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The National Taxpayer Advocate recently released her 2023 Annual Report to Congress and, while it is chock-full of newsworthy and important data, this blog entry focuses on the report’s discussion of the “wizard behind the curtain” problem, which impedes the independence of the IRS Appeals function.
As background, when taxpayers disagree with audit adjustments proposed by the IRS’ examination division, they have an opportunity to protest the adjustments to a different division within the IRS, known colloquially as Appeals. The IRS first established this administrative appellate-like forum in 1927. For decades, the Appeals function was a product of legislative grace. The IRS was under no obligation to provide an administrative forum in which taxpayers could challenge audit adjustments. The IRS nevertheless encouraged the usage of Appeals to screen out the many cases that should be resolved without the time and expense of full-blown litigation. Appeals has been a huge success in advancing this objective.
Over the years, the Appeals function has evolved, compelled by several pieces of legislation. In 1998, Congress enacted the IRS Restructuring and Reform Act which directed the IRS to establish and implement an organizational structure that ensured an independent appeals function within the IRS. More recently, in 2019, Congress enacted the Taxpayer First Act of 2019 which, among other things, added section 7803(e) to the Internal Revenue Code. Emphasizing independence as one of the organization’s central characteristics, section 7803(e) rebranded IRS Appeals as “the Independent Office of Appeals,” and codified the role of an administrative appeals function.
Merely labeling the office as “independent,” however, doesn’t make it so. While Appeals has taken positive steps towards increasing its autonomy, there are systemic and organizational barriers to independence that the Appeals function has struggled to overcome. The Taxpayer Advocate’s 2023 report highlights several of these impediments to IRS Appeals achieving a true measure of independence. This includes one that has previously garnered little attention (and is the focus on this blog entry): the usage and role of technical specialists.
The Taxpayer Advocate’s report explains that taxpayers and practitioners have been frustrated that Appeals technical specialists “often inform Appeals Officers and taxpayers that they cannot approve a settlement that deviates from undisclosed, nationwide settlement parameters . . . This lack of transparency hinders meaningful negotiation and often leads to a breakdown in the settlement process.” The report continues: “Taxpayers cannot meaningfully engage in a discussion on case resolution if Appeals makes the decision based on undisclosed settlement standards to which taxpayers are not privy. Many times, taxpayers are not communicating with the decision-maker or do not have access to the decision-maker since a ‘wizard behind the curtain’ exists who is making decisions for the assigned Appeals Officer.”
Indeed, even outside of review-and-concurrence cases, the ‘wizard behind the curtain” problem persists. In this context, the role of the technical expert is essentially nothing more than an advisor to the Appeals Officer. It’s still the Appeals Officer’s job to understand the strengths and weaknesses on both sides of the issues, and independently evaluate the hazards of litigation. An Appeals Officer is not supposed to simply defer to the technical specialist and use the specialist’s analysis as a substitute for their own autonomous evaluation of the merits. Yet, that’s exactly what happens in many cases. The Appeals Officer defers to the “wizard behind the curtain” whose view of appropriate settlement parameters may be influenced by their personal homogenized perception of how other cases are being settled.
To be sure, it is doubtful that technical specialists can accurately calibrate a specific taxpayer’s facts against the facts involved in other cases around the country that present similar issues. Tax cases are typically very fact specific, and rarely susceptible to a one-size-fits-all approach. The specialist would require both visibility into and detailed study of all cases nationwide with similar issues, and then actually conduct a sound comparison of the cases. More importantly, taxpayers have no way of testing the technical specialist’s calibration. They typically have no way of knowing the details of the cases the technical specialist may have in mind. This prevents any genuine dialogue with Appeals about the fairness of a settlement based on a technical specialist’s purported comparison of the taxpayer’s facts to those in other cases.
The independence of the IRS Appeals function is essential to fairly resolving cases at the administrative level, to the benefit of the courts and the parties who otherwise bear the expense and other burdens of litigation. The “wizard behind the curtain” dynamic is a roadblock to the process, and undermines the goal of resolving matters based on the hazards of litigation. The Taxpayer Advocate’s report emphasizes: “The current practice of relying on undisclosed settlement parameters . . . is at odds with the judicial mindset and culture that Appeals should embody . . . Appeals should make it explicit that specialists serve only as consultants. The [Appeals Officer] should be the one responsible for understanding the legal issues and facts and for assessing the hazards of litigation independently.” In short, a technical specialist should be a consultant, not a crutch, nor a de facto decision-maker.
The Taxpayer Advocate’s report hits on several additional obstacles to independence that Appeals faces. This includes a set of proposed regulations that contain provisions that undermine rather than improve the independence of the Appeals function. Those interested in the subject should review the Taxpayer Advocate’s report, as well as an article (written by a fellow shareholder at Chamberlain) that the report cites: Jeffrey S.Luechtefeld, Proposed Regs Limit the Independence of the Office of Appeals, Tax Notes, Oct.17, 2022, at 373. Collectively, these barriers to independence reduce the efficacy of Appeals. As the reports summarizes: “Appeals Officers [ ] often lack autonomy in making settlement decisions based on the hazards of litigation . . . contrary to the intended role of [Appeals Officers] . . . [which] undermines the integrity of the Appeals process and erodes taxpayer confidence in the system.”
All this is not to discount much of the good work at IRS Appeals and the organization’s continued success in resolving the vast majority of cases. But there are opportunities for significant improvements to the Appeals process, many of which the Taxpayer Advocate’s report highlights. Notably, most of the shortcomings at IRS Appeals identified in the Taxpayer Advocate’s report should not be blamed on budgetary constraints and can’t be fixed by simply throwing money at the problem. Instead, it will take leadership to adjust the organization, set the right tone, and cascade principles of independence throughout the Appeals function.