A few years ago, I had a client who was being audited by the IRS, and I ran into an overzealous revenue agent. Have you ever had one of those?
When the information document request (IDR) was sent to my client, he contacted my office and engaged me to represent him. The revenue agent (RA) wanted the audit to occur on April 10. This was only three weeks after I had been engaged. The IDR was jam-packed with information the RA wanted, and I knew that would take time to gather. Not to mention it was tax season.
Never having had a problem rescheduling an initial appointment, I called the RA and told him I needed at least a month to gather all the information he was requesting. I was denied. I then escalated the matter to the RA’s manager and she sided with the RA. I explained I wouldn’t be at the appointment and the RA said he would issue his report. I went to the manager asking for another RA, but my request fell on deaf ears.
I received the report and immediately appealed it. During my appeals hearing, I explained to the appeals officer (AO) what had happened, and the AO kicked it back down to audit. Wouldn’t you know it? I got the same RA.
Finally, the audit occurred and the RA was ruthless. He denied pretty much every argument I had. He then issued his report and I appealed it again. The AO who was assigned to me was amazing. On appeal, I ended up with a no change audit.
Traditionally, appeals officers settle cases based on either an analysis of the facts and/or the law, or due to “hazards of litigation.” Most appeals officers use the “facts and law” approach to settle their cases. Under this approach, to reach a settlement on a particular issue, an appeals officer typically will go over the facts, develop additional relevant data, conduct an analysis of the law, and apply the facts to the law to reach a conclusion. Most appeals officers prefer to use this approach because it is easier to quantify the settlement, and because it’s more tangible than the hazards of litigation approach.
What is a “hazards of litigation” settlement? Incredibly, nowhere does Appeals define the term “hazards of litigation” or explain what a “hazards of litigation” settlement is. Instead, it states, “A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in event of litigation, or one which reflects mutual concessions for the purpose of settlement based on relative strength of the opposing positions where there is substantial uncertainty of the result in event of litigation.”
“Hazards of litigation” in Appeals has generally become known as the probability that a party will lose the issue if it were litigated. After evaluating the facts and law, the appeals officer will formulate an opinion as to what the likely outcome will be in the event of litigation. While most compliance personnel tend to view issues in terms of “black and white,” most Appeals Officers tend to view them in terms of “shades of gray.” Given that cases usually involve unique facts and not all courts or judges apply the law uniformly, the litigating hazards for a particular issue may vary greatly from case to case, or even from appeals officer to appeals officer. In addition, the taxpayer (or representative) and the appeals officer may have completely different views of the litigating hazards involved. The best they may be able to do is agree upon a range for settlement.
With the hazards of litigation as a standard in appeals, it gives the AO more latitude in settling cases. Not only is the actual law in play, but will it cost the government too much money to take the case to court? Is there a high probability the case will be won in Tax Court?
Next time you have an audit or collections issue that you don’t agree with, try going to appeals.
Craig W. Smalley, MST, EA, is the founder and CEO of CWSEAPA, LLP, and Tax Crisis Center, LLC.