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Expanding Ex Parte

Posted on Feb. 17, 2015

In 1998 Congress created the IRS version of ex parte  found in section 1001(a)(4) of RRA 98 but not codified.  It also created rules making public certain previously internal documents found in section 3509 of RRA 98 which were codified in IRC 6110(i) permitting the release of Chief Counsel e-mail advice to the public.  The two provisions came together for me through a post on Tax Notes on January 26, 2015 of a Chief Counsel e-mail on September 18, 2014 concerning the application of the ex parte rules to communications between Appeals and Chief Counsel.  The message, though short, bears a close look if you care about ex parte rules – and I am not sure that I do because I now represent low income taxpayers to whom they have little applicability.

The ex parte rules seek to insulate Appeals from other parts of the IRS that might taint their opinion by providing insights about a taxpayer that the taxpayer has no ability to counter.  This goal has some merit but some limitations.  It can create artificial barriers to attorney-client communications when Appeals needs advice from counsel.  It can also create work duplication in an agency already understaffed and has almost no meaning for low income taxpayers because no employee individually knows much about their cases since the cases get worked in batch processing which does not have a single IRS compliance employee assigned to the case who might later taint the Appeals employee.

Shortly after passage of RRA 98, the IRS promulgated Rev. Proc. 2000-43. In 2012, with a decade’s more experience, it published Rev. Proc. 2012-18 setting out its view of how the ex parte provisions will work.  Working on ABA comments to Rev. Proc. 2012-18, I saw how very differently lawyers representing large taxpayers view ex parte than those representing low income taxpayers.  The goal of those representing large taxpayers centered on isolating Appeals Officers to the greatest extent possible including from their attorneys.  This makes sense for large taxpayers.  It may or not make the best sense from a policy perspective.

The rationale for the ex parte provisions stems from concern that the non-Appeals IRS employees called their colleagues in Appeals and provided them with negative insights never written into the case file and so never available to the taxpayer.  Where this happened the taxpayer could not rebut the stigma that it did not even know existed.  No circumstance better demonstrates the IRS pre-1998 practice than the examination of a large corporation.  When the IRS examined a large corporation, it sent a team of agents who spent months or years examining the return and creating adjustments that led to a proposed tax deficiency.  If the taxpayer filed a protest and took some, or all, of the case to Appeals to dispute the audit findings, the audit team would come to the Appeals Office and meet with the assigned Appeals Officer for a day, or more, going over each of the adjustments.  This meeting provided an excellent opportunity for the newly assigned Appeals Officer to get up to speed on a case but also gave the audit team the opportunity to heavily promote their views on each legal and factual issue as they rebutted the taxpayer’s arguments in the protest.  Ex parte ended these meetings unless the taxpayer was also invited.  Essentially, it ended the meetings – a good result if you view them as unfair to the taxpayer and a bad result if it created a more inefficient system and a less informed Appeals Officer.

Another change to the way the IRS operates came about at approximately the same time with the creation of the stovepipe business units.  Counsel attorneys assigned to those units and particularly to LB&I regularly work with the exam client during the audit to develop the positions that go into the adjustments to the return.  This creates the possibility that if an Appeals Officer seeks advice from Counsel as the Appeals Officers work the case following the protest, the person giving legal advice on the matter could be the same attorney who gave legal advice to the IRS exam team.  In such a situation the ex parte rules could be compromised as the attorney provides the same insights about the taxpayer previously provided by the exam team.  To avoid this the 2012 Revenue Procedure lays out a number of rules concerning the interaction between Counsel and Appeals; however, the Revenue Procedure does not cover every possible situation.

The September 18 email demonstrates the dance Appeals and Chief Counsel must go through when Appeals seeks legal advice.  The email addresses whether the ex parte rules apply when Appeals must coordinate with Counsel because a case related to the one in Appeals exists in Counsel jurisdiction.  This issue did not get addressed in the 2012 Revenue Procedure or did not get directly addressed.  The email may be the first public pronouncement on the issue.

Generally, and logically, Appeals must coordinate a settlement with Counsel where each office holds a related case.  The response from Counsel in the email creates a distinction in the way Counsel communicates with Appeals based on whether the case is in court or not in court.

If the related cases are in court, Counsel can communicate with Appeals without providing the communication to Appeals before, after or during the communication.  If the case in Appeals is not in court, then the ex parte rules apply and Counsel must involve the taxpayer in the communication.  The Counsel attorney would have worked with the Examination employees in developing the large case.  The application of ex parte to this communication stems from the concern that the Counsel attorney will provide the Appeals employee with the same type of “insight” the examiner would have received making this an end run around the prohibition against the examiner talking to Appeals without the taxpayer present.  The price here is stifling of lawyer client communications between Appeals and Counsel.

For those interested in ex parte, the email provides a glimpse at current thinking on the subject.  The glimpse comes because of the change to the law in 1998 opening up the internal communications of Chief Counsel’s Office.  This exercise in open government allows us to see and understand agency actions previously opaque.  This change benefits all taxpayers by making available to all information that previously may have been available only to a few.  Based on the Chief Counsel opinion here it appears that the IRM has not been updated since the 2012 Revenue Procedure came out and may not contain the latest thinking on this subject.  Practitioners can point Appeals to the email pending future revisions of the IRM.  Perhaps this issue will spur other updates of the IRM concerning ex parte situations that have come to light since the writing of the 2012 Revenue Procedure.  While my clients may not care about ex parte because their cases are handled by IRS compliance in batch processing, other taxpayers do care.  I appreciate the openness of the process.

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