Appeals Judicial Approach and Culture (AJAC) Project Update: IRS Appeals as the Impartial Evaluator

AJAC Project Update: IRS Appeals as the Impartial Evaluator

On July 18, 2014, the Treasury Department released a memorandum resulting in the first guidance to IRS Appeals employees on the implementation of the Appeals Judicial Approach and Culture (AJAC) Project. See, Susan L. Latham, Department of the Treasury, Memorandum for Appeals Employees, Control No. AP-08-0713-03 (July 18, 2013)(hereinafter, the "AJAC Memo"). The stated purpose of the AJAC Project is to return Appeals "to a quasi-judicial approach in the way it handles cases, with the goal of enhancing . . . perceptions of a fair, impartial and independent Office of Appeals." The AJAC Memo set forth the changes to be implemented via revisions to the Internal Revenue Manual, which were published between November 1, 2013 and December 20, 2013.

Essentially, where over the past years Revenue Officers and ACS would routinely provide CDPH rights at the time of contact, now practitioners are forced (if not encouraged) to attempt to work things out with this level of review prior to coming before the IRS Office of Appeals. Otherwise, Appeals may send you back for review-and thus prolong the resolution of your client's case.

I. CONSIDERATION OF NEW ISSUES GENERALLY

The revised Manual assures that Appeals is not to raise new issues or reopen issues on which the taxpayer and the Service are in agreement. I.R.M. 1.2.17.1.2 (11-14-2013). This policy statement represents a shoring up of what was once a more relaxed approach to raising new or previously agreed-upon issues with Appeals. Prior IRS policy instructed that Appeals was not to raise new issues or reopen agreed-upon issues when the grounds for doing so are "substantial" and the potential effect on tax liability is "material." See I.R.M. 1.2.1, Policies of the IRS Handbook 1.8.6, P-8-49, New Issues Not To Be Raised Unless Material (approved Dec. 23, 1960); see generally Saltzman, IRS Practice & Procedure (2d Ed.), ¶9.07[4].

The restrictions on raising new or agreed-upon issues do not apply to any matters raised by the taxpayer. I.R.M. 8.6.1.6.1 (11-14-2013). In a docketed case, a "new issue" is broadly defined as any adjustment to an item effecting the taxpayer's liability that is not included in the statutory notice of deficiency. I.R.M. 8.4.1.15.3 (11-1-2013). If a taxpayer raises such in a docketed case, Appeals must communicate with Area Counsel to determine whether any pleadings should be amended prior to discussion and negotiation with the taxpayer. While the latter was the practice prior, this set of revisions offers both a sword and a shield to taxpayers. Taxpayers may seek to raise new issues with Appeals while keeping closed any questionable issues resolved under examination.

Notwithstanding, Appeals is not prevented from raising "a new theory or alternative argument" to a taxpayer's facts as under prior policy. I.R.M. 8.6.1.6.1 (11-14-2013). Appeals may not "develop evidence that is not in the case file to support the new theory or argument." I.R.M. 8.6.1.6.2 (11-14-2013). While this sounds like good news for a taxpayer, how this phrase is interpreted is likely to be on a case by case basis until the IRM or another policy body decides to make a unilateral change across the campuses.

II. Collection Due Process (CDP) and Equivalent Hearings

CDP and Equivalent cases are to be evaluated only on the information contained in the Collection case file. I.R.M. 8.22.4.2.1 (11-14-2013). If a file contains sparse or insufficient information, Appeals must either request information directly from the taxpayer or else issue an Appeals Referral Investigation ("ARI") to Collection to gather more information before making a determination. Id. Appeals cannot simply return the file to Collection or make a determination. It is therefore encouraged to seek additional facts.

The IRM further clarifies that Appeals has no responsibility to protect a tolling CSED or ASED in a CDP or Equivalent proceeding. I.R.M. 8.22.4.2.3 (11-14-2013). IRC § 6330(e) suspends the CSED for the period of time during which the CDP hearing and any subsequent appeal is pending and provides for a minimum of 90 days for collection after a final CDP determination. Thus, this clarification is unlikely to have any significant impact on the Service's overall collection efforts.

In CDP OIC cases, Appeals' role is to consider only the case as developed by the Centralized Offer in Compromise unit ("COIC"). In analyzing an OIC, COIC shares the results of their investigation with the taxpayer in a pre-determination letter. If COIC makes any recommendation other than acceptance, it is the function of Appeals to make a final determination. Since COIC's adverse recommendation is not a final determination under IRC 7122(f), Appeals must make a determination within 24 months from the date the offer was first received by the IRS. 8.22.7.10.6.5 (11-05-2013). Otherwise the offer is automatically deemed accepted. I.R.C. § 7122(f).

Offers with a preliminary recommendation by COIC are treated as a priority, and AJAC directs Appeals to attempt to make a final determination within 120 days of receipt. In line with the overall theme of AJAC, Appeals can only consider the assets documented by Collection, unless the taxpayer voluntarily provides new information to Appeals. Id. Similarly, Appeals cannot investigate an OIC to identify and value additional assets, and is specifically directed not to revise the value of an asset.

III. NON-CDP OFFERS IN COMPROMISE

In OIC appeals cases under AJAC, Appeals must "advise the taxpayer of what is needed in order for the offer to be properly evaluated and/or accepted and provide a reasonable opportunity to submit supplemental information or documentation." I.R.M. 8.23.1.1 (11-20-2013). Appeals will not request information or evidence for purposes of strengthening the government's case. I.R.M. 8.23.3.1(6) (11-21-2013). Agreed reasonable collection potential ("RCP") issues that were addressed during Collections will not be re-examined by Appeals. I.R.M. 8.23.3.3(3) (11-21-13). In addition, Appeals employees will not attempt to identify and value any additional assets, and will not revise the value of an asset to an amount that is higher than previously determined by Collection. I.R.M. 8.23.3.3(4). Thus, the burden is on Collection to submit case files with complete and thorough documentation. This means that cases are likely to be worked more thoroughly before going to Appeals. This also means that it behooves the practitioner to seriously attempt to resolve matters with collections, even if they have a CDPH in the works.

A taxpayer may submit new information while the case is in Appeals, and Appeals is to consider it. I.R.M. 8.23.3.3(5). However, where Collections' development of an issue is weak, Appeals will review only the information contained in the case file and weigh it against information and testimony provided by the taxpayer. I.R.M. 8.23.3.3(6). AJAC provides that Appeals is not to "re-work" an offer rejected by Compliance; rather, Appeals should consider only those items in dispute at the time of rejection. Per IRM 8.23.1.3 (11-20-2013), any requests for the taxpayer to provide supplemental information to Appeals are to indicate:

  • precisely what is needed, and when
  • that the information, documentation, unfiled return, payment, etc., that is necessary
  • Appeals will make its decision based upon available information if all of the requested items are not received by the due date provided.

Appeals will consider a financial statement verified if it is dated within twelve (12) months of the OIC proceeding, since it was provided to Collection and they reviewed or had the opportunity to review it. I.R.M. 8.23.3.3(7). Thus, financials need not be updated as long as they were executed within one year of assignment of the OIC matter to Appeals.

A final highlight under AJAC is with respect to Area Counsel's role in acceptance of large offers. IRC § 7122(b) requires an opinion from Counsel to be placed in the file if the liability, including tax, penalties and interest, is $50,000 or more. Counsel's review is a two-step process, beginning with a certification that the legal requirements for compromise were met. If an offer passes this first test, Counsel then reviews the proposed acceptance "for consistent application of the Service's policies regarding acceptance." 8.23.4.2.2 (11-21-2013). However, the revised Manual specifically states that Appeals need not agree with Counsel: "[a]lthough Counsel's opinion is required for compromise, its concurrence with the decision to accept the offer is not." IRM 8.23.4.2.2(4) (11-21-2013).

As Appeals is also getting comfortable with its new responsibilities and powers, it behooves taxpayers and practitioners to provide ACS and the RO they are working with all complete and financial statements and/or resolution proposal prior or soon after the right to go to Appeals is gestated. This will not make your application a wasted trip. Finally, it's for the RO and ACS to do their work as opposed to pushing it off onto Appeals. Thus, these changes were long expected.

Now that the music has changed, so must the proverbial dance.