A bill awaiting President Donald Trump’s signature targets an issue at the center of a court battle that Facebook Inc. lost to the IRS—a taxpayer’s right to the agency’s internal appeals process.
The bill (H.R. 3151), which changes some IRS operations and lays groundwork for more restructuring, says the appeals process shall generally be available to all taxpayers.
It comes about a year after a federal district court judge supported the Internal Revenue Service’s decision to block Facebook from taking its $7 billion tax dispute to the agency’s appeals office, a ruling that limited the company’s ability to avoid a full Tax Court trial. The company had argued it had a statutory right to access the appeals office process.
Because a judge denied that claim, Facebook faces a trial set for February 2020 if it is unable to settle before then.
The IRS bill, which heads to the White House after the Senate passed it June 13, appears to respond to Facebook’s loss by codifying a taxpayer’s right to access the appeals process, said Rochelle Hodes, a principal in the Washington National Tax Office at Crowe LLP. Hodes previously worked as associate tax legislative counsel at the Treasury Department.
But even with the change, there’s still room for the IRS to deny requests, she said.
The agency takes the stance under Revenue Procedure 2016-22 that it can deny the referral of a case to appeals if there are significant issues common to other cases in litigation where it’s important that the agency maintain a consistent position.
In the IRS bill, lawmakers “reinforce this idea of consistent interpretation,” Hodes said. The measure creates a new independent office of appeals that it says should resolve tax controversies without litigation on a basis that “promotes a consistent application and interpretation of, and voluntary compliance with, the Federal tax laws.”
Saying the appeals process right will be “generally” available also may limit the scope of the provision, she said.
But the bill does create some disincentives for the IRS to deny requests like Facebook’s.
It forces the commissioner to provide a detailed explanation for denials and requires the commissioner to inform taxpayers of their right to protest a denial and offer procedures for doing so.
For the most part, the bill is simply writing current IRS practices into law, said Heather Maloy, U.S. tax controversy leader at Ernst & Young LLP.
“It’s really just a lot of codifying what already exists,” she said. The bill pulls some language directly from the current Appeals Office’s mission statement and Rev. Proc. 2016-22.
But some changes will require substantial internal rewiring.
The bill would give certain taxpayers—individuals with adjusted gross incomes of $400,000 or less and organizations with gross receipts of $5 million or less—access to the non-privileged portions of their case files at least 10 days before a conference with the appeals office.
Currently, taxpayers can access their files using the Freedom of Information Act, but this provision would remove that extra step for smaller businesses and individuals. The change goes into effect one year after the bill’s enactment.
Implementing the change could be a challenge for the agency, requiring substantial improvements to the IRS’s current information technology systems, according to several practitioners and former government officials.
The ability to transfer those case files is “not nearly as automated as you might expect right now,” said Mike Dolan, national director of IRS policies and dispute resolution in the Washington National Tax practice of KPMG LLP. Dolan is a former IRS deputy commissioner and also served two extended appointments as acting commissioner.
He said if he was still at the agency he would be spending a good portion of the year-long transition focusing on technology upgrades and ensuring there’s a streamlined process for getting documents from the examination team to the appeals office within the 10 days. The change will also require auditors to keep and preserve better records.
Modernization Under Way
The agency has already begun some of the modernization work as part of its broader effort to update the IRS’s systems and procedures, Hodes said.
The agency in April released a six-year modernization plan costing between $2.3 billion and $2.7 billion that it has already started to execute.
With the new IRS bill enacted, the agency should explore options for leveraging technological advances it’s already made, said Travis Thompson, an associate in the tax and criminal defense practice groups at Sideman & Bancroft LLP.
“Recently, the IRS has invested a great deal of resources on new technologies to promote its new data driven mindset, and this has helped the agency become more efficient and provide better taxpayer and taxpayer representative experiences,” he said by email.
For example, starting in 2018, the Office of Appeals introduced a WebEx platform for taxpayers to have appeals meetings using a computer or smart phone device, he said.