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Appeals Judicial Approach and Culture Project (AJAC) Implementation

Posted on Sep. 4, 2014

About a year ago, we had some initial coverage of the Appeals Judicial Approach and Culture Project (“AJAC”) which can be found here.  In July, Appeals issued two memorandums implementing various changes to the IRM regarding AJAC, and portions of the new procedures go into effect in this week.  For those of you unfamiliar, AJAC is a program of “returning Appeals to a quasi-judicial approach in the way it handles cases,” and moving it away from fact finding and raising new issues or arguments.  Both internal Appeals representatives and external stakeholders had expressed concern that Appeals was sliding away from its independent, quasi-judicial status, and AJAC was implemented in response.

Below we will provide a very brief overview of Appeals and its importance, and then describe some of the changes that are on the horizon.

Appeals is the IRS’s internal administrative dispute resolution branch, which seeks to resolve tax issues between the government and taxpayers in a more cost effective manner than going to court.  Appeals seeks to resolve the controversies without litigation on a fair and impartial basis to both the government and the taxpayer.  Appeals is incredibly successful at settling tax controversies, with over 85% settled amicably.  This is very important to our tax system, since the court system would not be able to handle the volume of additional cases.

Although a branch of the Service, Appeals’ independence is important to the settlement of cases.  Similarly, the perception of independence is just as important.  If taxpayers believe Appeals is simply going to rubber stamp Exam or Collections, it will thwart the efforts of Appeals.  Similarly, if taxpayers believe Appeals is essentially going to do a more in depth exam, and create additional issues for the taxpayer, taxpayers are potentially going to elect to go to the Courts.  This is what AJAC strives for; impartiality, efficiency and real and perceived independence.  I heard someone comment at the May ABA Tax Meeting that AJAC was going to be renamed “Appeals Independence”, which may have just been a joke, but indicates the program’s goals.

In July, Appeals issued two memos indicating the changes that would be implemented into the IRM regarding AJAC.  Each can be found here (compliance) and here (collections).  The additional guidance largely implements prior general statements.  The new guidance is implemented for all compliance cases received by Appeals after September 2, 2014 (Happy day after Labor Day!).  The collections materials were implemented in mid-August.  The remainder of this post focuses on a portion of the compliance memo, discuses some of its general provisions, and then touches on a prior aspect of AJAC that had been implemented.

The first set of important changes are found under IRM, which states:

(1)     Appeals will not return cases to Exam for further development.

(2)    The following circumstances…are grounds for returning a case:

  1. Missing protest, or a protest, when required, fails to set forth the taxpayer’s position, lacks detail, or fails to meet the requirements of Publication 5;
  2. Contrary to Service practice, the case is a reopening of a previously closed case as set forth in Rev. Proc. 2005-32;
  3. Some action must be taken or some event must occur before Appeals can adequately consider the case;
  4. There is a failure to obtain timely consent to an extension of the statute of limitations;
  5. The case involves claims for abatement of excise tax, employment tax, or TFRP which are not deemed meritorious by the Service;
  6. Failure to comply with significant requirements of the IRM;
  7. Technical advice was pending at the time of the referral;
  8. Appeals discovers potential fraud, malfeasance or misrepresentation of a material fact;
  9. The taxpayer provides new information or evidence (more on this one below);
  10. The taxpayer raises new issues that the originating function has not considered (same).

What we see is that Appeals is supposed to make a determination based on the existing file provided by the originating function, if at all possible.  There are circumstances, however, where additional investigation is needed, and that is not the job of Appeals.  In general, this is a positive, but it could delay cases, or, if implemented rigidly, cause inefficiency.

IRM provides guidance on what should occur when the taxpayer provides new information before Appeals, and states the Appeals officer shall return it to the originating function if the Appeals officer determines it merits additional analysis or investigative action.  Both terms are defined in the IRM, and additional analysis is generally anything that is not self-evident or involves voluminous information.  Investigative action is anything requiring additional fact finding or verification of authenticity.  There is a specific note that if information is provided in response to Appeals asking to clarify or corroborate information, such response does not have to go back to the originating function necessarily.

Hopefully, this will ensure that Appeals will generally hold files unless there is significant need for additional investigation based on what the taxpayer raises.  We agree that Appeals should not investigate, but some minor additional information should be able to be shared without having to go back to the originating function.   There are instances where the person from the originating function may have been lackluster, in which case practitioners may need to supplement the file and would rather Appeals take that information without being returned to the originating function.

Although Appeals will not seek to raise new legal arguments for the Service, taxpayers may raise a new theory or alternative legal argument in Appeals that the taxpayer did not raise before the examination division.  In cases coming from the examination division, under IRM, Appeals will direct the case back to the originating function if the taxpayer raises a new legal argument.  Those collection cases involving CDP, however, must remain under Appeals jurisdiction since the statute contemplates that Appeals will make the determination and provides no role for the referring function.  Taxpayers and practitioners should realize that raising a new argument will result in getting booted back to Exam, where the Service can raise new issues also.

A change that was previously implemented in 2013 related to AJAC is worth repeating here also. IRM states that Appeals will not raise any “new issues” or reopen an already agreed to issue.  The prior policy was that Appeals could raise an issue if it were substantial and the potential impact on tax was material.  The note to the section does indicate that Appeals may consider an issue if there is a showing of fraud, malfeasance or a misrepresentation of a material fact.  Some question remains as to what is a “new issue” compared to alternative arguments on the same issue, as IRM indicates Appeals may consider “new theories and/or alternative legal arguments that support the parties’ position.”  This seems like an area where practitioners and the Service could disagree.

A number of other practical questions on how AJAC will work in operation await the full implementation of this initiative (Keith suggested a bunch of these).  Will Appeals really send every case back in which the taxpayer raises any new facts or any new legal arguments?  What if the fact is irrelevant?  What if the legal argument is one that the Appeals Officer knows lacks merit or knows will win the case?  Must the Appeals Officer send back a case even when the outcome of sending it back remains a foregone conclusion?  How will the timing of this back and forth motion work?  Now that Appeals is located in campuses potentially in cities remote to the examination function, does this mean shipping a taxpayer’s file all over the country?  If a taxpayer was examined in correspondence exam, does it matter where Appeals sends the files since the case is theoretically fungible?  Will the IRS be asking for more extensions of the statute of limitations with all of the back and forth of the cases?  How should practitioners anticipate and respond to such requests?

Although questions remain, we are excited about the development and interested to see how things progress.  Please let us know your thoughts as the program is rolled out.

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