June 2003

IRS Fast Track Mediation and Settlement

By Sharon Katz Pearlman

Over the past several years, the IRS has focused its attention on developing new ways to expedite the traditional examination resolution process. The resolution model’s historical linear path from the examination process to appeal and into litigation often took a long time from start to finish—as much as 10 years to receive a Tax Court opinion. In response to complaints, the IRS began to develop a series of new tools for taxpayers. One such tool is the Large and Mid-Sized Business (LMSB) Fast Track Dispute Resolution Pilot Program, which the IRS launched in 2002. Although the pilot was originally structured to run for one year, its success caused IRS officials to extend it. In IRS Release 2003-44, the IRS announced that the pilot has been made permanent. A revenue procedure detailing the permanent program will be forthcoming; until that time, the pilot guidelines are still applicable.

Since the Fast Track Mediation/Settlement Pilot Program began on November 14, 2001, many taxpayers have taken advantage of the program to expedite resolution of cases that do not appear settleable at the examination level. The pilot program also accelerates the ability to obtain a form of Appeals Division consideration prior to the issuance of the 30-day letter, and it avoids “hot interest,” the additional 2% interest that corporations are required to pay on deficiencies of more than $100,000 when an issue is appealed. Generally, hot interest begins to accrue 30 days after the 30-day letter is issued by the Compliance Division. As stated in Notice 2001-67, the purpose of the pilot is “to enable taxpayers and the IRS to work together in a concentrated and expedited fashion to resolve outstanding issues while the case is in LMSB jurisdiction.” Thus, a taxpayer selecting this program has the opportunity to be heard by an Appeals Division mediator prior to the issuance of a 30-day letter. The obvious intention is to expedite resolution while the case is at the examination level and decrease the need for costly and time-consuming appeals protests and conferences.

The existing pilot is limited to taxpayers in the LMSB Division of the IRS. LMSB taxpayers are those with assets in excess of $10 million. The Appeals and LMSB Examination Divisions jointly administer the program, and taxpayers seeking entry into the program must have unagreed issues in at least one open year of their exam cycle. While this program is limited to large corporations, other options are available to assist small business and self-employed taxpayers in using mediation options to resolve their cases.

The LMSB Pilot Program

The program is structured with two components: fast-track mediation and fast- track settlement.

Mediation. Under this option, an appeals officer who has been trained in mediation techniques acts as a mediator and tries to encourage the taxpayer and the IRS team toward resolution. The process is traditional mediation, and if the parties cannot come to an agreement, the process ends. The appeals officer has no role other than to facilitate the discussions and work with the parties to encourage resolution.

Settlement. If this option is selected, the process begins as outlined above. The appeals mediator works with both parties to try to encourage a settlement, and attempts to craft a resolution that both parties find acceptable. If the parties are unable to reach a resolution using mediation, the appeals officer may then invoke settlement authority and review the case as if she were an appeals officer handling the case through the traditional Appeals Division process. By invoking settlement authority, the appeals officer may review the facts of the case with an eye toward litigation hazards, and make a recommendation based on her appraisal of such hazards. The appeals officer then informs both parties of her view of the case, and the parties may either agree or disagree with that recommendation. If the resolution that the appeals officer suggests is acceptable to the taxpayer but not to the examination team, the process requires the team to contact the territory manager for his concurrence with the team’s decision. By requiring the territory manager’s concurrence in the decision not to agree, the process avoids situations in which the team is refusing to agree for reasons not based on sound, logical principles.

Either party may withdraw from the process at any time, and the appeals officer cannot impose a binding decision on either party. If the matter is not resolved during the Fast Track process, then the issue will return to the Examination Division and proceed through the system using the regular procedures.

The Procedure

An interested taxpayer should contact an LMSB team manager to request entry into the Fast Track program. Both the taxpayer and the examination team must agree to use the process. A request to participate in the program must be made after the issuance of Form 5701, “Notice of Proposed Adjustment,” but before the issuance of a 30-day letter, and when it has become clear that the issue will not be resolved using traditional examination procedures.

The request is made using the Fast Track Agreement Form, which asks basic questions about the taxpayer and the issue. The taxpayer must also select the mediation or settlement option. The form, executed by both the taxpayer and the team manager, is submitted to the Fast Track program manager, along with Form 5701 and a brief taxpayer response. No formal protest is required.

Within 10 days of submitting the request, the taxpayer is notified whether its case has been accepted into the program. Thus far, almost every case that has sought Fast Track resolution has been admitted into the program. In addition, the program requires that the entire process be completed within 120 days. The average time, 70 days, is a substantial improvement over traditional methods.

Other Considerations

The Fast Track program is a good tool for taxpayers that would prefer to resolve a matter without resorting to a lengthy appeals process or litigation. The process is confidential and, like all other administrative IRS matters, is subject to the nondisclosure provisions of IRC section 6103. While the examination and traditional appeals processes are also confidential, the litigation process is not. Accordingly, taxpayers with an aversion to publicity may prefer this process as an option before resorting to litigation. In addition, and importantly, the Fast Track process is, as its name suggests, fast. It substantially expedites the resolution process, while avoiding the imposition of hot interest.

Section 1001(a) of the IRS Restructuring and Reform Act of 1998 provided for an ex parte rule forbidding communications between Appeals Division officers and IRS examination teams unless the taxpayer is present. Although this provision is helpful when dealing with the IRS during a routine case matter, it is not necessarily helpful in a Fast Track situation, where the appeals officer needs to talk to each of the parties separately. Although the Fast Track process may continue without a waiver of the ex parte rule, in practice, taxpayers entering into the process generally agree to waive the ex parte rule.

Fast Track is not extended to certain issues, set forth in Notice 2001-67. The vast majority of issues, however, are appropriate for Fast Track consideration.

Once the process is completed, the parties sign a Fast Track Agreement LMSB Appeals Session Report, detailing the settlement, and ultimately enter into a Closing Agreement. The agreement is prepared using IRS Form 906, “Closing Agreement on Final Determination Covering Specific Matters.” Once executed, the agreement is binding on the taxpayer and the IRS and may not be reopened absent extraordinary circumstances, such as fraud or malfeasance. The resolution applies to the years covered by the executed agreement. A Coordinated Industry Case (CIC) taxpayer may ask to have the resolution applied in accordance with Delegation Orders 236 or 247, which allow the team manager to apply the same settlement reached at Appeals to prior or subsequent cycles, and allow for coordinated issue settlement, respectively.

Sharon Katz Pearlman, JD, LLM, is partner-in-charge, Northeast Area, for KPMG LLP’s tax controversy services (TCS) practice. Prior to joining KPMG, she was a special litigation attorney in the Office of Chief Counsel, IRS, North Atlantic Region.

Philip Zimmerman, APM, CPA
Mediator and Arbitrator

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