Magazine article The CPA Journal

New Opportunities to Reduce the Cost of Tax Litigation through ADR

Magazine article The CPA Journal

New Opportunities to Reduce the Cost of Tax Litigation through ADR

Article excerpt

The Association of the Bar of the City of New York, which sponsors many legal education programs that CPAs may attend, recently hosted "Resolving Taxpayer Disputes: Mediating and Arbitrating with the IRS," a major program on alternative dispute resolution (ADR). The use of ADR for taxpayer disputes with the IRS falls under the IRS Appeals Office (Appeals). The ADR program is supervised by Thomas Carter Louthan, director of the office of alternative dispute resolution and customer service programs in the national office of appeals. Louthan, along with Donald L. Black, Jr., national director of appeals, Tax Court judges, members of Appeals, private practice mediators, and tax specialists spoke at the well-attended program.

IRS Mediation

The IRS encourages the use of ADR to create an administrative forum, independent of compliance functions, that can more efficiently prevent or resolve disputes. Since 1995, the IRS has made available a test mediation program for adjustments of $10 million or more. On November 16, 1998, it began a two-- year test program for adjustments of $1 million or more. Unfortunately, only 50 mediation requests had been filed by the end of 1999. Of these, 24 mediations have been completed with an 87% success rate, resolving about $3 billion in proposed disallowances. A new policy, which would permit any size disallowance meeting certain requirements to be mediated, is expected to be announced this year. Meanwhile, the IRS is taking certain of these cases into mediation on an ad hoc basis.

How IRS Mediation Works

Mediation is particularly useful and will be considered for cases that are highly fac tual, involving issues such as valuation, reasonable compensation, transfer pricing, depreciation, computer sales and leasebacks, and debt vs. equity.

If there is no agreement after a good faith effort at negotiation in Appeals, a taxpayer can request mediation before a case is designated for litigation or docketed before the U.S. Tax Court. This gives the taxpayer a second chance to resolve an issue before having to litigate it. Similarly, in certain cases, taxpayers can request early referral of one or more issues from a tax examination to Appeals while allowing other issues to be developed during the continuing examination.

Taxpayers seeking to mediate are required to submit a written request for mediation to the appropriate assistant regional director of appeals (large case) with a copy to the national director of appeals. If the request is granted, the IRS and the taxpayer enter into a mediation agreement that states, among other things, 1) the issues to be mediated, 2) an acknowledgment that the process is voluntary and confidential, 3) an expla nation of how the costs are to be paid and the mediator selected, and 4) the procedures for the exchange of partici pant lists and written summations regarding each issue.

Mediator Selection

There can be one mediator or co-- mediators. When a non-IRS mediator or co-mediator is selected, the taxpayer and the national appeals office share the cost equally. If an Appeals mediator or co-- mediator is selected, the national appeals office pays the full cost.

Participants in the Bar Association program encouraged the use of an IRS co-- mediator, especially one of a higher level than the appeals officer assigned to the case. The IRS co-mediator would generally be more familiar with IRS policy and procedures, which can save time and money for the taxpayer.

Mediators are subject to the approval of both the taxpayer and the IRS. …

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