353 4. If the taxpayer’s offer is rejected, the taxpayer has 30 days to ask the Appeals Office of the IRS to reconsider the taxpayer’s offer.354 5. The IRS offers fast track mediation services to help taxpayers resolve many issues including a dispute regarding an offer in compromise. 355 For more information, see Publication 3605. 6. Generally, if the taxpayer submits an offer in compromise, the IRS will delay certain collection activities. The IRS usually will not levy (take) the taxpayer’s property to settle the taxpayer’s tax bill during the following periods: a.

While the IRS is evaluating the taxpayer’s offer in compromise. 356

The 30 days immediately after the offer is rejected. 357

While the taxpayer’s timely-filed appeal is being considered by Appeals. 358

7. Also, if the IRS rejects the taxpayer’s original offer and the taxpayer submits a revised offer within 30 days of the rejection, the IRS generally will not levy the taxpayer’s property while it considers the taxpayer’s revised offer.359 8. C.

For more information about submitting an offer in compromise, see Form 656.

Periods of financial disability.

1. If the taxpayer is an individual (not a corporation or other taxpaying entity), the period of limitations on credits and refunds can be suspended during periods when the taxpayer cannot manage the taxpayer’s financial affairs because of physical or mental impairment that is medically determinable 360 and either: (i) has lasted or can be expected to last continuously for at least 12 months, 361 or (ii) can be expected to result in death. 362

350 Treas. Reg. § 301.7122-1(b)(1) 351 Treas. Reg. § 301.7122-1(b)(2) 352 Treas. Reg. § 301.7122-1(b)(3)(i) 353 Treas. Reg. § 301.7122-1(b)(3)(ii) 354 IRM 5.14.9.8 (08-05-2010) 355 IRS Publication 3605 356 IRC § 6331(k)(1)(A); IRM 5.8.1.10 (01-01-2015) 357 IRC § 6331(k)(1)(B); IRM 5.8.1.10 (01-01-2015) 358 Id. 359 IRS Publication 556 page 8 360 IRC § 6511(h)(1) 361 IRC § 6511(h)(2)(A) 362 Id. 44

2. The period for filing a claim for refund will not be suspended for any time that someone else, such as the taxpayer’s spouse or guardian, was authorized to act for the taxpayer in financial matters. 363 3. To claim financial disability, the taxpayer generally must submit the following statements with the taxpayer’s claim for credit or refund: a.

A written statement signed by a physician, qualified to make the determination, that sets

forth: (1)

The name and a description of the taxpayer’s physical or mental impairment, 364

(2) The physician's medical opinion that the taxpayer’s physical or mental impairment prevented the taxpayer from managing the taxpayer’s financial affairs, 365 (3) The physician's medical opinion that the taxpayer’s physical or mental impairment was or can be expected to result in death, or that it has lasted (or can be expected to last) for a continuous period of not less than 12 months, 366 and (4) To the best of the physician's knowledge, the specific time period during which the taxpayer was prevented by such physical or mental impairment from managing the taxpayer’s financial affairs367, and (5) A written statement by the person signing the claim for credit or refund that no person, including the taxpayer’s spouse, was authorized to act on the taxpayer’s behalf in financial matters during the period described in paragraph (1)(d) of the physician's statement. 368 Alternatively, if a person was authorized to act on the taxpayer’s behalf in financial matters during any part of the period described in that paragraph, the beginning and ending dates of the period of time the person was so authorized. 369 b. The period of limitations will not be suspended on any claim for refund that (without regard to this provision) was barred as of July 22, 1998. 370 II.

Suspension of Interest and Penalties A.

In General

1. Generally, the IRS has 3 years from the date the taxpayer filed the tax return (or the date the return was due, if later) to assess any additional tax. 371 2. However, if the taxpayer files the tax return timely (including extensions), interest and certain penalties will be suspended if the IRS does not mail a notice to the taxpayer, stating the taxpayer’s liability and the basis for that liability, within a 36-month period beginning on the later of: a.

The date on which the taxpayer filed the taxpayer tax return, 372 or

363 IRC § 6511(h)(2)(B) 364 IRM 25.6.1.10.2.9.1.4.B (05-17-2004) 365 Id. 366 Id. 367 Id. 368 IRM 25.6.1.10.2.9.1.4.A (05-17-2004) 369 IRS Publication 556 page 15 370 Id. 371 IRC § 6501(a) 372 IRC § 6404(g)(1)(A)(i) 45

The due date (without extensions) of the taxpayer tax return. 373

3. If the IRS mails a notice after the 36-month period, interest and certain penalties applicable to the suspension period will be suspended.374 4. The suspension period begins the day after the close of the 36-month period and ends 21 days after the IRS mails a notice to the taxpayer stating the taxpayer’s liability and the basis for that liability. 375 5. Also, the suspension period applies separately to each notice stating the taxpayer liability and the basis for that liability received by the taxpayer.376 B.

Suspension Does Not Apply To.

The suspension does not apply to a: 1.

Failure-to-pay penalty,377

Fraudulent tax return,378

3. Penalty, interest, addition to tax, or additional amount with respect to any tax liability shown on the 379 tax return or with respect to any gross misstatement,380 4. Penalty, interest, addition to tax, or additional amount with respect to any reportable transaction that is not adequately disclosed or any listed transaction, 381 or 5. C.

Criminal penalty.382

Seeking relief from improperly assessed interest.

1. The taxpayer can seek relief if interest is assessed for periods during which interest should have been suspended because the IRS did not mail a notice to the taxpayer in a timely manner. 383 2. If the taxpayer believes that interest was assessed with respect to a period during which interest should have been suspended, submit Form 843, writing “Section 6404(g) Notification” at the top of the form, with the IRS Service Center where the taxpayer filed the tax return. 384 3.

The IRS will review the Form 843 and notify the taxpayer whether interest will be abated. 385

4. If the IRS does not abate interest, the taxpayer can pay the disputed interest assessment and file a 386 claim for refund.

373 IRC § 6404(g)(1)(A)(ii) 374 IRC § 6404(g)(1)(A) 375 IRC § 6406(g)(3) 376 IRC § 6404(g)(1)(B) 377 IRC § 6404(g)(2)(A) 378 IRC § 6404(g)(2)(B) 379 IRC § 6404(g)(2)(C) 380 IRC § 6404(g)(2)(D) 381 IRC § 6404(g)(2)(E) 382 IRC § 6404(g)(2)(F) 383 IRS Publication 556 page 5 384 Id. 385 Id. 386 Id. 46

5. If the taxpayer claim is denied or not acted upon within 6 months from the date the taxpayer filed it, the taxpayer can file suit for a refund in the taxpayer United States District Court or in the United States Court of Federal Claims.387 D.

Unreasonable Error of Delay

1. If the taxpayer believes that an IRS officer or employee has made an unreasonable error or delay in performing a ministerial or managerial act (discussed later under Abatement of Interest Due to Error or Delay by the IRS), file Form 843 with the IRS Service Center where the taxpayer filed the tax return. 388 2. If the Service denies the taxpayer’s claim, the Tax Court may be able to review that 389 determination. 3. See Tax Court can review failure to abate interest, later under Abatement of Interest Due to Error or Delay by the IRS. 4.

If the taxpayer later agrees:

a. If the taxpayer agrees with the examiner's changes after receiving the examination report or the 30-day letter, sign and return either the examination report or the waiver form. Keep a copy for the taxpayer records.390 b. The taxpayer can pay any additional amount the taxpayer owes without waiting for a bill. Include interest on the additional tax at the applicable rate. This interest rate is usually for the period from the due date of the return to the date of payment. 391 c. amount.

The examiner can tell the taxpayer the interest rate(s) or help the taxpayer figure the

392

5. The taxpayer must pay interest on penalties and additional tax for failing to file returns, for overstating valuations, for understating valuations on estate and gift tax returns, and for substantially understating tax liability. Interest is generally figured from the date (including extensions) the tax return is required to be filed to the date the taxpayer pays the penalty and/or additional tax. 393 6. If the taxpayer pays the amount due within 10 business days after the date of notice and demand for immediate payment, the taxpayer will not have to pay any additional penalties and interest. This period is extended to 21 calendar days if the amount due is less than $100,000. 394 E.

How to Stop Interest From Accruing 1.

If the Taxpayer Owes Additional Tax

a. If the taxpayer thinks that the taxpayer will owe additional tax at the end of the examination, the taxpayer can stop the further accrual of interest by sending money to the IRS to cover all

387 Id. 388 Id. 389 Id. 390 Id. 391 Id. 392 Id. 393 Id. 394 Id. 47

or part of the amount the taxpayer thinks the taxpayer will owe. 395 Interest on part or all of any amount the taxpayer owes will stop accruing on the date the IRS receives the taxpayer’s money. 396 b. The taxpayer can send an amount either in the form of a deposit in the nature of a cash bond or as a payment of tax.397 Both a deposit and a payment stop any further accrual of interest. 398

d. However, making a deposit or payment will stop the accrual of interest on only the amount the taxpayer sent. Because of compounding rules, interest will continue to accrue on accrued interest, even though the taxpayer has paid the underlying tax. 399 e. To stop the accrual of interest on both tax and interest, the taxpayer must make a deposit or payment for both the tax and interest that has accrued as of the date of deposit or payment. 400 2.

Payment or Deposit. a.

Deposits differ from payments in two ways:

(1) The taxpayer can have all or part of the taxpayer deposit returned to the taxpayer without filing for a refund. (2) However, if the taxpayer requests and receives the taxpayer’s deposit and the IRS later assesses a deficiency for that period and type of tax, interest will be figured as if the funds were never on deposit.401 b.

Also, the taxpayer deposit will not be returned if one of the following situations applies: (1)

The IRS assesses a tax liability.402

(2) The IRS determines that, by returning the deposit, it may not be able to collect a future deficiency.403 (3) liability.404

The IRS determines that the deposit should be applied against another tax

c. Deposits returned to the taxpayer will include interest based on the Federal short-term rate determined under section 6621(b).405 (1) tax.

The deposit returned will be treated as a tax payment to the extent of the disputed

406

395 IRC § 6603(a) 396 IRC § 6603(b) 397 IRS Publication 556 page 6 398 Id. 399 Id. 400 Id.; IRM 8.7.17.1.1.2 (10-24-2013) 401 IRS Publication 556 page 6; IRM 8.7.17.1.5 (10-24-2013) 402 IRS Publication 556 page 6 403 Id. 404 Id. 405 Id., IRC §§ 6603(d)(1), (4) 406 IRS Publication 556 page 6 48

(2) A disputed tax means the amount of tax specified at the time of deposit as a reasonable estimate of the maximum amount of any tax owed by the taxpayer, such as the deficiency proposed in the 30-day letter.407 d.

Notice not mailed.

(1) If the taxpayer sends money before the IRS mails the taxpayer a notice of deficiency, the taxpayer can ask the IRS to treat it as a deposit. The taxpayer must make the request in writing.408 (2) If, after being notified of a proposed liability but before the IRS mails the taxpayer a notice of deficiency, the taxpayer sends an amount large enough to cover the proposed liability, it will be considered a payment unless the taxpayer requests in writing that it be treated as a deposit.409 (3) If the amount the taxpayer sends is at least as much as the proposed liability and the taxpayer does not request that it be treated as a deposit, the IRS will not send the taxpayer a notice of deficiency. If the taxpayer does not receive a notice of deficiency, the taxpayer cannot take the taxpayer’s case to the Tax Court. See Tax Court, later under Appeals to the Courts.410 f.

Appeal Rights. (1)

Notice mailed.

If, after the IRS mails the notice of deficiency, the taxpayer sends money without written instructions, it will be treated as a payment. The taxpayer will still be able to petition the Tax Court.411 (2)

Money Sent.

If the taxpayer sends money after receiving a notice of deficiency and the taxpayer has specified in writing that it is a “deposit in the nature of a cash bond,” the IRS will treat it as a deposit if the taxpayer sends it before either: (i) the close of the 90-day or 150-day period for filing a petition with the Tax Court to appeal the deficiency,412 or (ii) the date the Tax Court decision is final, if the taxpayer has filed a petition. 413 3.

Using a Deposit To Pay the Tax.

a. If the taxpayer agrees with the examiner's proposed changes after the examination, the taxpayer deposit will be applied against any amount the taxpayer may owe. The IRS will not mail the taxpayer a notice of deficiency and the taxpayer will not have the right to take the taxpayer case to the Tax Court.414 b. If the taxpayer does not agree to the full amount of the deficiency after the examination, the IRS will mail the taxpayer a notice of deficiency. 407 Id. 408 Id. 409 Id. 410 Id. 411 Id. 412 Id. 413 Id. 414 Rev. Proc. 2005-18 Sec. 4.02(1) 49

c. The taxpayer’s deposit will be applied against the proposed deficiency unless the taxpayer writes to the IRS before the end of the 90-day or 150-day period stating that the taxpayer still wants the money to be treated as a deposit. The taxpayer will still have the right to take the taxpayer’s case to the Tax Court.415 III.

Reduction of Interest A.

Interest Netting.

1. If the taxpayer owes interest to the IRS on an underpayment for the same period the IRS owes the taxpayer interest on an overpayment, the IRS will figure interest on the underpayment and overpayment at the same interest rate (up to the amount of the overpayment). 416 2. B.

As a result, the net rate is zero for that period. 417

Abatement of Interest Due to Error or Delay by the IRS.

1. The IRS may abate (reduce) the amount of interest the taxpayer owes if the interest is due to an unreasonable error or delay by an IRS officer or employee in performing a ministerial or managerial act (discussed later).418 2. Only the amount of interest on income, estate, gift, generation-skipping, and certain excise taxes 419 can be reduced. 3. The amount of interest will not be reduced if the taxpayer or anyone related to the taxpayer contributed significantly to the error or delay.420 4. Also, the interest will be reduced only if the error or delay happened after the IRS contacted the taxpayer in writing about the deficiency or payment on which the interest is based. 421 5.

An audit notification letter is such a contact. 422

6. The IRS cannot reduce the amount of interest due to a general administrative decision, such as a decision on how to organize the processing of tax returns. C.

Ministerial Act.

1. This is a procedural or mechanical act, not involving the exercise of judgment or discretion, during the processing of a case after all prerequisites (for example, conferences and review by supervisors) have taken place.423 2. A decision concerning the proper application of federal tax law (or other federal or state law) is not 424 a ministerial act. Example 1. 415 Id. Sec. 4.02(2) 416 IRS Publication 556 pages 6-7 417 Id.; IRC § 6621(d) 418 IRC § 6404(e)(1) 419 IRS Publication 556 page 7; IRM 20.2.7.4 (05-09-2014) 420 IRS Publication 556 page 7 421 Id. 422 Id. 423 IRM 20.2.7.4.2 (05-09-2014) 424 IRS Publication 556 page 7 50

The taxpayer moves from one state to another before the IRS selects the taxpayer’s tax return for examination. A letter stating that the tax return has been selected is sent to the taxpayer’s old address and then forwarded to the taxpayer’s new address. When the taxpayer gets the letter, the taxpayer responds with a request that the examination be transferred to the area office closest to the taxpayer’s new address. The examination group manager approves the taxpayer’s request. After the taxpayer’s request has been approved, the transfer is a ministerial act. The IRS can reduce the interest because of any unreasonable delay in transferring the case. 425 Example 2. An examination of the tax return reveals tax due for which a notice of deficiency (90-day letter) will be issued. After the taxpayer and the IRS discuss the issues, the notice is prepared and reviewed. After the review process, issuing the notice of deficiency is a ministerial act. If there is an unreasonable delay in sending the notice of deficiency to the taxpayer, the IRS can reduce the interest resulting from the delay.426 D.

Managerial Act.

1. This is an administrative act during the processing of a case that involves the loss of records or the exercise of judgment or discretion concerning the management of personnel. 427 2. A decision concerning the proper application of federal tax law (or other federal or state law) is not a managerial act.428 Example 3. A revenue agent is examining the taxpayer’s tax return. During the middle of the examination, the agent is sent to an extended training course. The agent's supervisor decides not to reassign the taxpayer’s case, so the work is unreasonably delayed until the agent returns. Interest from the unreasonable delay can be abated since both the decision to send the agent to the training class and not to reassign the case are managerial acts. 429 E.

How to Request Abatement of Interest.

1. The taxpayer requests an abatement (reduction) of interest on Form 843. The taxpayer should file the claim with the IRS service center where the taxpayer filed the tax return that was affected by the error or delay.430 2. If the taxpayer has already paid the interest and the taxpayer would like a credit or refund of interest paid, the taxpayer must file Form 843 within 3 years from the date the taxpayer filed the taxpayer’s original return or 2 years from the date the taxpayer paid the interest, whichever is later. 431 a. not apply.432 b. of tax.

If the taxpayer has not paid any of the interest, these time limitations for filing Form 843 do Generally, the taxpayer should file a separate Form 843 for each tax period and each type

433

425 Id. 426 Id. 427 Id.; IRM 20.2.7.4 (05-09-2014) 428 IRS Publication 556 page 7 429 Id. 430 Id. 431 Id. 432 Id. 433 Id. 51

3. However, complete only one Form 843 if the interest is from an IRS error or delay that affected the taxpayer’s tax for more than one tax period or for more than one type of tax (for example, where 2 or more tax years were being examined).434 4. If the taxpayer’s request for abatement of interest is denied, the taxpayer can appeal the decision to the IRS Appeals Office.435 a.

Tax Court can review failure to abate interest. 436

b. The Tax Court can review the IRS's refusal to abate (reduce) interest if all of the following requirements are met. (1) The taxpayer filed a request for abatement of interest (Form 843) with the IRS after July 30, 1996.437 (2) The IRS mailed the taxpayer a notice of final determination or a notice of disallowance.438 (3) The taxpayer filed a petition with the Tax Court within 180 days of the mailing of the notice of final determination or the notice of disallowance. 439 c.

The following requirements must also be met:

(1) For individual and estate taxpayers — the taxpayer’s net worth must not exceed $2 million as of the filing date of the taxpayer’s petition for review. For this purpose, individuals filing a joint return shall be treated as separate individuals. 440 (2) For charities and certain cooperatives — the taxpayer must not have more than 500 employees as of the filing date of the taxpayer’s petition for review.441 (3) For all other taxpayers — the taxpayer’s net worth must not exceed $7 million, and the taxpayer must not have more than 500 employees as of the filing date of the taxpayer’s petition for review.442 F.

Abatement of Interest for Individuals Affected by Presidentially Declared Disasters or Military or Terrorist

Actions 1. If the taxpayer is (or was) affected by a Presidentially declared disaster occurring after 1996 or a terrorist or military action occurring after September 10, 2001, the IRS may abate (reduce) the amount of interest the taxpayer owes on certain taxes. 443 2. The IRS may abate interest for the period of any additional time to file or pay that the IRS provides on account of the disaster or the terrorist or military action. The IRS will issue a notice or news release indicating who are affected taxpayers and stating the period of relief. 444 434 Id. 435 Id. 436 IRC § 6404(h)(1) 437 IRS Publication 556 page 7 438 Id. 439 Id. 440 Id. 441 Id. 442 Id. 443 IRC § 7508A(a)(2) 444 IRS Publication 556 page 8 52

3. If the taxpayer is eligible for relief from interest, but was charged interest for the period of relief, the IRS may retroactively abate the taxpayer interest. 445 To the extent possible, the IRS can take the following actions: a.

Make appropriate adjustments to the taxpayer account. 446

Notify the taxpayer when the adjustments are made. 447

Refund any interest paid by the taxpayer where appropriate. 448

4. For more information on disaster area losses, see Disaster Area Losses in Publication 547. For more information on other tax relief for victims of terrorist attacks, see Publication 3920. 449

445 Id. 446 Id. 447 Id. 448 Id. 449 Id. 53

Review Question—Five To stop interest from accruing where additional tax will be owed, the taxpayer should: A.

Place the amount of the estimated tax liability in an interest bearing account.

Send money to the IRS to cover all or part of the estimated amount of liability.

Notify the IRS that he or she intends to pay the full amount once determined.

Wait and see if additional tax is actually owed.

SECTION SIX – Appeal to the Courts Learning Objectives. Upon completion of this section, you will be able to: > Identify the trial level courts which may hear a federal tax case in the United States > Identify which tax cases can be heard by any tax forum, which tax cases can only be heard by the Tax Court, and which tax cases can only be heard by the District Court. > Define the various factors which should be considered when choosing the appropriate tax forum in which to litigate a taxpayer’s appeal. I.

Appeal to the Courts A.

Overview

1. If the case cannot be settled at Appeals the client simply wishes to by-pass Appeal, the case can be appealed in the courts 2.

The trial level courts available for tax cases include the following: a.

The Tax Court,450

District courts, and 451

The Court of Federal Claims,452

In a limited circumstance, the taxpayer may also be able to litigate in the bankruptcy court. 453

4. Most tax cases are filed in the Tax Court, presumably because the full payment of the tax in dispute does not deprive the Tax Court of jurisdiction in the case. 454 5.

However, a lawyer contemplating tax litigation should also consider the other available options as

well.455 B.

The Tax Court

1. The Tax Court is composed of 19 presidentially appointed members. Trial sessions are conducted and other work of the Court is performed by those judges, by senior judges serving on recall, and by special trial judges.456

450 BNA IRS Practice Advisor: Tax Litigation ¶ 1110.A 451 Id. 452 Id. 453 Id. 454 Id. 455 Choice of Forum in Federal Civil Tax Litigation (Part 1)-GERALD A. KAFKA-THE PRACTICAL LAWYER—WINTER 2011 Page 55 456 ustaxcourt.gov 55

2. All of the judges have expertise in the tax laws and apply that expertise in a manner to ensure that taxpayers are assessed only what they owe, and no more. Although the Court is physically located in Washington, D.C., the judges travel nationwide to conduct trials in various designated cities.457 3. When the Commissioner of Internal Revenue has determined a tax deficiency, the taxpayer may dispute the deficiency in the Tax Court before paying any disputed amount. 458 4. The Tax Court’s jurisdiction also includes the authority to redetermine transferee liability, make certain types of declaratory judgments, adjust partnership items, order abatement of interest, award administrative and litigation costs, redetermine worker classification, determine relief from joint and several liability on a joint return, review certain collection actions, and review awards to whistleblowers who provide information to the Commissioner of Internal Revenue on or after December 20, 2006. 459 C.

The Court of Federal Claims

1. The Court of Federal Claims is authorized to hear primarily money claims founded upon the Constitution, federal statutes, executive regulations, or contracts, express or implied in fact, with the United States.460 2. Many cases before the court involve tax refund suits, an area in which the court exercises concurrent jurisdiction with the United States district courts. The cases generally involve complex factual and statutory construction issues in tax law.461 3. The Court of Federal Claims was formerly called the U.S. Court of Claims, and is successor to the Court of Claims.462 D.

The District Court

1. The nation’s 94 district or trial courts are called U.S. District Courts. District courts resolve disputes by determining the facts and applying legal principles to decide who is right. 463 2. Trial courts include the district judge who tries the case and a jury that decides the case. Magistrate judges assist district judges in preparing cases for trial. They may also conduct trials in misdemeanor cases. 464 3. There is at least one district court in each state, and the District of Columbia. Each district includes a U.S. bankruptcy court as a unit of the district court. Four territories of the United States have U.S. district courts that hear federal cases, including bankruptcy cases: Puerto Rico, the Virgin Islands, Guam, and the Northern Mariana Islands.465 4. District courts have jurisdiction, in law and equity, over cases under the laws of the United States— this includes most tax cases.466 E.

Bankruptcy Courts

457 Id 458 Id. 459 Id. 460 28 U.S.C. § 173 461 uscfc.uscourts.gov/about-court# 462 Id. 463 uscourts.gov/about-federal-courts/court-role-and-structure 464 Id. 465 Id 466 28 U.S.C. § 1340 56

1. 11 U.S.C. §505(a)(1) provides permissive jurisdiction to determine “amount or legality of any tax whether or not paid”.467 2. terms.

3. F.

Bankruptcy courts are separate units of district courts; bankruptcy court judges serve limited

468

The jurisdiction of the Bankruptcy Court to hear tax disputes is permissive, not mandatory. 469

Jurisdictional Issues 1.

Overview a.

In some cases, there is no choice as the forum in which the case may be brought.

b. However, in most cases the taxpayer will have a choice of the three trial level courts mentioned above: the Tax Court, the Court of Federal Claims, and federal district court. 470 c. The Tax Court has exclusive prepayment jurisdiction; refund jurisdiction authority however is in the Tax Court, the Court of Federal Claims, and the Bankruptcy Courts. 471 2.

Tax Cases for all Forums - The following types of tax cases maybe brought in all forums: 472 a.

Income, estate, and gift taxes;

Public charity excess lobbying taxes

Private foundation taxes;

Qualified plan taxes; and

Excise taxes on RICs and REITs.

3. Exempt Status And Classification Declaratory Judgment Actions – Jurisdiction over exempt organization status and classification declaratory judgment actions lies in the Tax Court, District Courts, and the Court of Federal Claims.473 4. Disclosure Actions - The Tax Court or the District Court for the District of Columbia each have jurisdiction to hear disclosure actions under IRC § 6110 Revenue Code 474 5.

Actions Where Choice of Forum is Unavailable

a. Cases Which Can Only be Heard by the Tax Court - The following types of cases can only be brought in the Tax Court has exclusive jurisdiction: 475

467 11 U.S.C. § 505(a)(1) 468 28 U.S.C. §§ 151, 152(a)(1) 469 11 U.S.C. § 505(a) 470 BNA IRS Practice Advisor: Tax Litigation ¶ 1110.A. 471 Choice of Forum in Federal Civil Tax Litigation (Part 1)-GERALD A. KAFKA-THE PRACTICAL LAWYER—WINTER 2011 Page 55; IRC. §§6213(d), 6512(b), 7422(a), 11 USC§505(a), 28 USC §1340, 1346(a)(1), 28 USC §1491 472 Id 473 Id.; IRC § 7428(a); 28 U.S.C. § 1507 474 IRC § 6110(f)(4)(A) 475 Choice of Forum in Federal Civil Tax Litigation (Part 1)-GERALD A. KAFKA-THE PRACTICAL LAWYER—WINTER 2011 Page 58-59. 57

(1)

Appeal from collection due process determination (lien or levy case) 476;

(2)

Review of IRS refusal to abate interest; 477

(3) Review of a decision granting or denying (in whole or in part) an award for reasonable administrative costs under §7430(a); 478 (4)

Declaratory action (qualified plans);479

(5)

Declaratory action (gift valuation);480

(6)

Declaratory action (tax-exempt bonds);481

(7)

Declaratory action (estate-tax installment payment eligibility under §6166); 482

(8)

Redetermination of Informant Awards; 483

(9)

Liabilities before raising section 6015 claims, declining to find jurisdiction. 484

b. Cases Which Can Only be Heard by the District Court - The following types of cases can only be brought in the Tax Court has exclusive jurisdiction: 485 (1)

Summons enforcement actions, filed by United States 486

(2)

Petition to quash third-party summons, filed by taxpayer 487

(3)

Quiet title actions brought by United States 488

(4)

Action to enforce or discharge liens in favor of the United States 489

(5)

Judicial approval of principal residence levy, filed by United States 490

(6)

Erroneous refund suit, filed by United States 491

(7)

Tax return preparer492 and tax shelter injunction suits, 493 filed by United States

(8) Actions to quiet title, foreclose, partition, condemn, or interpleader with respect to real property on which the United States claims a lien 494 476 IRC § 6330(d)(1) 477 IRC § 6404(h); Hinck v. United States, 550 U.S. 501 (2007) 478 IRC § 7430(f)(2) 479 IRC § 7476(a) 480 IRC § 7477(a) 481 IRC § 7478(a) 482 IRC § 7479(a). But see § 7422(j), allowing refund suits where estate tax has not been fully paid solely because of Section 6166 election 483 IRC § 7623 484 IRC § 6015(e)(1)(A) 485 Choice of Forum in Federal Civil Tax Litigation (Part 1)-GERALD A. KAFKA-THE PRACTICAL LAWYER—WINTER 2011 Page 57-58. 486 IRC § 7402(b); IRC §§ 7609(f), (h)(1) 487 IRC §§ 7609(b)(2), (h)(1) 488 IRC § 7402(e) 489 IRC § 7403(a); 28 U.S.C. § 2410 490 IRC § 6334(e)(1)(B) 491 United States v. Wurts, 303 U.S. 414, 415 (1938); IRC § 7405(a) 492 IRC § 7407(a) 493 IRC § 7408(a) 494 28 U.S.C. § 2410 58

(9)

Wrongful levy actions495

(10)

Review of jeopardy levy or jeopardy assessment, filed by taxpayer 496

(11)

Civil disclosure damages actions, filed by taxpayer 497

(12) Civil damages actions against United States for IRS failure to release lien or certain unauthorized collection actions 498 (13) 6.

Claims for refund of trust fund recovery penalty.499

Other Actions a.

TEFRA Partnership

Within 90 days after the day on which a notice of a final partnership administrative adjustment is mailed to the tax matters partner, the tax matters partner may file a petition for a readjustment of the partnership items for such taxable year with either the Tax Court, the district court of the United States for the district in which the partnership's principal place of business is located, or the Court of Federal Claims.500 b.

Claims For Relief From Joint And Several Liabilities

An individual who has made a joint return may elect to seek spousal relief under the procedures prescribed under IRC § 6015 may seek review in the Tax Court. 501 7. Unreviewable Cases - Some tax disputes cannot be reviewed by any court. 502, these include a refusal by the IRS to abate unpaid portions of assessed income, gift, or estate tax under section 6404(a) is not susceptible to judicial review.503, and overpayment offsets..504 II.

Choice of Forum

In choosing the proper forum in which to litigate a tax case some or all of the following factors should be considered: A.

Prepayment Versus Refund

1. One of the primary advantages of litigating a case in the Tax Court is that the taxpayer doesn’t have to pay the disputed tax in order to litigate the case. 505 495 IRC § 7426; EC Term of Years Trust v. United States, 550 U.S. 429 (2007) 496 IRC § 7429(b)(2)(A); But see § 7429(b)(2)(B) (providing Tax Court jurisdiction in limited circumstances) 497 IRC § 7431(a) 498 IRC § 7433(a); See §7433(e)(1) (providing jurisdiction for bankruptcy court to hear damages claims for Title 11 violations by IRS) 499 IRC § 6672(c)------DOUBLE CHECK 500 IRC §6226(a) 501 IRC § 6015(e) 502 Choice of Forum in Federal Civil Tax Litigation (Part 1)-GERALD A. KAFKA-THE PRACTICAL LAWYER—WINTER 2011 Page 60 503 Id., See, e.g., Krugman v. Commissioner, 112 T.C. 230, 237 (1999)(no jurisdiction to abate additions to tax), in contrast to interest abatement decisions, which may be reviewed by the Tax Court under section 6404(h) of the Code. 504 Choice of Forum in Federal Civil Tax Litigation (Part 1)-GERALD A. KAFKA-THE PRACTICAL LAWYER—WINTER 2011 Page 60; §6402(f) (barring judicial review of Treasury offsets applied against other-agency debts); Kalb v. United States, 505 F.2d 506, 509 (2d Cir. 1974), cert. denied, 421 U.S. 979 (1975)(dismissing claim for judicial review of overpayment offset applied to federal tax liability); In re Lybrand, 338 B.R. 402, 407 (Bankr. W.D.Ark. 2006). But see Oatman v. Dep’t of Treasury, 34 F.3d 787, 789 (9th Cir. 1994) (holding district court has jurisdiction under 28 U.S.C. §1346(a)(1) to review Treasury’s refusal to allow taxpayer’s claim to one-half community property interest in offset tax overpayment). 505 BNA IRS Practice Advisor: Tax Litigation ¶ 1110.A. 59

Jurisdiction in the Tax Court can be obtained without prepaying the tax in dispute.

3. On the other hand, full payment of tax liabilities is required in order to obtain jurisdiction before a district court or the Court of Federal Claims. 506 B.

Interest

1. Also, to be considered is the difference in interest which accrues in the case of underpayments as opposed to overpayments of tax, i.e., will you pay more interest on an underpayment than you will earn on an overpayment. 2. While the underpayment and overpayment interest rate is the same for non-corporate taxpayers; for corporate taxpayers, there is a disparity between the overpayment interest rate and the large corporate underpayment rate. 3. The difference between the overpayment and underpayment large corporation (a “large corporate under payment” is more than $100,000) interest rate of 4.5 percent. As a result if the taxpayer loses the case in Tax Court they are risking not only the tax but the greater interest. 507 C.

Limitations of Refund Claims

1. If a case is brought in Tax Court there is a limitation on the on the taxpayer’s ability to pursue a refund claim for the same tax period. 2.

After the Tax Court case has been resolved, the taxpayer may only file suit for refund of: a.

As to overpayments determined by a decision of the Tax Court which has become final,

b. As to any amount collected in excess of an amount computed in accordance with the decision of the Tax Court which has become final, and c. As to any amount collected after the period of limitation upon the making of levy or beginning a proceeding in court for collection has expired; but in any such claim for credit or refund or in any such suit for refund the decision of the Tax Court which has become final, as to whether such period has expired before the notice of deficiency was mailed, shall be conclusive, and d.

As to overpayments attributable to partnership items, and

e. As to any amount collected within the period during which the Secretary is prohibited from making the assessment or from collecting by levy or through a proceeding in court under the provisions of section 6213(a), and f. D.

As to overpayments the Secretary is authorized to refund or credit pending appeal. 508

Precedent

Since the court will be bound by its own prior decisions on consistent facts, the taxpayer should of course consider the existing precedents in the alternative forums which may be favorable or unfavorable to their case. 509 506 Id. 507 IRC §6621(c); Choice of Forum in Federal Civil Tax Litigation (Part 1)-GERALD A. KAFKA-THE PRACTICAL LAWYER—WINTER 2011 Page 61 508 IRC §6512(a) 509 BNA IRS Practice Advisor: Tax Litigation ¶ 1110.C. 60

Jury Trial

A jury trial is only available in the district court, and not in either the Tax Court or the Court of Federal Claims. A jury trial could be considered advantageous in cases that turn on factual determinations, if the taxpayer can present a sympathetic case.510 F.

New Issues

1. The Tax Court is free to consider new issues which have not necessarily been presented previously by the taxpayer. 2. This can swing both ways however. Under IRC §6214, except as provided by IRC § 7463, the Tax Court has jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the original deficiency, and also to determine whether any additional amount, or any addition to the tax should be assessed, if a claim is asserted by the Service. 511 H.

Discovery

The Tax Court generally allows more limited discovery than either the Court of Federal Claims or the federal district courts. Informal discovery and stipulations of undisputed facts and issues are normally encouraged, and the Tax Court will generally not permit formal discovery unless the informal discovery process has failed 512 I.

The Forum

The Tax Court generally allows for a more sophisticated discussion of the tax issues, since both the judges and the attorneys representing the government are general tax specialists 513. J.

Timing

1. Failure to a timely petition with the Tax Court within 90-days of the notice of deficiency will result in the taxpayer being denied access to the Tax Court. The Tax Court has no authority to extend this jurisdictional deadline.514 2. The time limits in the refund courts, the district court and the Court of Claims, are no more lenient, they just allow for more time. 515 3. Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return must be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid 516 .

510 See Swanson v. Comr., 65 T.C. 1180 (1976) . 511 IRC§6214(a 512 BNA IRS Practice Advisor: Tax Litigation ¶ 1110.G; see, e.g., Branerton Corp. v. Comr., 61 T.C. 691 (1974) (party not required to answer interrogatories until after informal consultation with opposing party). 513 BNA IRS Practice Advisor: Tax Litigation ¶ 1110.H, J. 514 IRC§6213(a 515 GERALD A. KAFKA-THE PRACTICAL LAWYER—WINTER 2011 Page 62. 516 IRC§6511(a) 61

Review Question—Six At the unsuccessful conclusion of the appeal process within the IRS, the taxpayer may pursue relief in four trial-level courts. Which of the following statements is true? A.

The Tax Court is the least favored and utilized

venue for litigating tax issues.

The Court of Federal Claims exclusively hears lines.

complex commercial cases involving taxes collected across state

District courts only have jurisdiction if the amount in controversy is no less than $75,000 is at issue.

District courts have exclusive jurisdiction over

actions to enforce or discharge liens in favor of the United States.

SECTION SEVEN – Collection Appeals Learning Objectives. Upon completion of this section, you will be able to: > Define the nature of a taxpayer’s collections appeal rights. >Differentiate between the two options for collection appeals, i.e. Collection Due Process and Collection Appeals Program. > Identify what matters are appealable, the process of appeal, and the ramifications of appeal under both Collection Due Process and Collection Appeals Program. > Identify the ways in which to appeal collection actions of the IRS, including the filing of a Notice of Federal Tax Lien and a proposed levy of the taxpayer’s property. I.

Collection Appeals Rights A.

Overview 1.

Many IRS collection actions may be appealed to the IRS Office of Appeals (Appeals). 517

2. Because Appeals is separate from and independent of the IRS Collection office, it protects its independence by adhering to a strict policy of prohibiting certain ex parte communications with the IRS Collection office or other IRS offices.518 3. Under the Collections Appeals Program, if the taxpayer disagrees with an IRS employee’s decision and want to appeal it, the taxpayer can ask their manager to review the case. 519 4. If the taxpayer disagrees with the manager’s decision, the taxpayer can continue with the Collection Appeals Program as outlined in Publication 1660. 520 5. limited to:

Instances in which the taxpayer can pursue the Collection Appeals Program include, but aren’t a.

Before or after the IRS file a Notice of Federal Tax Lien; 521

Before or after the IRS seize (“levy”) property; 522

c. After the IRS reject, terminate, or propose to terminate an Installment Agreement (a conference with the manager is recommended, but not required). 523 6. B.

The two options for appeal are: (i) Collection Due Process and (ii) Collection Appeals Program. 524

Collection Due Process 1.

Collection Due Process (“CDP”) is available if the taxpayer receives one of the following notices: a.

Notice of Federal Tax Lien Filing and The Taxpayer Right to a Hearing under IRC 6320 525

Final Notice - Notice of Intent to Levy and Notice of The taxpayer Right to a Hearing 526

Notice of Jeopardy Levy and Right of Appeal 527

517 IRS Publication 1660 page 1 518 Rev. Proc. 2012-18 Sec. 2.03(1) 519 IRS Publication 1660, Collection Appeal Rights- page 3 520 Id. 521 IRM 5.1.9.4 (02-07-2014) 522 Id. 523 Id. 524 IRS Pub 1660, Collection Appeal Rights- page 1. 525 IRM 8.22.4.2.2.1 (09-25-2014) 526 Id. 527 Id. 63

d. Hearing

e. 2.

Notice of Levy on the taxpayer State Tax Refund – Notice of The taxpayer Right to a

528

Post Levy Collection Due Process (CDP) Notice. 529

Under CDP: a.

Appeals' determination may be appealed in court. 530

Appeals (1)

verifies that legal and procedural requirements have been met, 531

(2)

explores collection alternatives or challenges to the liability,532 and

(3) balances the proposed collection action with taxpayer's legitimate concern of 533 intrusiveness. c. C.

Appeals retains jurisdiction over its determinations. 534

Collection Appeals Program 1.

Collection Appeals Program (CAP) is available for the following actions: a.

Before or after the IRS files a Notice of Federal Tax Lien 535

Before or after the IRS levies or seizes the taxpayer property 536

Termination, or proposed termination, of an installment agreement 537

Rejection of an installment agreement538

Modification, or proposed modification, of an installment agreement 539

f. CAP generally results in a quicker Appeals decision and is available for a broader range of collection actions.540 2.

Under CAP: a.

Appeals' administrative decision is final. 541

The goal is to provide a response with a 5-day turnaround. 542

c. Appeals' review is for appropriateness of the action proposed or taken based on law, regulations, policy and procedures after considering all of the relevant facts and circumstances. 543 d. Appeals does NOT consider alternatives to the issue under appeal, but solely determines the appropriateness of the issue under appeal. 544 Example 1: Proposed Lien Filing 528 Id. 529 IRS Publication 1660 page 1 530 Id. 531 IRM 8.24.1.1.1 (12-02-2014) 532 Id. 533 Id. 534 Id. 535 IRS Publication 1660 page 1 536 Id. 537 Id. 538 Id. 539 Id. 540 IRM 8.24.1.2.4 (12-02-2014) 541 IRM 8.24.1.1.1 (12-02-2014) 542 Id. 543 Id. 544 Id. 64

The taxpayer submits a CAP appeal request upon completion of the required managerial conference, which did not produce a resolution to the disagreement concerning the proposed Notice of Federal Tax Lien filing. During the Appeals conference, the Appeals hearing officer determines the taxpayer's income tax liability is under audit reconsideration and confirms with Examination that the balance is going to be reduced to an amount that would qualify the taxpayer for a streamlined installment agreement. In this case, Appeals does not sustain Collection's position concerning the proposed Notice of Federal Tax Lien filing. Appeals' determination directs that Collection's lien determination will be deferred, pending Collection's consideration of a streamlined installment agreement. Having considered the appropriateness of the issue under appeal, the Appeals hearing officer will not negotiate the collection alternative(s) (e.g. installment agreement) 545. Example 2: Levy The taxpayer submits a CAP appeal, requesting a levy release. The taxpayer acknowledges he has a delinquent return but claims the levy is creating an economic hardship. Aside from the delinquent return, the taxpayer is cooperative, having provided the requested Collection Information Statement (CIS) and supporting financial documentation to Collection. Appeals reviews the financial documentation forwarded by Collection and determines the levy is creating an economic hardship against the taxpayer. Considering IRC 6343(a)(1)(D), Appeals does not sustain Collection, directing that the levy be released. Having considered the appropriateness of the issue under appeal, the Appeals hearing officer will not consider any other case resolutions (e.g., collection alternatives or placing the account in CNC status). 546 II.

Collection Actions A.

Understanding collection actions 1.

There are several words and phrases particular to the collection process. 547

Here are definitions of some of the most commonly used collection terms:

a. Federal tax lien: A legal claim against all current and future property, such as a house or car, and rights to property, such as wages and bank accounts. The lien automatically comes into existence if the taxpayer doesn’t pay taxpayer’s amount due after receiving taxpayer’s first bill. 548 b. Notice of Federal Tax Lien (NFTL): A public notice to creditors. It notifies them that there is a federal tax lien that attaches to all the taxpayer’s current and future property and rights to property.549 c. Levy: A legal seizure of property or rights to property to satisfy a tax debt. When property is seized (“levied”), it will be sold to help pay a taxpayer’s tax debt. If wages or bank accounts are seized, the money will be applied to the tax debt. 550 d. Seizure: There is no legal difference between a seizure and a levy. The IRS will use both terms interchangeably.551 B.

Notice of Intent to Levy and Notice of Taxpayer’s Right to a Hearing:

545 Id. 546 Id. 547 IRS Publication 594 page 4 548 Id. 549 Id. 550 Id. 551 IRS Publication 594 page 5 65

Generally, before property is seized, the IRS has to send the taxpayer a Notice of Intent to Levy552 and Notice of Taxpayer’s Right to a Hearing.553 1. If the taxpayer doesn’t pay the overdue taxes, make other arrangements to satisfy the tax debt, or request a hearing within 30 days of the date of this notice, the IRS may seize taxpayer’s property. 554 2. The taxpayer may also receive a summons that legally compels the taxpayer or a third party to meet with the IRS and provide information, documents, or testimony.555 C.

Collection Actions in Detail 1.

Federal Tax Liens In General: a.

A federal tax lien is legal claim against property.556

It is a legal claim against all current and future property.557

c. When a taxpayer doesn’t pay the first bill for taxes due, a lien is created by law and attaches to the taxpayer’s property.558 d. It applies to property (such as the taxpayer’s home and car) and to any current and future rights the taxpayer may have to that property.559 2.

A Notice of Federal Tax Lien: a.

A Notice of Federal Tax Lien provides public notice to creditors that a lien exists. 560

b. The IRS files the Notice of Federal Tax Lien so the IRS can establish the priority of the IRS’s claim versus the claims of other creditors. 561 c. The Notice of Federal Tax Lien is filed with local or state authorities, such as county registers of deeds or the Secretary of State offices. 562 d. agencies.563 3.

If a Notice of Federal Tax Lien is filed, it’s often reported by consumer credit reporting

What to do if a Notice of Federal Tax Lien is filed a.

The taxpayer can pay the full amount owed immediately.564

b. The Notice of Federal Tax Lien only shows taxpayer’s assessed balance as of the date of the notice. It doesn’t show taxpayer’s payoff balance or include the IRS’s charges for filing and releasing the lien.565 c. To find out the full amount the taxpayer must pay to have the lien released, call the number on taxpayer’s lien notice.566 D.

How to Appeal a Notice of Federal Tax Lien 1.

Collection Due Process Hearing

552 Id.; IRC § 6331(d) 553 IRS Publication 594 page 5; IRC § 6330(a)(1) 554 IRC § 6331(d); IRM 5.11.1.3.2. (08-01-2014) 555 IRS Publication 594 page 7 556 IRS Publication 594 page 4 557 Id.; IRM 5.17.2.5 (03-27-2012) 558 IRC § 6321 559 IRS Publication 594 page 4; IRM 5.17.2.5 (03-27-2012) 560 IRS Publication 594 page 5; IRM 5.12.1.4 (10-14-2013) 561 Id. 562 IRS Publication 594 page 5 563 Id. 564 Id.; IRC § 6325(a)(1) 565 Id. 566 Id. 66

a. Within 5 business days of filing the Notice of Federal Tax Lien, the IRS will send the taxpayer a Notice of Taxpayer’s Right to a Collection Due Process Hearing. 567 b. The taxpayer will have until the date shown on the notice to request a Collection Due Process hearing with the Office of Appeals.568 c. After the Collection Due Process hearing, the Office of Appeals will issue a determination on whether the Notice of Federal Tax Lien should remain filed, or whether it should be withdrawn, released, discharged, or subordinated.569 d. If the taxpayer disagrees with the determination, the taxpayer will have 30 days after it’s made to seek a review in the U.S. Tax Court. 570 e. If the taxpayer doesn’t file a hearing request within 30 days, the taxpayer will not be entitled to a Collection Due Process hearing but may be entitled to an equivalent hearing. 571 f. The request for an equivalent hearing, however, doesn’t prohibit the IRS from seizing and doesn’t suspend the 10-year period for collecting tax. 572 g. Hearing.573 2.

In addition, a taxpayer is not entitled to a judicial review of the decision from the Equivalent

Collection Appeals Program

In addition to any Collection Due Process rights the taxpayer may have, the taxpayer may also appeal a proposed or actual filing of a Notice of Federal Tax Lien under the Collection Appeals Program. 574 E.

Reasons the IRS will “release” a federal tax lien

1. A “release” of a federal tax lien means that the IRS has cleared both the lien for the tax debt and the public Notice of Federal Tax Lien. 575 2. The IRS will do this by filing a Certificate of Release of Federal Tax Lien with the same state and local authorities with whom the IRS filed taxpayer’s Notice of Federal Tax Lien. 576 3.

The IRS will release a lien if: a.

The tax debt is fully paid,577

Payment of the tax debt is guaranteed by a bond, 578 or

The period for collection has ended. (In this case, the release is automatic.) 579

4. For more information, see Publication 1450, Instructions on How to Request a Certificate of Release of Federal Tax Lien.580 F.

Reasons the IRS may “withdraw” a Notice of Federal Tax Lien 1.

A “withdrawal” removes the Notice of Federal Tax Lien from public record. 581

567 Id.; IRC § 6320(a) 568 IRS Publication 594 page 5 569 Id. 570 Id.; IRC § 6320; IRM 5.12.6.3.3 (10-14-2013) 571 IRM 5.19.8.4.3 (11-01-2007) 572 Id. 573 Id. 574 IRM 8.24.1.2 (12-02-2014); IRM 5.12.6.4 (10-14-2013) 575 IRS Publication 594 page 5 576 IRC § 6325(f) 577 IRC § 6325(a)(1) 578 IRC § 6325(a)(2) 579 Id.; IRC § 6325(a)(1) 580 IRS Publication 594 page 5 581 Id. 67

The withdrawal tells other creditors that the IRS is abandoning its lien priority. 582

3. This doesn’t mean that the federal tax lien is released, or that the taxpayer is no longer liable for 583 the amount due. 4.

The IRS may withdraw a Notice of Federal Tax Lien if:

a. The taxpayer entered into an Installment Agreement to satisfy the tax liability, unless the Agreement provides otherwise.584 b. For certain types of taxes, the IRS will routinely withdraw a Notice of Federal Tax Lien if the taxpayer entered into a direct debit installment agreement and meet certain other conditions: 585 c.

It will help the taxpayer pay taxpayer’s taxes more quickly; 586

The IRS didn’t follow IRS procedures;587

It was filed during a bankruptcy automatic stay period; 588 or

f. It’s in taxpayer’s best interest (as determined by the Taxpayer Advocate) and in the best interest of the government.589 For example, this could include when taxpayer’s debt has been satisfied and the taxpayer requests a withdrawal.590 G.

How to apply for a “discharge” of a federal tax lien from property 1.

A “discharge” removes the lien from specific property.591

There are several circumstances under which the federal tax lien can be discharged.

a. For example, the IRS may issue a Certificate of Discharge if the taxpayer is selling property and a Notice of Federal Tax Lien has been filed; the taxpayer may be able to remove or discharge the lien from that property through the sale. 592 b. For more information on whether the taxpayer qualifies for a discharge, see Publication 783, Instructions on How to Apply for a Certificate of Discharge of Property from Federal Tax Lien. 593 H.

How to make the federal tax lien secondary to other creditors

1. position.594

(“subordination”)

A “subordination” is where a creditor is allowed to move ahead of the government’s priority

2. For example, if the taxpayer is trying to refinance a mortgage on taxpayer’s home, but aren’t able to because the federal tax lien has priority over the new mortgage, the taxpayer may request that the IRS subordinate the IRS’s lien to the new mortgage.595 3. For more information on whether the taxpayer qualify for a subordination, see Publication 784, How to Prepare an Application for a Certificate of Subordination of Federal Tax Lien. 596 I.

Appeal rights for withdrawal, discharge, or subordination

582 Id. 583 Id. 584 IRC § 6323(j)(1)(B) 585 IRS Publication 594 page 5; IRM 5.12.9.3.2.1 (10-14-2013) 586 IRC § 6323(j)(1)(C) 587 IRS Publication 594 page 5 588 Id. 589 IRC § 6323(j)(1)(D) 590 IRS Publication 594 page 5 591 Id.; IRM 5.17.2.8.1 (03-27-2012) 592 IRS Publication 594 page 5 593 Id. 594 IRS Publication 784, page 1 595 IRS Publication 594 page 5 596 Id. 68

If the IRS deny taxpayer’s request for a withdrawal, discharge, or subordination, the taxpayer may appeal under Collections Appeals Program.597 J.

Levy: A seizure of property 1.

In General

a. While a federal tax lien is a legal claim against taxpayer’s property, a levy is a legal seizure that actually takes taxpayer’s property (such as taxpayer’s house or car) or taxpayer’s rights to property (such as taxpayer’s income, bank account, or Social Security payments) to satisfy taxpayer’s tax debt. 598 b. Keep in mind that the IRS can’t seize taxpayer’s property if the taxpayer has a current or pending Installment Agreement, Offer in Compromise, or if the IRS agree that the taxpayer is unable to pay due to economic hardship, meaning seizing taxpayer’s property would result in taxpayer’s inability to meet basic, reasonable living expenses. 599 2.

Reasons the IRS may seize (“levy”) taxpayer’s property or rights to property

a. If the taxpayer doesn’t pay the taxes due (or make arrangements to settle taxpayer’s debt), the IRS could seize and sell the taxpayer’s property.600 b.

The IRS usually seizes only after the following has occurred: (1)

The IRS assessed the tax and sent the taxpayer a bill, 601

(2)

The taxpayer neglected or refused to pay the tax, 602 and

(3) The IRS sent the taxpayer a Final Notice of Intent to Levy and Notice of Taxpayer’s Right to a Hearing at least 30 days before the seizure. 603 c. However, there are exceptions for when the IRS doesn’t have to provide a 30-day notice before seizing taxpayer’s property. These include situations when: (1)

The collection of the tax is in jeopardy,604

(2)

A levy is served to collect tax from a state tax refund, 605

(3)

A levy is served to collect the tax debt of a federal contractor,606 or

(4)

A Disqualified Employment Tax Levy (DETL) is served. 607

d. If the IRS serves a levy under one of these exceptions, the IRS will send the taxpayer a letter explaining the seizure and taxpayer’s appeal rights after the levy is issued. 608 3.

What the taxpayer should do if taxpayer’s property is seized (“levied”)

a. If taxpayer’s property or federal payments are seized, call the number on taxpayer’s levy notice. If the taxpayer is already working with an IRS employee, call him or her for assistance. 609 b.

Examples of property the IRS can seize (“levy”)

597 IRS Publication 594 page 6; IRM 8.24.1.2 (12-02-2014) 598 IRS Publication 594 page 6; IRC § 6331(b) 599 IRS Publication 594 page 6 600 IRC §§ 6331(a), (b) 601 IRS Publication 594 page 6 602 Id. 603 Id. 604 IRC § 6331(d)(3) 605 IRS Publication 594 page 6 606 Id. 607 Id. A Disqualified Employment Tax Levy is the seizure of unpaid employment taxes and can be served when a taxpayer previously requested a Collection Due Process appeal on employment taxes for other periods within the past 2 years. 608 Id. 609 Id. 69

(1)

Wages, salary, or commission held by someone else

(a) If the IRS seizes taxpayer’s rights to wages, salary, commissions, or similar payments that are held by someone else, the IRS will serve a levy once, not each time the taxpayer is paid.610 (b) The one levy continues until taxpayer’s debt is fully paid, other arrangements are made, or the collection period ends. 611 (c) Other payments the taxpayer receive, such as dividends and payments on promissory notes, are also subject to seizure. 612 (d) However, the seizure only reaches the payments due or the right to future payments as of the date of the levy.613 (2)

Taxpayer’s bank account

(a) Seizure of the funds in taxpayer’s bank account will include funds available for withdrawal up to the amount of the seizure. 614 (b) After the levy is issued, the bank will hold the available funds and give the taxpayer 21 days to resolve any disputes about who owns the account. 615 (c) After 21 days, the bank will send the IRS the taxpayer’s money, plus any interest earned on that amount, unless the taxpayer has resolved the issue in another way.616 (3)

Taxpayer’s federal payments

(a) As an alternative to the levy procedure used for other payments such as dividends and promissory notes, certain federal payments may be systemically seized through the Federal Payment Levy Program in order to pay taxpayer’s tax debt. 617 (b) Under this program, the IRS can generally seize up to 15% of taxpayer’s federal payments (up to 100% of payments due to a vendor for goods or services sold or leased to the federal government). 618 The IRS will serve the levy once, not each time the taxpayer is paid. (c) The one levy continues until taxpayer’s debt is fully paid, other arrangements are made, the collection period ends, or the IRS releases the levy.619 (d) The federal payments that can be seized in this program include, but aren’t limited to, federal retirement annuity income from the Office of Personnel Management, Social Security benefits under Title II of the Social Security Act (OASDI), and federal contractor/vendor payments.620 (4)

Taxpayer’s house, car, or other property

(a) If the IRS seizes taxpayer’s house or other property, the IRS will sell taxpayer’s interest in the property and apply the proceeds (after the costs of the sale) to taxpayer’s tax debt. Prior to selling taxpayer’s property, the IRS will calculate a minimum 610 IRC § 6331(e) 611 Id.; IRS Publication 594 page 6 612 IRS Publication 594 page 6 613 IRM 5.11.5.3 (09-26-2014) 614 IRS Publication 594 page 6 615 Id. 616 IRC § 6332(c) 617 IRS Publication 594 page 6 618 IRC § 6331(h) 619 IRS Publication 594 page 6 620 Id. 70

bid price. The IRS will also provide the taxpayer with a copy of the calculation and give the taxpayer an opportunity to challenge the fair market value determination. 621 (b) The IRS will then provide the taxpayer with the notice of sale and announce the pending sale to the public, usually through local newspapers or flyers posted in public places.622 (c) After giving public notice, the IRS will generally wait 10 days before selling taxpayer’s property.623 (d) Money from the sale pays for the cost of seizing and selling the property and, finally, taxpayer’s tax debt. If there’s money left over from the sale after paying off taxpayer’s tax debt, the IRS will tell the taxpayer how to get a refund. 624 c.

Property that can’t be seized (“levied”)

(1) Certain property is exempt from seizure. For example, the IRS can’t seize the following: unemployment benefits, certain annuity and pension benefits, certain service-connected disability payments, workers compensation, certain public assistance payments, minimum weekly exempt income, assistance under the Job Training Partnership Act, and income for court-ordered child support payments.625 (2) The IRS also can’t seize necessary schoolbooks and clothing, undelivered mail, certain amounts worth of fuel, provisions, furniture, personal effects for a household, and certain amounts worth of books and tools for trade, business, or professions. There are also limitations on the IRS’s ability to seize a primary residence and certain business assets. 626 (3) Lastly, the IRS can’t seize taxpayer’s property unless the IRS expect net proceeds to help pay off taxpayer’s tax debt. 627 4.

How to appeal a proposed seizure (“levy”)

a. The taxpayer can request a Collection Due Process hearing within 30 days from the date of taxpayer’s Notice of Intent to Levy and Notice of Taxpayer’s Right to a Hearing. The taxpayer’s request should be sent to the address on taxpayer’s notice. 628 b. For more information, see Form 12153, Request for a Collection Due Process or Equivalent Hearing.629 c. At the conclusion of taxpayer’s hearing, the Office of Appeals will provide a determination. The taxpayer will have 30 days after the determination to challenge it in the U.S. Tax Court. 630 d. If the taxpayer doesn’t file a hearing request within 30 days, the taxpayer is not entitled to a Collection Due Process hearing, but the taxpayer may be entitled to an Equivalent Hearing. 631 e. The request for an Equivalent Hearing, however, doesn’t prohibit the IRS from seizing and doesn’t suspend the 10-year period for collecting tax. 632

621 Id. 622 IRC § 6335(b) 623 IRC § 6335(d) 624 IRS Publication 594 page 6 625 IRC § 6334(a) 626 Id. 627 IRS Publication 594 page 6 628 IRC §§ 6330(a)(3)(B), 6330(b) 629 IRS Publication 594 page 6 630 IRC § 6330(d)(1) 631 IRM 5.19.8.4.3 (11-01-2007) 632 IRS Publication 594 page 4 71

f. In addition, the taxpayer is not entitled to a judicial review of the decision from the Equivalent Hearing.633 g. If Collection Due Process rights aren’t available for taxpayer’s case, the taxpayer may have other appeal options, such as the Collection Appeals Program. 634 5.

Reasons the IRS “release” a levy a.

The IRC specifically provides that the IRS must release a levy if the IRS determines that: (1)

The taxpayer paid the amount the taxpayer owed; 635

(2)

The period for collection ended prior to the levy being issued; 636

(3)

It will help the taxpayer pay taxpayer’s taxes; 637

(4) The taxpayer entered into an Installment Agreement and the terms of the agreement don’t allow for the levy to continue; 638 (5) The levy creates an economic hardship on the taxpayer, meaning the IRS has determined that the taxpayer is unable to meet basic, reasonable living expenses; 639 or (6) The value of the property is more than the amount owed and releasing the levy won’t hinder the IRS’s ability to collect the amount owed. 640 b. In addition, a levy on wages or salary must be released as soon as possible if the IRS determines that taxpayer’s tax isn’t collectible. 641 c. The IRS will also release a levy if it was issued improperly. For example, the IRS will release a levy if it was issued: (1)

Against property exempt from seizure;642

(2)

Prematurely;643

(3)

Before the IRS sent the taxpayer the required notice; 644

(4)

While the taxpayer is in bankruptcy and an automatic stay is in effect; 645

(5) Where the expenses of seizing and selling the levied property would be greater than the fair market value of the property;646 (6) While an Installment Agreement request, Innocent Spouse Relief request, or Offer in Compromise is being considered or had been accepted and is in effect; 647 or (7) While the Office of Appeals or Tax Court is considering certain appeals and the levy wasn’t a Disqualified Employment Tax Levy to collect employment taxes, a state refund, or jeopardy levy.648 633 IRM 5.19.8.4.3 (11-01-2007) 634 IRS Publication 594 page 6 635 IRC § 6343(a)(1)(A) 636 Id. 637 IRC § 6343(a)(1)(B) 638 IRC § 6343(a)(1)(C) 639 IRC § 6343(a)(1)(D) 640 IRC § 6343(a)(1)(E) 641 IRC § 6343(e) 642 IRS Publication 594 page 7 643 Id. 644 Id. 645 Id. 646 Id. 647 Id. 648 Id. 72

Reasons the IRS may return seized (“levied”) property a.

The IRS may return taxpayer’s property if: (1)

Its seizure was premature;649

(2)

Its seizure was in violation of the law;650

(3)

Returning the seized property will help the IRS’s collection of taxpayer’s debt; 651

(4)

The taxpayer enter into an Installment Agreement that doesn’t allow a levy; 652

(5)

The IRS didn’t follow IRS procedures;653 or

(6) It’s in taxpayer’s best interest (as determined by the Taxpayer Advocate) and in the best interest of the government.654 b. If the IRS decides to return taxpayer’s property but it’s already been sold, the IRS will give the taxpayer the money the IRS received from the sale. 655 c. The taxpayer can file a request for seized property to be returned, or the IRS can return seized property on the IRS’s own initiative, generally up to 9 months after the seizure. 656 7.

How to recover seized (“levied”) property that’s been sold

a. To recover taxpayer’s real estate, the taxpayer (and anyone with interest in the property) may recoup it within 180 days of the sale by paying the purchaser what they paid, plus interest at 20% annually.657 b. If taxpayer’s property has been seized (“levied”) to collect tax owed by someone else, the taxpayer may appeal under the Collection Appeals Program or (within the time prescribed by law), file a claim under Internal Revenue Code section 6343(b), or the taxpayer may (within the time prescribed by law) file a suit under Internal Revenue Code section 7426 for the return of the wrongfully seized property. 658 c. For more information, see Publication 4528, Making an Administrative Wrongful Levy Claim under Internal Revenue Code section 6343(b). 659 8.

How to recover economic damages

a. If the IRS seizure was in error, taxpayer’s payment was lost or misplaced, or there was a direct debit Installment Agreement processing error and the taxpayer incurred bank charges, the IRS may reimburse the taxpayer for charges the taxpayer paid. 660 b. For more information, see Form 8546, Claim for Reimbursement of Bank Charges. If taxpayer’s claim is denied, the taxpayer can sue the federal government for economic damages. 661 c. If the IRS intentionally or negligently didn’t follow Internal Revenue law while collecting taxpayer’s taxes, or the IRS wrongfully seized taxpayer’s property, the taxpayer may be entitled to recover economic damages.662 649 IRC § 6343(d)(2)(A) 650 IRS Publication 594 page 7 651 IRC § 6343(d)(2)(C) 652 IRC § 6343(d)(2)(B) 653 IRC § 6343(d)(2)(A) 654 IRC § 6343(d)(2)(D) 655 IRC § 6343(b) 656 IRS Publication 594 page 7 657 Id. 658 Id. 659 Id. 660 IRM 1.2.14.1.11 (01-13-2011) 661 IRS Publication 594 page 7 662 IRC § 7426(h) 73

d. Mail taxpayer’s written administrative claim to the attention of the Advisory Group Manager for taxpayer’s area at the address listed in Publication 4235, Collection Advisory Group Addresses. 663 e. If the taxpayer filed a claim and taxpayer’s claim is denied, the taxpayer can sue the federal government, but not the IRS employee, for economic damages. 664 K.

Summons: Used to secure information

1. If the IRS is having trouble gathering information to determine or collect taxes the taxpayer owes, the IRS may serve a summons.665 A summons legally compels the taxpayer or a third party to meet with an officer of the IRS and provide information, documents, and/or testimony.666 2. If the taxpayer is responsible for a tax liability and the IRS serves a summons on the taxpayer, the taxpayer may be required to:

433-B.

Testify,667

Bring books and records to prepare a tax return 668, and/or

Produce documents to prepare a Collection Information Statement, Form 433-A or Form

669

3. If the IRS serves a third-party summons to determine tax liability, the taxpayer will receive a notice indicating that the IRS’s contacting a third party. Third parties can be financial institutions, record keepers, or people with relevant information to taxpayer’s case. The IRS won’t review their information or receive testimony until the end of the 23rd day after the notice was given. 670 The taxpayer also has the right to: a. Petition to reject (“quash”) the summons before the end of the 20th day after the date of the notice;671 or b. comply .

Petition to intervene in a suit to enforce a summons to which the third party didn’t

672

4. If the IRS issues a third-party summons to collect taxes the taxpayer already owes, the taxpayer won’t receive notice or be able to petition to reject or intervene in a suit to enforce the summons. 673 III.

Collection of employment tax A.

About employment taxes

1. Employment taxes are the amount the taxpayer must withhold from taxpayer’s employees for their income tax and Social Security/Medicare tax, plus the amount of Social Security/Medicare tax the taxpayer pays for each employee.674 2.

Federal unemployment taxes are also considered employment taxes. 675

If the taxpayer does not pay taxpayer’s employment taxes, the IRS will:

663 IRS Publication 594 page 7 664 Id. 665 IRC § 7602(a) 666 IRS Publication 594 page 7 667 IRC § 7602(a) 668 Id. 669 IRS Publication 594 page 7 670 IRC § 7609(a) 671 IRC § 7609(b)(2) 672 IRC § 7609(b)(1) 673 IRC § 7609(c)(2)(D)(i) 674 IRS Publication 594 page 7 675 Id. 74

a. Assess a failure to deposit penalty, up to 15% of the amount not deposited in a timely 676 manner; and b. The IRS may propose a Trust Fund Recovery Penalty assessment against the individuals responsible for failing to pay the trust fund taxes. 677 B.

About trust fund taxes

1. Trust fund taxes are the income tax, Social Security tax, and Medicare tax withheld from the employee’s wages.678 2. They are called trust fund taxes because the employer holds these funds “in trust” for the government until it submits them in a federal tax deposit. 679 3. Certain excise taxes are also considered trust fund taxes because they are collected and held in trust for the government until submitted in a federal tax deposit. 680 For more information, see Publication 510, Excise Taxes. 4. To encourage prompt payment of withheld employment taxes and collected excise taxes, Congress has passed a law that provides for the Trust Fund Recovery Penalty. For more information, see Publication 15, Circular E, Employer’s Tax Guide.681 C.

Trust Fund Recovery Penalty

1. The Trust Fund Recovery Penalty is a penalty that is assessed personally against the individual or individuals who are responsible for paying the trust fund taxes but willfully did not do so. 682 2.

The amount of the penalty is equal to the amount of the unpaid trust fund taxes. 683

3. If the Trust Fund Recovery Penalty is proposed against the taxpayer, the taxpayer will receive a letter and Form 2751, Proposed Assessment of Trust Fund Recovery Penalty.684 4. If the taxpayer agrees with the penalty, the taxpayer must sign and return Form 2751 within 60 days from the date of the letter. To avoid the assessment of the Trust Fund Recovery Penalty, the taxpayer may also pay the trust fund taxes personally.685 5. If the taxpayer disagrees with the penalty, the taxpayer has 10 days from the date of the letter to inform the IRS that (i) the taxpayer does not agree with the proposed assessment, (ii) has additional information to support taxpayer’s case, or (iii) wants to try to resolve the matter informally.686 6. If the taxpayer can’t resolve the disagreement with IRS, the taxpayer has 60 days from the date of the letter to appeal with the Office of Appeals.687 7. If the taxpayer doesn’t respond to the letter, the IRS will assess the penalty amount against the taxpayer personally and begin the collection process to collect it. The IRS may assess this penalty against a responsible person regardless of whether the company is still in business. 688 D.

Additional information

676 IRC § 6656(b)(1); IRM 4.23.9.11 (05-14-2008) 677 IRC § 6672(a) 678 IRM 5.19.14.1.2 (08-26-2013) 679 IRS Publication 594 page 8 680 IRM 5.19.14.1.2 (08-26-2013) 681 IRS Publication 594 page 8 682 IRC § 6672(a) 683 Id. 684 IRS Publication 594 page 8 685 Id. 686 Id. 687 Id. 688 Id. 75

Innocent Spouse Relief

a. Generally, both the taxpayer and taxpayer’s spouse are responsible, jointly and individually, for paying any tax, interest, or penalties on taxpayer’s joint return. 689 b. If the taxpayer believes taxpayer’s current or former spouse should be solely responsible for an incorrect item or an underpayment of tax on taxpayer’s joint tax return, the taxpayer may be eligible for Innocent Spouse Relief. 690 c. This could change the amount the taxpayer owes, or the taxpayer may be entitled to a refund. Keep in mind the taxpayer generally must submit Form 8857, Request for Innocent Spouse Relief, no later than two years from the date of the IRS first attempts to collect the outstanding debt, except for requests for equitable relief under Internal Revenue Code section 6015(f).691 d.

For additional information, see Publication 971, Innocent Spouse Relief. 692 2.

Representation during the collection process

a. During the collection process, a hearing, or an appeal, the taxpayer can be represented by the taxpayer, an attorney, a certified public accountant, an enrolled agent, an immediate family member, or any person enrolled to practice before the IRS. 693 If the taxpayer is a business, the taxpayer can also be represented by full-time employees, general partners, or bona fide officers. 694 b. To have taxpayer’s representative appear before the IRS, contact the IRS on taxpayer’s behalf, and/or receive taxpayer’s confidential material, Form 2848, Power of Attorney and Declaration of Representative, must be filed with the IRS.695 c. To authorize someone to receive or inspect confidential material, Form 8821, Tax Information Authorization must be filed with the IRS. 696 3.

Sharing taxpayer’s tax information

During the collection process, the IRS is authorized to share taxpayer’s tax information in some cases with city and state tax agencies, 697 the Department of Justice, federal agencies, people the taxpayer authorize to represent the taxpayer, and certain foreign governments (under tax treaty provisions). 698 4.

The IRS may contact a third party

a. The law allows the IRS to contact others (such as neighbors, banks, employers, or employees) to investigate taxpayer’s case.699 b.

The taxpayer has the right to request a list of third parties contacted about taxpayer’s

case.700 c. hearing.701 d. notice.

The taxpayer has 30 days from the date of the notice to request a Collection Due Process A taxpayer can also request an Equivalent Hearing within one year from the date of the

702

689 IRC § 6013(d)(3) 690 IRS Publication 594, page 8 691 Id. 692 Id. 693 IRM 5.1.23.2 (12-13-2011) 694 IRS Publication 594, page 8 695 Id.; IRM 5.1.23.3.1.1 (08-19-2011) 696 IRS Publication 594, page 8 697 IRC § 6103(d) 698 IRS Publication 594, page 8 699 Id.; IRC § 7602(a)(2) 700 Treas. Reg. § 301.7602-2(e)(1) 701 IRC § 6330 702 IRM 8.22.4.3 (03-29-2012) 76

GLOSSARY OF DEFINITIONS Appeals Dispute Resolution Procedure – “Appeals Dispute Procedures” are procedures the IRS has established under which any taxpayer may request early referral of issues from the examination or collection division to the Office of Appeals Binding Arbitration - The Office of Appeals “binding arbitration” program is a program used to resolve issues while a case is in Appeals, after settlement discussions are unsuccessful and, generally, when all other issues are resolved but for the specific factual issue(s) for which arbitration is being requested. Collateral Agreement – A “collateral agreement” is an agreement utilized in compromise cases, estate tax cases and related income tax valuations, gift tax cases, and in other Appeals cases under appropriate circumstance, secured from, and signed by or for, taxpayers or related parties to clarify, or obtain a commitment relative to, some related matter other than the amount of assessment or overassessment involved in the case disposition. Closing Agreement – A “closing agreement” is the only statutorily basis for entering into an agreement binding on both the Service and a taxpayer. Collection Appeals Program – The “Collection Appeals Program” or “CAP” is one of two options available, along with Collection Due Process, for appealing collection action of the IRS. Appeals under CAP are available in the following situations: (1) before or after the IRS files a Notice of Federal Tax Lien; (2) before or after the IRS levies or seizes the taxpayer property; (3) upon termination, or proposed termination, of an installment agreement; (4) upon rejection of an installment agreement; or (5) upon modification, or proposed modification, of an installment agreement Collection Due Process – The “Collection Due Process Program” is one of two options available, along with the Collections Appeals Program, for appealing collection action of the IRS. Under Collection Due Process, a taxpayer may file an appeal if they receive one of the following notices: (1) Notice of Federal Tax Lien Filing and the Taxpayer Right to a Hearing under IRC 6320; (2) Final Notice - Notice of Intent to Levy and Notice of the taxpayer Right to a Hearing; (3) Notice of Jeopardy Levy and Right of Appeal; (4) Notice of Levy on the taxpayer’s State Tax Refund and the Taxpayer Right to a Hearing. The Court Of Federal Claims - The Court of Federal Claims is based in Washington, D.C., and also may hear trials in cities around the nation. All the cases before the Court of Federal Claims involve a monetary dispute between the plaintiff and the United States; tax cases make up a substantial subset of those cases. DIF System – The “DIF System” is mathematical technique used by the IRS to rate individual income tax returns and some corporate returns for examination potential. District Courts – “District courts” are located throughout the nation. There are 94 judicial districts, including at least one in each state. District courts have jurisdiction, in law and equity, over cases under the laws of the United States—including most tax cases. District court judges enjoy lifetime appointments The Early Referral Procedure - The “Early Referral Procedure” is designed to resolve cases more expeditiously by Examinations and Appeals working simultaneously. Under this procedure any taxpayer may request early referral of one or more unresolved issues from the examination or collection division to the Internal Revenue Service Office of Appeals. Fast Track Mediation - The Internal Revenue Service offers “fast track mediation” services (“FTS”) to help taxpayers resolve many disputes by offering an expedited process with a trained mediator without having to file a written protest. Federal Tax Lien - A “federal tax lien” is a legal claim against all current and future property, such as a house or car, and rights to property, such as wages and bank accounts. The lien automatically comes into existence if the taxpayer doesn’t pay taxpayer’s amount due after receiving taxpayer’s first bill.

Levy – A “‘levy” is a legal seizure of property or rights to property to satisfy a tax debt. When property is seized (“levied”), it will be sold to help pay a taxpayer’s tax debt. If wages or bank accounts are seized, the money will be applied to the tax debt. Notice of Federal Tax Lien (NFTL) - A “Notice of Federal Tax Lien” is a public notice to creditors. It notifies them that there is a federal tax lien that attaches to all the taxpayer’s current and future property and rights to property. Seizure –There is no legal difference between a “seizure” and a “levy”. The IRS will use both terms interchangeably – see the definition of the term “levy”. Form 870 and Form 870-AD series – Form 870 and Form 870-AD series are settlement agreements used in nondocketed cases in order to reflect an agreement forms Installment Agreement – An “installment agreement” is an agreement with the IRS pursuant to which the taxpayer who cannot pay the full amount the taxpayer owes can pay his or her outstanding tax liability in monthly installment plan. Offer in Compromise - An “Offer in Compromise” is a procedure pursuant to which the IRS may accept the taxpayer’s offer to settle his or her outstanding tax liability for less than the full amount due and owing. National Taxpayer Advocate – The National Taxpayer Advocate is an independent organization within the IRS, which assists taxpayers in resolving problems with the IRS and has the authority to issue a taxpayer assistance order where the taxpayer is suffering, or is about to suffer, significant hardship as a result of the IRS’s actions. 30 Day Letter – A”30-day letter” notifies the taxpayer of their rights to appeal the proposed changes made by Examinations within 30 days by filing a written protest or Small Case Request with the Office of Appeals. Settlement Agreements – A “settlement agreement” is an agreement entered into between the taxpayer and the IRS when a settlement is reached in a tax dispute. Appeals uses four types of agreement forms: (1) the usual waiver of restrictions on assessment, Form 870; (2) the special-purpose waiver form used in the Appeals Office, Form 870-AD; (3) a closing agreement; and (4) a collateral agreement. Small Case Request - A “small case request” may be filed by the taxpayer instead of filing a formal written protest if the total amount for any tax period is not more than $25,000. The Tax Court - The Tax Court is composed of 19 presidentially appointed members. Trial sessions are conducted and other work of the Court is performed by those judges, by senior judges serving on recall, and by special trial judges When the Commissioner of Internal Revenue has determined a tax deficiency, the taxpayer may dispute the deficiency in the Tax Court before paying any disputed amount Written protest – A “written protest” is filed by a taxpayer in certain cases upon receipt of a 30- Day Letter form the IRS in order to file an appeal with the Office of Appeals.

ANSWERS TO REVIEW QUESTIONS Question 1. A.

Incorrect. Written protests are required for any employee plan and exempt organization case regardless of the amount in issue.

Incorrect. Written protests are required for all partnership and S corporation cases.

Correct. A written protest is not required for a C corporation case where the amount in issue is no more than $25,000.

Incorrect. Written protests are required for all exempt organization cases.

Question 2. A.

Incorrect. The issue, if resolved, must lead to a quicker resolution of the entire case.

Incorrect. There can be no early referral without agreement by the taxpayer and examinations.

Correct. The early referral process is intended only for those issues that require no additional development and require only a decision.

Incorrect. Early referral is only for those issues that will lead to the faster resolution of the remaining issues.

Question 3. A.

Correct. Arbitration is generally available only for factual issues. This includes factual issues for which a request for competent authority has not yet been filed; as well as factual issues unresolved at the conclusion of unsuccessful attempts to enter into a closing agreement under I.R.C. § 7121.

Incorrect. Arbitration specifically excludes legal issues. The arbitration process is designed to improve tax administration, provide customer service, and reduce taxpayer burden. Limiting arbitration to factual issues ostensibly streamlines the process because issues of fact require considerable time and resources to determine. With factual issues resolved, the remainder of the appeals process becomes more focused.

Incorrect. Arbitration specifically excludes issues pending in courts. This is likely attributable to the redundancy in having the same matter pending in more than one forum. It also reduces the potential inconsistent determinations in the same matter.

Incorrect. “Whipsaw” issues are specifically excluded from arbitration in order to avoid inconsistent treatment in the absence of participation by all interested parties.

Question 4. A.

Correct. The Appeals Officer may utilize a closing agreement where he or she has uncertainty regarding the taxpayer’s true intent to accept the finality provisions.

Incorrect. The Appeals Officer may only request closing agreements under certain circumstances.

Incorrect. The Appeals Officer may request a closing agreement where there are related cases and the threat of whipsaw to the disadvantage of the government.

Incorrect. Though not unlimited, the Appeals Officer may request a closing agreement under a number of circumstances.

Question 5. A.

Incorrect. The taxpayer can only prevent interest from accruing by placing money on deposit with the IRS.

Correct. The money placed on deposit with the IRS will be applied towards any amount the taxpayer may owe.

Incorrect. The IRS will only halt interest if it is in possession of a deposit. 80

Incorrect. The taxpayer should always be proactive in contacting the IRS and placing the estimated liability on deposit.

Question 6. A.

FALSE: The Tax Court is actually the most popular means for litigating tax issues; though a thoughtful advocate planning tax litigation will carefully consider all available options.

FALSE: The Court of Federal Claims has jurisdiction only over those tax cases involving a monetary dispute between the plaintiff and the United States.

FALSE: The District Court’s jurisdictional limits apply only to civil matters in which a federal question is not the issue. Tax matters involving the IRS by their very nature will contain a federal questions.

TRUE: The ninety-four district courts have exclusive jurisdiction to enforce or discharge liens in favor of the United States. This statutory jurisdiction is set forth in 28 U.S.C. § 2410. There are also several other types of matters where the District courts have exclusive jurisdiction.

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