When a deal looks like it is lost, the perspective of both sides is to simply dig and go to the next level whatever that may be. If working with the IRS on the examination of a tax return both sides can agree to disagree. The IRS exam team finalizes the proposed adjustment and gives it to the taxpayer. The taxpayer responds with a 30-day letter. The IRS exam team writes up a response to the taxpayer’s 30-day letter response and the case is shipped off to IRS Appeals. Is there a better way?
What happens at Appeals at the IRS?
The case has to be closed out of IRS examination and be received at the Appeals Division at the IRS. Assume this takes 60 days. The case has to be received into inventory and assigned to an Appeals Officer at the IRS and the Appeals Officer needs to schedule a conference with the taxpayer. Assume this takes another 30 to 60 days. Appeals wants a year on the statute from the date they accepted the case as a minimum.
The Appeals Officer will schedule an opening conference where the IRS examination team and the taxpayer are both invited to present their arguments to the Appeals Officer. IRS examination often does not attend the opening conference, but on occasion they do. After the opening conference there may be a series of meetings between the Appeals Officer and the taxpayer or the taxpayer’s representatives. The Appeals Officer may not engage with the IRS examination team without contacting the taxpayer and inviting the taxpayer to that meeting. No new facts may be presented at Appeals. If new facts are presented at Appeals, then Appeals needs to send the case back to the examination team. No one wants that, so any new facts as a minimum should be presented within the 30-day letter by the taxpayer.
Appeals is out to settle the case based not only on the facts of the case (how IRS examination works to resolve cases), but also considers the hazards of litigation. This gives Appeals greater latitude than the examination team. Historically about 85% of the cases settle at Appeals. The remaining 15% or so may be docketed for federal court. The typical time frame at Appeals is nine months for smaller cases and two years or longer for larger cases. However, there is considerable variability within these numbers.
What can be done with an impasse on examination at the IRS?
When it appears, all is lost in examination and that the case cannot be resolved based on the facts, here are some other ideas for your consideration.
#1 Don’t let anger take over
Remain professional, avoid hostility, and focus on interests. Really try to understand where the IRS is coming from. Only by dealing with issues, the facts on the issues, the emotion tied to the issues, and the interests of the IRS is it possible to work to resolve the issue.
#2 Consider the relationship now and into the future
Often the taxpayer may think, once we are done with this year or these years under audit, we will be able to move on. The IRS looks at the situation a bit differently. Given the adjustment on the year(s) just audited and what the IRS exam team knows now, the next cycle (years under audit) should be more efficient. That’s right the IRS is looking at coming back and audit additional years. It pays to have a good working relationship with the IRS now for the next cycle that is likely coming.
#3 Create value with a renegotiation
Know what you want. Ask for it. Have three good reasons why this is in their best interest. For example, you want to renegotiate with the IRS to see if you can have closure now. The C-suite folks want closure, guaranteed. You want to focus on problem solving. Approach renegotiation as an opportunity for both sides to raise new issues or perspectives on issues.
Three ways value can be created with the IRS are by:
- Having an agreed case, it is an easier write for the IRS, and there can be closure for both sides.
- Really understand the taxpayer's perspective, their books and records, the analysis provided, and work to educate judiciously both sides.
- Promote a good working relationship with the taxpayer for the future to increase voluntary compliance going forward.
#4 Fully evaluate the cost of failure
Look at the costs in terms of time, resources, opportunities lost and the time frame for closure should the case proceed to Appeals. Think of the toil, mental health and physical health on the participants. All too often parties underestimate the financial and other costs of going to Appeals.
#5 Bring in the right parties for the negotiation
Consider all necessary parties. These are typically the IRS engineer, the IRS engineer manager, the agent, the agent’s manager, the taxpayer’s Power of Attorney (POA), the appropriate parties from the tax department, potentially a C-suite representative, the taxpayer’s study or appraisal expert, internal company experts, and anyone else that has value added to the process. Do not bring in someone that will poison the process.
#6 Using terminology that is neutral
The term “renegotiation” in and of itself may be thought of as negative. Terms such as “review”, “restructuring”, “rescheduling”, or “clarification” to describe the meeting may be perceived asmore neutral. Simply changing some terms can help shape the whole tenure of the session.
#7 Consider a mediator/facilitator
A neutral third person that is able to meet with both parties, listen to them, build trust and then help the parties to find a resolution that both sides can live with can save considerable time and money. A mediator designs a process for creating value, providing communication in neutral terms, and facilitates positive results.
Having recently experienced these types of processes on valuation and research credit studies by experts hired by taxpayers with issues before the IRS, these steps can work to overcome impasses with the IRS. For a more academic commentary on this topic see this article from the Harvard Law School Program on Negotiations.
About the author
Mike is a former IRS executive that oversaw business valuation nationally, research credit for 23 states and who brought mediation to the IRS Field Specialists Program. He is a mediator/negotiator that helps clients resolve issues and be more productive as a conflict resolution expert. You may contact Mike directly at mg@mikegreg.com and at (651) 633-5311. Mike has written 11 books including, The Servant Manager, Business Valuations and the IRS, and Peaceful Resolutions that you may find helpful. [Michael Gregory, ASA, CVA, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court]