IRS Update to Fast Track Settlement Program a Welcome First Step

For an agency in transition, the success of the IRS’s alternative dispute resolution programs is more important than ever. These programs, such as fast track settlement, offer taxpayers an efficient and less adversarial path to resolving disputes with the IRS.

The agency has made notable improvements to its ADR offerings in recent years, resulting in a 25% increase in taxpayer participation during fiscal year 2024. Further opportunities remain to refine these programs and strengthen taxpayer confidence in their effectiveness.

Resolving IRS disputes swiftly and fairly is far preferable to engaging in lengthy, drawn-out battles. Taxpayers only have a narrow window of opportunity for resolution. IRS examiners aren’t permitted to settle cases; that authority is left to officers in the IRS Independent Office of Appeals, the Office of Chief Counsel, or the Department of Justice.

The appeals office has been hit hard by retirements and reductions in force, which will only prolong what is already a multi-year process. That makes the IRS’s examination process the natural place for early resolution before a case moves into appeals or litigation.

That is particularly true because the Tax Court, the only prepayment judicial forum for federal tax disputes, remains extraordinarily busy. In fiscal year 2024, more than 20,000 cases were filed there, a formidable volume even with an (almost) full bench of judges. Litigation itself is inherently slow—pleadings, discovery, motion practice, trial, and post-trial briefing all take months, if not years.

One ADR option available while a case is under IRS examination is fast track settlement. It provides a mediation-like process between the taxpayer and exam, facilitated by an appeals officer. True to its name, it’s designed to expedite resolution, offering an abbreviated 120-day timeline to resolve large business and international issues.

While that may not be as quick as taxpayers would prefer, it’s far faster than completing the full examination process only to face months of waiting for an appeals conference (or worse, years of litigation).

The fast track program offers an early off-ramp to resolution before the IRS issues a statutory notice of deficiency. Better still, the process is confidential. Unlike litigation where the proceedings are part of the public record, fast track settlement is entirely private. And if it doesn’t produce an agreement, a taxpayer still retains the option to pursue resolution through the appeals office. In other words, it doesn’t foreclose opportunities for ADR, such as a traditional appeals conference or post-appeals mediation.

Updates to the fast track settlement program this year allow taxpayers to use it for single-issue cases. A taxpayer’s request to participate no longer can be denied without IRS managerial approval, and a taxpayer must be given an explanation if denied.

These updates reflect a continued effort to make the program more accessible, transparent, and taxpayer-friendly. In our experience, this renewed emphasis is translating into more receptiveness to fast track settlement, even in cases where the IRS seems particularly wedded to its position.

Several aspects of fast track settlement still warrant improvement. One concern involves the treatment of ex parte communications. Typically, strict rules prohibit direct contact between the IRS appeals office and its examination function to preserve the independence of appeals. However, that safeguard doesn’t apply with fast track settlements.

The Taxpayer Advocate Service has identified the appeals office’s “lack of independence” as one of the IRS’s most serious systemic issues. Allowing exam personnel, IRS counsel, and the appeals mediator to confer outside of the taxpayer’s presence understandably raises concerns about impartiality.

To bolster taxpayer confidence, the IRS should consider implementing firmer barriers between appeals mediators and the examination team or, at the very least, narrowly defining the circumstances under which ex parte communications may occur.

Similarly, appeals officers often begin and build their careers within the IRS examination function. Taxpayers understandably may question the impartiality of mediators who spent much of their careers as revenue agents or government auditors with limited experience advocating for taxpayers.

To address this, the IRS might consider offering an option for private mediation, at the taxpayer’s expense, within the fast track settlement framework. Taxpayers are likely to perceive a neutral, third-party mediator as less likely to be biased toward the IRS and its positions. This approach could help alleviate resource pressures within the appeals office, which experienced a 28% reduction in headcount earlier this year, allowing its officers to focus on traditional appeals conferences.

The IRS’s renewed focus on improving fast track settlement and its other ADR programs is a welcome step toward more efficient and equitable tax administration. Continued attention to transparency, independence, and taxpayer confidence will be essential to ensuring these programs fulfill their promise as a true alternative to prolonged disputes and costly litigation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Stephen Josey is counsel at Vinson & Elkins’ tax controversy and litigation practice in New York.

Brie Barry is a tax associate at Vinson & Elkins in Washington, DC.

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