The Arbitration Alternative

Article excerpt

The IRS is conducting a two-year pilot program under which a taxpayer and the IRS Office of Appeals can jointly request binding arbitration in certain cases. According to IRS announcement 2000-4, the program, which began in January, allows taxpayers to request binding arbitration for unresolved factual issues--asset valuation or reasonable compensation, for example--already in the appeals office administrative process.

RESOLVING UNRESOLVED ISSUES

The IRS Restructuring and Reform Act of 1998 created IRC section 7123(b)(2). The act required the IRS to establish a program allowing taxpayers and the appeals office to ask for binding arbitration on certain issues that are unresolved at the conclusion of (1) appeals procedures or (2) unsuccessful attempts to enter into an IRC section 7121 closing agreement or a section 7122 compromise.

CPAs will find arbitration is not available for

* Cases in which it is not appropriate under the statutes listed in the announcement.

* Issues involving the substantiation of expenses under IRC sections 162 or 274.

* An issue designated for litigation or docketed in any court.

* An "industry specialization program" issue or an issue where the IRS has decided a coordinated response is necessary to ensure consistent taxpayer treatment.

* A foreign tax treaty issue for which the taxpayer has filed a request for, or intends to seek, "competent authority" assistance.

* An issue for which the taxpayer has requested the "simultaneous appeals/ competent authority" procedure described in revenue procedure 96-13, section 8.

HOW IT WORKS

The taxpayer and the appeals office first must try to negotiate a settlement. If the negotiations are unsuccessful, the parties together may request binding arbitration to resolve factual disputes. For example, the parties could ask an arbitrator to determine whether, based on the applicable code and regulations, the compensation a company pays its president is reasonable.

For the pilot period, arbitration is optional. The taxpayer and the IRS assistant regional director of appeals-large case (ARDA-LC) must formally agree to it in writing. The taxpayer or appeals office may request arbitration after both parties agree to it. The taxpayer sends a written request to the team chief/appeals officer responsible for the case, who then prepares a written recommendation for action. The request and recommendation are forwarded to the appeals officer's immediate supervisor, whose decision is reviewed by his or her manager and forwarded to the ARDA-LC for final determination. The national director of appeals, Office of Alternative Dispute Resolution and Customer Service (Office of ADR&CS), is consulted before the IRS makes a final decision.

ARDA-LC generally makes a final determination within 30 calendar days from the date the team chief/appeals officer receives the request. ARDA-LC promptly informs the Office of ADR&CS and the appeals team chief (or appeals associate chief and appeals officer) of the decision. The team chief, in turn, promptly informs the taxpayer. If the request is approved, the Office of ADR&CS schedules an administrative conference with the taxpayer to discuss the arbitration process. If the IRS denies the request, the taxpayer may request a conference with ARDA-LC; there is no formal appeal procedure.

Arbitration binds the parties to the arbitrator's findings. A factual issue is eligible for this process if it can be resolved solely on a finding of fact and if the parties agree to the arbitrator's interpretation of law, regulation, ruling or other legal authority. The taxpayer and the appeals office must agree to be bound by, and not appeal, the arbitrator's findings.

The arbitrator and either party must communicate (including requests for and transfers of documentation and information) through an administrator unless both parties are present. …