TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

On March 20, 2017, the IRS issued a “Fast Track Settlement Program” to speed up settlements with individuals and small businesses through its Small Business/Self-Employed Division (“SB/SE”). Although this reform was likely to happen regardless, it does come on the heels of the new administration’s criticism — echoed by the IRS Taxpayer Advocate —that the IRS operates with a “gotcha” mentality and should shift to helping taxpayers avoid errors in the first place and resolve cases quickly and cheaply.

In Rev. Proc. 2017-25, the IRS noted that large business taxpayers already have a successful fast-track resolution procedure, and that the IRS had been operating a SB/SE fast-track pilot program since 2003. The IRS is now rolling out a permanent version of the pilot program, and the permanent version contains many of the best features of that pilot program.  It takes effect immediately.

Before Rev. Proc. 2017-25, if a taxpayer couldn’t resolve an issue with an SB/SE agent who was auditing the taxpayer, then the taxpayer would have to wait until the agent finalized the audit and issued a notice. That notice would trigger the taxpayer’s right to seek review of the agent’s decisions by the IRS’s Office of Appeals.  In this normal (non-fast-track) mode, Appeals takes a second look at the IRS agent’s position and offers to settle with the taxpayer on the same or more-generous terms than were offered by the case agent.  Appeals thereby provides an off-ramp for cases that are easily resolved and should not go through the even-more-expensive Tax Court and U.S. District Court routes.  The downside of the current approach of only bringing in Appeals after the examination ends, is that the IRS and taxpayers spend time and money while the agent pushes the audit over the finish line.

The new fast-track procedure is designed to allow for even earlier dispute resolution, which saves money for both the IRS — the agent can move on to another case instead of completing the present audit — and the taxpayer, who can limit legal and accounting bills through early intervention.

Now, the taxpayer can get two bites at the apple. If there’s a disputed “fully developed” factual or legal issue in an examination — meaning the IRS agent has all necessary legal advice and documentation — then the taxpayer can invoke the fast-track process and the Appeals office will try to resolve the issue in no more than 60 days. Even if this fast-track process is unsuccessful, the taxpayer can still take the case through the “traditional Appeals process” after the IRS has finished the examination, permitting a second bite at the apple.

Of course, what would an IRS procedure be without a large helping of red tape? The final fast-track procedure differs from the pilot program in that: the IRS added a “good faith” requirement that taxpayers be fully cooperative – in the IRS’s exclusive opinion – during the audit; the IRS Group Manager must have tried and failed to resolve the issue; and the IRS added a catch-all provision that the fast-track procedure is inapplicable where employing it “would not be in the interest of sound tax administration” (aka, if the IRS doesn’t want to do it).

The bottom line: this is great news for taxpayers, particularly those who are represented in audits. There is no downside for the taxpayer of bringing in an Appeals officer to help resolve an issue, because at worst the Appeals officer will agree with SB/SE.  On the upside, Appeals officers frequently disagree with SB/SE agents, and they can be a powerful ally for the taxpayer and her representatives in trying to resolve disputed legal or factual issues.  This isn’t a cure-all for dealing with unreasonable IRS revenue agents, but it will provide a cost-effective way to challenge agents, particularly when they appear to be taking an unreasonable position during the audit.

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3200. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the Criminal Division.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).