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Once upon a time when a taxpayer was under audit by the Internal Revenue Service (“IRS”) if the case could not be resolved with the examining agent, the options generally were to request a conference with the agent and the group manager, file a written protest requesting that the case be considered by an Appeals Officer in the Appeals Division of the IRS or wait for the issuance of a Notice of a Deficiency and file a petition with the United State Tax Court. Hesitant about incurring the cost of potential litigation, most taxpayers would opt to go to Appeals, understanding that the Appeals Officer, like the examining agent, is an employee of the IRS. Despite that relationship the appeals process is held out as an independent review with a primary consideration being the Appeals Officer’s ability to consider hazards of litigation as part of the settlement negotiations. Back in the day the taxpayer would generally hear from an Appeals Officer physically located in the taxpayer’s IRS district within 60 days of filing the protest. It was not unusual for the Appeals Officer to schedule an initial conference within 60 days providing a real possibility of concluding the matter within six months. The reality today, however, is that it may be 120 days or more before the taxpayer hears from an Appeals Officer, frequently the Appeals Officer is located in another state, and the process is likely to take a year or longer.

In recognition of the foregoing, the IRS has established a series of programs to increase the number of cases resolved at the examination level, collectively referred to as “alternative dispute resolution”. Two of these programs are identified as “Fast Track Mediation” (“FTM”) and “Fast Track Settlement” (“FTS”). These are both available during the examination phase of an audit and are both designed to expedite the participation of an Appeals Officer in settlement negotiations without having to formally close the examination case and transfer it to an Appeals Office. Utilization of these programs is on the rise because both the taxpayer and the examining agent get input from the Appeals Officer, there are short defined time lines within which the process is to be concluded, and there is little downside to either to the taxpayer or the IRS.

Again the primary goal is to resolve the case at the initial examination level while preserving the quality of result by involving an Appeals Officer trained in utilizing effective mediation techniques. Either the taxpayer or the IRS can request FTM or FTS, but both parties must agree to go forward by initiating the process through execution of Form 13369, “Application to Mediate,” or Form 14017, “Application for Fast Track Settlement”, together with a brief statement from the taxpayer of the facts and the taxpayer’s position. Neither FTM nor FTS is to be pursued until it is clear the taxpayer and the examining agent are not going to reach an agreement, and often it occurs after a meeting that involves the examiner’s group manager.

Under either FTM or FTS the taxpayer should be contacted by an Appeals Officer within ten days of submitting the appropriate form. There are certain cases in which the IRS will take the position that neither FTM nor FTS is appropriate. In both FTM and FTS the entire process is anticipated to be completed within forty to sixty days after the IRS receives the appropriate form. At the conference the participants include the taxpayer and/or the taxpayer’s representative, the IRS examiner and the Appeals Officer who is serving as mediator. In some situations there may be other participants such as the IRS group manager. At the conference the mediator will lead the process generally beginning with a joint session, first providing the taxpayer an opportunity to set forth the facts and discuss his position, followed by an opportunity for the IRS examiner to respond and discuss the position taken by the IRS. The mediator may then try to facilitate discussions among both parties or the mediator may participate in separate individual discussions with each of the taxpayer and the IRS examiner. Following any such individual discussions a joint meeting will resume and the mediator will continue to attempt to facilitate a mutually agreeable settlement position. Either the taxpayer or the IRS examiner may withdraw from the process any time, or the mediator may inform the parties that it is the mediator’s opinion that no settlement will be reached and the process should be terminated. If the case is not resolved the mediator will destroy any notes created during the session, and if the taxpayer subsequently files a protest seeking review by the Appeals Officer the case will not be assigned to the mediator for any such subsequent Appeals consideration.

While the FTM and FTS processes are generally similar there are some important distinctions. Under FTM certain collection cases can be mediated including Collection Due Process, Offers in Compromise and Trust Fund Recovery Penalty cases. On the other hand, while FTM can only be used at the examination level, FTS can be initiated at the Appeals level. However, the most important differences between FTM and FTS involve settlement authority and hazards of litigation. The mediator in a FTM case has no settlement authority, nor is the mediator authorized to interject possible hazards of litigation as part of the settlement negotiations. If the mediator is not successful in bringing the taxpayer and the examining agent to agreement then the mediation is terminated and the case is closed in the normal course of the examination. On the other hand, under FTS, the mediator is specifically delegated settlement authority and has the ability to consider hazards of litigation. During the mediation both the taxpayer and the examining agent may propose a basis of settlement or there may be no proposal from either side. In either event the Appeals Officer can independently propose a basis of settlement, however, neither the taxpayer nor the examining agent are bound to accept any basis of settlement proposed by the mediator. Furthermore, just as if the case in examination had been closed unagreed in the traditional manner and the case sent to Appeals, the mediator, unlike an examining agent, can look at the facts and circumstances and the law as presented and evaluate potential hazards that either the taxpayer or the IRS would face if the case went to trial. In many cases the consideration of hazards of litigation is critical in reaching a basis of settlement.

While neither FTM nor FTS should be automatically pursued the processes should be considered. This is particularly true if there are essentially no questions about the facts but the issue is primarily the application of the law to the facts.   Other factors to consider include the experience of the examining agent, the complexity of the issue and whether the issue will continue to arise in subsequent tax years. Involvement of an Appeals Officer at the examination level may save time, money and frustration, things near and dear to every client’s heart.

About the author

Attorney David D. Dahl has been practicing law since 1982 and is recognized throughout the State of North Carolina for his federal and state tax controversy practice. Before joining Manning Fulton, Dave was a trial attorney for the Internal Revenue Service, Office of District Counsel, Cleveland, Ohio where he tried numerous cases with the IRS. Since then, he has represented clients before the IRS Examination Division, Appeals Division, United States Tax Court, United States District Court and United States Appeals Court. Dave has also represented clients in a range of issues before the North Carolina Department of Revenue.
Dave is listed among Business North Carolina‘s Legal Elite (2012-2013) in the area of tax and estate planning, in The Best Lawyers in America® (2013) in the area of corporate law, and in North Carolina Super Lawyers (2012, 2013) in the area of tax.

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