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When U.S. taxpayers find themselves in dispute with the Internal Revenue Service (IRS) they can face confusing processes, a rotating roster of agents and employees, and an often opaque decision making process that can make them feel outnumbered and intimidated. Recent changes to the IRS dispute resolution process have made those feelings even worse. Now the American Institute of Certified Public Accountants (AICPA) is speaking out about the changes.
The AICPA is made up of 418,000 accounting professionals in 143 countries. Members represent individuals, businesses, and non-profit organizations before federal, state, local, and international tax agencies, including the U.S. Internal Revenue Service (IRS). They are taxpayer advocates on the individual level, and occasionally, at the legislative level.
On September 13, 2017, Chastity K. Wilson, the Vice Chair of the AICPA's IRS Advocacy & Relations Committee, provided a written statement to the United States House of Representatives Committee on Ways and Means Subcommittee on Oversight. The hearing on "IRS Reform: Resolving Taxpayer Disputes" provided the AICPA an opportunity to criticize the recent changes to the IRS dispute resolution process — changes which the AICPA says erode taxpayer trust in the system and willingness to settle disputes without litigation.
Wilson testified in her statement that penalty disputes received from the IRS are currently handled independently by each of the primary IRS divisions (Wage & Investment, Large Business & International, Small Business/Self-Employed and Tax-Exempt & Government Entities). The AICPA finds that the way these disputes are handled is inconsistent, partially due to the lack of training received by IRS personnel assigned to the penalty notices.
Perhaps because of this, the IRS routinely denies penalty disputes without full consideration of the taxpayer's technical arguments or reasonable cause submissions. This causes cases that could be easily resolved to escalate to the Appeals level. The AICPA recommended that the Appeals leadership review this process to identify necessary training, systemic problems, and duplication of efforts. The goal, it said, should be to ensure a consistent settlement process and reduce the number of Appeals, while ensuring taxpayers have an opportunity to present their case in a fair and independent manner.
At the Appeals level, the October 2016 changes to its conference procedures have caused many taxpayers to distrust the penalty dispute process. The AICPA criticized the changes for:
These changes work against taxpayers in ways that the AICPA believes undercuts the dispute resolution process and is likely to lead to additional tax litigation. The presence and visible influence of IRS compliance employees causes taxpayers to question the Appeals officer's independence. Taxpayers feel outnumbered and pressured into a settlement they can't afford or wouldn't otherwise accept. By shifting the authorization of face-to-face meetings away from the taxpayers, the Appeals process denies them the opportunity to have their case presented and feel heard without prior judgment. Requiring approval of settlements slows down the Appeals process and undercuts the independence of the decision makers.
In addition, the AICPA noted that the settlements approved by the Appeals Team Managers tend to be less favorable to the taxpayer. Reviewers tend to only increase settlement amounts. This can cause taxpayers to end up paying more than they had negotiated in the Appeals conference.
Taken together, these changes put taxpayers at odds with the IRS Appeals team. Their negotiations will be colored by these perceptions. Taxpayers will more easily turn down settlement in favor of having their day in court.
In addition to criticizing the changes the IRS already made, the AICPA also had some recommendations of its own. They related to centralizing and modernizing the penalty dispute process, making it easier for taxpayer advocates to receive and transfer information about tax investigations. In an effort to make IRS services more "customer-focused", the AICPA recommended:
What the Oversight Committee will do with the information contained in the AICPA's written statement remains to be seen. However, Wilson's testimony was able to shine light on the frustrations of taxpayers dealing with the existing IRS penalty dispute process and the need for independence and consistency within the Appeals process.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding a IRS penalty dispute or appeal, contact Joe Viola to schedule a consultation.