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Who Settles Cases – Appeals or Counsel (and Why?)

Posted on Jan. 26, 2022

One of the many interesting charts in the National Taxpayer Advocate’s 2021 annual report displays who settled the case before Tax Court trial, Appeals or Counsel. The trends are not good for Appeals. They show that more and more settlements occur at Counsel. What the chart does not show is why. I would be very interested in a study of the cases that settled at Counsel and why they settled there instead of Appeals. I suspect the Chief Counsel would be interested in this as well as it reflects resource shifting.

At page 196 of the NTA’s annual report it states that 82% of petitioned cases settled in FY 2021. That’s a little higher than the average of cases in the prior decade because the percentage of dismissals was down in FY 2021 (something I will address in a subsequent post) but not far outside the norm. This post is not about the overall percentage of settled cases but the breakdown of where the cases settled between Counsel and Appeals. The report has a nice graph for that which you can see here:

Figure: Screen-Shot-2022-01-26-at-8.56.39-AM.png

Notice that starting in 2018, a pre-pandemic year, the percentage began to shift with more cases being settled at Counsel as a percentage of the total. In each of the past 10 years Appeals has settled the most cases, but why is it settling less cases in recent years as a percentage of the total? Is it resources? Is it training? Is it a change in culture? Did more cases go through Appeals pre-petition? Are taxpayers less willing to work with Appeals? Is it some other factor or a combination of factors? The NTA’s report does not discuss the why question. It only addresses the who.

The obvious consequence within the IRS is that having more cases settle at Counsel puts more pressure on the resources at Counsel and probably a little more pressure on the resources at the Tax Court since settlement at Counsel usually, but not always, means a settlement closer to trial with more opportunity for some interaction with the Court.  To understand the why question, it would be logical to do a study of the cases settled at Counsel after going to Appeals and learn what caused the taxpayer to forego the opportunity to settle with Appeals and wait to settle with Counsel.  I have not seen such a study.  It seems it would be useful to appeals because it would allow Appeals to learn why Appeals Officers failed to settle cases that ultimately settled without trial.  In learning the answer, Appeals would then be better equipped to evaluate the litigation hazards of the next case.

I complained about the ability of the Appeals Officers I encountered to judge the hazards of litigation in a blog post several years ago. The thesis behind my complaint with Appeals Officers was that most did not have a good grasp of evidence and litigation hazards. I could supply a number of anecdotal stories on that point where an Appeals Officer declined to settle because my client could not produce some written proof of a point the AO thought needed to be proved by a piece of paper, but anecdotes are not what is needed to understand if Appeals is functioning optimally. I had a case last year where the AO totally misunderstood the statute regarding dependency exemptions. After a failed attempt to explain it to her, I gave up and sent her a qualified offer which she also did not understand. The case settled immediately upon arrival in the Counsel office. Everyone who handles a decent volume of Tax Court cases has some story of the misguided AO but the trends in the NTA report show that something is happening beyond just the complaints of a grumpy old man.

Shelly Kay, a former colleague of mine at Chief Counsel who went on to become the head of Appeals, wrote a rejoinder to my 2015 post pointing out that Appeals did properly train its employees on litigation hazards and that actually going to court was not important to understanding how to settle a case. [One of my complaints was that AOs located in Service Centers had no idea about the dynamics of a Tax Court case and some who worked in field offices had also never seen or closely followed a case in the Tax Court process after it left their hands.]

I certainly don’t dismiss Shelly’s response, but I continue to feel that Appeals officers need to build a system that tracks what happens to docketed cases after it leaves their hands unsettled in order to learn about the case and build on that knowledge for future cases. In my prior post I referenced the movie Groundhog Day because of my concern that by not learning what happened to their case after it went to Counsel, AOs were destined to repeat the same mistakes. If they followed the cases and learned why Counsel settled each case that Appeals did not, they could better handle the next case.

I recognize that some petitioners do not work with AOs just as they did not work with the examiner and that only the imminent threat of trial brings the necessary focus. I do not mean to suggest that AOs as a group or individually don’t do their job, but I find more often than I feel I should that AOs do not understand the dynamics of what will happen to a case if it goes to trial and therefore cannot properly assess the settlement hazards. The chart from the NTA report suggests a trend in pushing settlements downstream from Appeals. It would be nice to have a report from TIGTA or GAO or Appeals and Counsel that took a hard look at settlement trends and how settlement could be accomplished more often and more efficiently at Appeals.

Keep in mind that I am representing low income taxpayers who make up the bulk of the taxpayers the IRS audits but that I have no recent experience with AOs handling large and mid-size cases.

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