IRS Tests ADR Programs in Appeals

On December 1, 2008, the Internal Revenue Service, in its Bulletin No. 2008-48 (PDF, 40 pages) included Announcement 2008–111 (beginning on Page 1224), entitled "Test of Procedures for Mediation and Arbitration for Offer in Compromise and Trust Fund Recovery Penalty Cases in Appeals".

The announcement by the IRS modified prior revenue procedures to enable a two-year test program involving two new forms of alternative dispute resolution for taxpayers on certain appeal matters:

This announcement modifies Revenue Procedures 2002–44, 2002–2 C.B. 10, and 2006–44, 2006–2 C.B. 800, by establishing a two-year test of the mediation and arbitration procedures for Offer in Compromise and Trust Fund Recovery Penalty cases that are under the jurisdiction of the [IRS] Office of Appeals.

The new pilot program was the subject of an informational release, IR-2008-135, entitled "IRS Announces Two New Appeals Programs" (12/01/08), announcing post-Appeals mediation or arbitration procedures for test programs in the two settings of an Offer in Compromise (OIC) and a Trust Fund Recovery Penalty (TFRP).

Beginning Dec. 1, 2008, for a two-year test period, Appeals will offer post-Appeals mediation and arbitration for OIC and TFRP cases for taxpayers whose appeals are considered at the Appeals office in Atlanta, Ga.; Chicago, Ill.; Cincinnati, Ohio; Houston, Texas; Indianapolis, Ind.; Louisville, Ky.; Phoenix, Ariz.; and San Francisco, Calif.

Under these two alternative dispute resolution programs, the taxpayer or Appeals may request nonbinding mediation. The taxpayer may decline Appeals’ request for mediation. Appeals will evaluate a taxpayer’s request for mediation based on the criteria detailed in Revenue Procedure 2002-44 and Announcement 2008-111.

A request for binding arbitration must be made jointly by the taxpayer and Appeals. The mediation and arbitration procedures do not create any additional authority for settlement by Appeals. * * * [Formatting added.]

The Announcement notes that such ADR procedures will not be available when "the taxpayer has already attempted to resolve the matter through Fast Track Mediation" or when an offer in compromise was submitted by a taxpayer to the IRS as an alternative to an IRS collection action.

In a summary article drawn from these materials, entitled "IRS Introduces Two Appeals Programs" (12-02/08) posted by WebCPA, the distinctions between mediation and arbitration, as alternative dispute resolution devices to be tested at selected IRS offices, were highlighted:

During the test period, appeals employees will advise the taxpayer of the availability of these alternative dispute strategies and the deadline for requesting such strategies.

The post-appeals mediation process is available for both legal and factual issues. The mediator's role is to facilitate settlement negotiations so the parties can reach an agreement, but the mediator does not have settlement authority over any issue.

The arbitration procedure is available for factual issues only. The arbitrator's role is to hear both sides of a disputed issue and then render a decision based on the specific factual issue. The decision is binding on both parties. However, the arbitrator does not have the authority to decide that the offer in compromise itself must be accepted or that a person is or is not liable. Neither party may appeal the decision of the arbitrator or contest the decision in any judicial proceeding. * * * [Formatting added.]

Testing of such ADR devices by the IRS is significant. Hopefully the test will reveal the processes to be efficient and effective in resolving IRS claims against taxpayers.

The IRS ADR test program follows a trend in many areas of law for resolution of disputes more through open exploration, direct discussion, and an acceptable agreement by parties, in a process controlled and supervised by an experienced, independent mediator or arbitrator, rather than through adverse positioning, formal litigation, and a court's adjudication.