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Service Formally Establishes Appeals Arbitration Program In Rev. Proc. 2006-44, the Service formally established the Appeals Arbitration Program (AAP), under which the IRS and the taxpayer agree to have a third party make a decision about a factual issue that will be binding on both of them. Background In Ann. 2000-4, the Service announced that it was establishing a two-year pilot program testing a binding arbitration procedure, effective Jan. 18, 2000. Ann. 2002-60 extended that two-year test for an additional one-year period (ending July 1, 2003). Although no further guidance had been issued until now, the IRS had continued to honor requests for arbitration under Ann. 2002-60. Rev. Proc. 2006-44 formalizes the AAP and supersedes Anns. 2000-4 and 2002-60. Availability The AAP may be used to resolve issues while a case is in Appeals, after settlement discussions are unsuccessful and when all other issues are resolved but for the specific factual issue for which arbitration is being requested. Arbitration is available only for factual issues, including those unresolved at the conclusion of unsuccessful attempts to enter into a closing agreement under Sec. 7121. It is not available for:
Application Process Either the taxpayer or Appeals may submit a request to arbitrate after consulting with the other party. A taxpayer should submit a request to the appropriate Appeals Team Manager and a copy to the Chief, Appeals, 1099 14th Street, NW, Suite 4200 East, Washington, DC 20005, Attn: Office of Tax Policy and Procedure. The request should: 1. Provide the taxpayer’s name, identification number and address, and the name, title, address and telephone number of a person to contact; 2. Provide the Appeals Team Case Leader’s, Appeals Officer’s or Settlement Officer’s name; 3. Identify the tax periods involved; 4. Describe the issue for which the taxpayer is requesting arbitration, including the dollar amount of the adjustment in dispute; and 5. Contain a representation that the issue is not an excluded issue from the AAP. The Appeals Team Manager will respond to the taxpayer and the Appeals Team Case Leader, Appeals Officer or Settlement Officer within two weeks after receiving the taxpayer’s request. The team manager will secure the concurrence of the Chief, Appeals, Office of Tax Policy and Procedure, before notifying the taxpayer and the Appeals Team Case Leader, Appeals Officer or Settlement Officer of the decision. If the request to arbitrate is approved, the team manager will schedule a conference or conference call that will include a representative from the Chief, Appeals, Office of Tax Policy and Procedure. The Appeals representative will act as the initial administrator to manage and supervise the arbitration proceeding and to act as liaison between the taxpayer and Appeals (the parties), and between the arbitrator and the parties. If the request is denied, the taxpayer may request a conference with the Team Manager to discuss the denial. The denial of a request to arbitrate is not subject to judicial review. Arbitration Agreement After a request to arbitrate is approved, the parties enter into a written agreement to arbitrate. A model agreement is included as Exhibit 1 of Rev. Proc. 2006-44. The agreement should: 1. Specify the issues that the parties have agreed to arbitrate; 2. Assign to the arbitrator the prescribed task of finding facts; 3. Describe the answer the parties seek (e.g., specific dollar amount, range of dollar values, finding of yes or no); 4. Describe and limit the type of information the arbitrator may consider; 5. Contain an initial list of witnesses, attorneys, representatives and observers for each party; 6. Provide that the time and place of any hearing will be determined by the parties’ mutual agreement; and 7. Prohibit ex parte contacts between the arbitrator and the parties. The agreement should be completed within four weeks after the taxpayer has been notified that the request to arbitrate has been approved. The parties should proceed to arbitration within 90 days after signing the agreement. Appeals may withdraw from the arbitration process if the taxpayer is unable to adhere to those timeframes without reasonable cause. By signing the agreement, the taxpayer consents to the IRS’s disclosure of its returns and return information to the arbitration participants it listed in the agreement and identified in writing after execution of the agreement. If the agreement is executed by a person under a power of attorney granted by the taxpayer, the power of attorney must clearly express the taxpayer’s grant of authority to consent to IRS disclosure of the taxpayer’s returns and return information to third parties; a copy of that power of attorney must be attached to the agreement. Arbitration Process The parties may select an arbitrator from Appeals or an outside organization that provides a roster of neutral individuals. If the arbitrator is provided by an outside organization, it also may provide the administrator in lieu of the one from the Chief, Appeals, Office of Tax Policy and Procedure. The parties will share equally the compensation, expenses and related fees and costs of the non-IRS arbitrator, as well as any reasonable costs for the services of a non-Service administrator (subject to applicable rules and regulations for government procurement). The non-IRS arbitrator and administrator will be contractors subject to the disclosure restrictions of Sec. 6103(n). If an Appeals arbitrator is selected, he or she must be from another Appeals office or the Office of the Chief, Appeals, and Appeals will pay all associated expenses. Because of the inherent conflict that results from the arbitrator’s employment with the Service, he or she must provide to the taxpayer a statement confirming the proposed service as an arbitrator and status as a current IRS employee, and that a conflict results from the continued status as a Service employee. No later than 30 days before the arbitration session, each party will prepare a summary of its position for consideration by the arbitrator and submit the summary to him or her. The arbitrator will consider only the legal guidance identified by the parties. If the arbitrator needs additional legal guidance, both parties must agree to provide it and the manner in which it is to be communicated to the arbitrator. The parties may withdraw, by mutual agreement, from the AAP any time before the date of the arbitration session. Postponements for good cause will be determined by agreement between the parties. No later than 30 days after the arbitration session, the arbitrator will prepare a written report and submit a copy to the administrator. Once the arbitrator has rendered a decision on all or some of the issues, Appeals will use established procedures to close the case, including preparation of a specific-matters closing agreement. Rev. Proc. 2006-44 was effective on Oct. 30, 2006. Implications The IRS offers several dispute resolution methods as an alternative to the traditional dispute resolution appeals process. These are designed to provide taxpayers with quicker resolution of tax controversies than afforded by the traditional appeals process. In this instance, the Appeals arbitration process is at the end of the Appeals process, after unsuccessful attempts to reach a settlement. It is strictly limited to factual issues. If the arbitrator’s decision is favorable to the taxpayer, it resolves the case without the need for litigation. However, if it is unfavorable, the decision is binding. Neither party can appeal an arbitrator’s decision or contest the issue(s) subject to the arbitration process in any judicial proceeding, including (but not limited to) the Tax Court, U.S. Court of Federal Claims or a Federal district or appellate court. Taxpayers considering using the Appeals arbitration process should do so only after weighing their potential litigation options and assessing their chances of success in litigation versus arbitration and the overall potential costs involved for each prospect. From Paul Manning, J.D., Washington, DC |
