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Judging Litigation Hazards without Seeing or Following Litigation

Posted on July 6, 2015

Appeals Officers and Settlement Officers seek to settle cases using their authority to settle cases based on hazards of litigation (IRM Sections and  I have wondered how they do it with little or no knowledge of litigation and write here with a suggestion on how they might gain insight into tax litigation that might assist them in reaching settlements.

When I served in the IRS Chief Counsel’s Office in Richmond, we always had local Appeals Officers come to the calendar calls.  They assisted us by meeting with taxpayers and frequently settling cases at the last minute.  They also watched calendar call and the interaction between the Court and the parties.  Because their office was physically located adjacent to our office, we frequently went back and forth to talk about cases or issues (of course, only in appropriate circumstances after the 1998 passage of the ex parte (Pub.L. 105-206 Section 1001(a)(4)).

I tried to make a point to let the specific Appeals Officer know what happened on a case on which I concluded through trial or settlement.  With that type of presence in the Court and a dialogue on case results, the Appeals Officers in Richmond would develop a sense of what happened to cases in litigation and could use that knowledge to make offers based on litigation hazards.

Since moving to Philadelphia eight years ago I have never seen an Appeals Officer in Tax Court.  Here, two appeals offices exist.  One is the field office for Philadelphia serving the Eastern half of the state and probably parts of other states.  The other appeals office is the one for the Service Center.  For the past several years, the Service Center appeals office has existed in downtown Philadelphia an easy subway or train ride from the location of the Tax Court when it visits Philadelphia.  Despite the fact that either Appeals Office could easily visit the Tax Court neither does.

I cannot say what happens everywhere in the country but I am near certain that appeals offices located on campuses, to which the cases from my low income taxpayer clinic get sent, do not send their employees to the Tax Court with any regularity if at all.  It would be curious to poll Appeals Officers and Settlement Officers to determine the percentage that had ever set foot in Tax Court.  We have a very different Appeals Division from the one that developed in decades past yet the Office still has the authority to settle cases based on litigation hazards and purports to do so.

I learned at the recent ABA meeting that Appeals no longer uses the acronym AJAC.  It is possible that in some locations Appeals employees stopped going to Tax Court calendar calls because they did not want to assist in settling cases at the last minute as doing so might be contrary to their mission of being judicial and sending cases back for more factual development.  I also learned that Appeals is working on an AJAC corollary for docketed cases.  Perhaps my post will arrive in time for them to see and reject my thinking on the topic.

Before I get to my suggestion on how to improve the ability of Appeals employees to evaluate litigating hazards, I would make a quick plea for training even though I know the training budget is tight.  There are three areas that regularly come up when my clinic encounters the Service Center Appeals employees.  First, they have no idea that testimony is evidence.  Many have risen from correspondence exam.  They think that what a taxpayer says has no value.  They cannot understand the concept that testimony is evidence and the issue is weight.  I do not expect them to hang on every word my client might utter but in many cases the IRS will not have contrary testimony to that of the taxpayer.  In some cases documentary evidence does not exist because the issue concerns the dependency exemption and the children may be too young to have school records and the parents did not take the children to the doctor that year or have them mentioned on the lease.  The absence of documents does not mean the taxpayer will lose in the Tax Court but it almost always means they will not reach a settlement in Appeals because the Appeals employee does not know how to evaluate testimony and, even if they do, they will have great difficulty evaluating the credibility of the witness from their remote location.

Second, my clinic has yet to encounter an Appeals employee who understands IRC 6201(d).When we tell the Appeals employee that the client does not agree with the information on the Form 1099 or W-2, the response is that the client must go and get documentary proof from the issuer and provide it to the Appeals employee proving the negative that the income does not belong to them.  The statute suggests otherwise where the client has told the same thing to the examiner (or at least attempted to tell someone from correspondence exam.)  So, we routinely terminate our conversation with Appeals and head to Chief Counsel to ask the docket attorney to get the information from the third party– which they do.  Sometimes, the information jogs the memory of our client and sometimes it makes clear that it was not the income of our client but it is frustrating that this issue seems one that no one in Service Center Appeals offices understands.

Third, my clinic rarely encounters an Appeals employee who understands the burden of proof issue raised when our client has cooperated with the examination.  It is virtually impossible to get the Service Center Appeals employee to look at the code section, research it and understand it.  The more likely outcome of the discussion is that the Appeals employee concludes my clinic likes to raise tax protestor or other frivolous arguments.  The fact that we deal with employees scattered around the country means that they have no knowledge of my clinic as an adversary and no ongoing trust (or distrust) built up over the years through regular interaction.  This also makes it more difficult for them to appreciate issues we raise that might be novel to that Appeals employee.

In each of these three scenarios as well as with litigation hazards, the inability to settle at Appeals because what I perceive as a lack of knowledge, training and trust in my office places more burden on the local Chief Counsel’s office to pick up the slack.

Back to litigating hazards and how Service Center and other Appeals employees evaluate the hazards of something they know very little about – evidence and the Tax Court process.  I think the problem is not the individual employees the vast majority of whom want to reach the correct result.  The problem lies with the system.  Each day the Service Center Appeals employees go to work and address the issues in the case(s) before them that day.  They make a decision and they move on to the next case.  Much like the employees in ACS every day is Groundhog Day where they relive the previous day because they receive no feedback on their decisions allowing them to understand that not every decision they make was viewed the same by the Counsel employee who picked up the case after them or by the Tax Court.

To remedy this problem, the Service Center Appeals employees need feedback.  They need to receive the specific Counsel Settlement Memos produced on the cases they worked showing that Counsel sustained the determination of the Appeals employee, settled it after receiving additional information or, in a small percentage of cases, rejected the analysis of the Appeals employee because it failed to take into account the true hazards in the case.

Receiving regular feedback and occasionally visiting the Court would allow Appeals employees to grow by allowing them to see the times they got it right and the times that perhaps they did not.  In wishing for the sophisticated Appeals employees who worked with me for many years in Richmond, I may have set an unattainable goal or maybe I am too old and wish for things past which never did exist.  The location of Appeals employees in Service Centers need not produce employees with difficulty evaluating litigation hazards, but it makes the process more challenging since they frequently have less interaction with Chief Counsel employees and almost none with the Tax Court.  I am curious to see if Appeals forthcoming pronunciation on how it will handle docketed cases will address my concerns.

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