Editor's Note: This is one in a series of "practice notes," providing readers with important background or updates on important issues affecting the avoidance or resolution of controversies with tax authorities. Reader comments should be sent to the authors or to firstname.lastname@example.org.
"You got to be careful if you don't know where you're going, because you might not get there." — Yogi Berra
You submitted your protest to IRS Appeals, and after months of waiting, a settlement conference was scheduled. Although you think you have a strong position on the only issue in the case, you would concede 40 percent to settle the matter and avoid costly litigation. Your initial Appeals conference turns out to be the only one that you are going to have (that often happens, even in large cases), and the Appeals Officer offers you a 40-percent concession based on her evaluation of the litigation hazards. You tell her that the IRS should concede 60 percent and ask to schedule another meeting so that you may address her analysis of the case. But she says, "There's nothing more to discuss — deal or no deal?" You tell her "No deal."
Before advising your CFO that the next step is litigation, take a step back and consider requesting mediation. Appeals mediation often presents little or no down side, the request process is easy, the settlement offer on the table is not likely to be withdrawn, and the additional cost and burden for the taxpayer are generally modest. And, of course, you just might reach a settlement at the mediation session!
Mediation is a nonbinding process that uses a neutral party to guide the parties to a settlement. IRS Appeals mediation began in 1995, when a pilot program was introduced. Over the years, Appeals has expanded the scope of the mediation program, and today Post Appeals Mediation (or PAM) is available for most factual and legal issues. Yet mediation appears to be underutilized by taxpayers and historically has been used in a very small percentage of Appeals cases. Although Appeals does not publish detailed statistics about PAM (how many cases settled, how many proceeded to litigation), anecdotally it is thought that a high percentage of mediation cases are settled.
The taxpayer's request for mediation is a very brief letter that describes the issue, the amount(s) and year(s) in dispute, identifies the Appeals Officer, and represents that the issues for mediation are not excluded from the program. The letter is sent to your Appeals Officer, his or her area supervisor, and the National Office. If your request for mediation is accepted (and most are), then discussions will be held (typically by phone) to go over the mediation process, negotiate a mediation agreement, and select an Appeals mediator and, if the taxpayer so desires, a non-IRS co-mediator.
At this point, your reaction may be "My case is going to be mediated by another Appeals Officer? What's the point?" To participate in PAM, you must use an Appeals mediator, generally someone from the same office or geographical area of the taxpayer. Although the Appeals mediator is not a true neutral party (i.e., unrelated to both parties), the mediator has been trained to facilitate resolution of disputes, and experience confirms that Appeals mediators can be quite effective because they know the organization and have likely settled hundreds of cases themselves.
You may use a non-IRS mediator in addition to the Appeals mediator, but at your own expense. A non-IRS co-mediator may make sense for certain complex tax issues (e.g., a mediator who is a retired judge with tax expertise), for issues of a specialized nature (e.g., a mediator experienced in oil and gas matters if the Appeals mediator has no experience in that area), or if the Appeals mediator does not have significant mediation experience. You should ask for a list of the Appeals mediators available for your case, and ask about their mediation experience (how many mediations, what types of cases, were they successful). Also, you should check with other tax professionals who have had experience with your Appeals mediator candidates (and with non-IRS mediators).
After you have agreed on the mediator(s), you and Appeals will sign a mediation agreement that identifies the issue to be mediated, the time and place of the mediation (typically within 60 days from signing the agreement), and the due date for submission of each party's case summary to the mediator(s). Most mediation sessions last no more than a day, although in multiple-issue cases more time may be required. Both parties must have someone with decisionmaking authority at the mediation. This requirement ensures that an Appeals supervisor will usually participate. The exceptions occur where your case was handled by an Appeals Team Case Leader who generally has settlement authority. In these cases, you should request that the supervisor participate.
At the mediation session, you likely will spend little time meeting face-to-face with your Appeals Officer. Rather, the mediator will meet separately with each party, going back and forth to discuss the facts and the litigation hazards and to explore settlement options. At any time during that process, you may decide that you want to meet face-to-face with the Appeals Officer. Some mediators will focus more on process rather than the substance of the dispute, whereas a mediator with expertise or experience in your particular issue may express his own views about the litigation hazards and reasonable settlement options.
Recall that at your settlement conference, the Appeals Officer offered you 40 percent, but you countered with 60 percent. The good news is that you are not that far apart, and a skilled mediator may assist the parties in reevaluating their positions and guide them to a settlement. Absent new facts or legal authority, experience suggests that Appeals is not likely to lower its prior offer during the mediation, so in most cases the offer on the table will still be available after the mediation. Before requesting PAM, you should determine whether you are willing to reconsider (but not necessarily change) your previous evaluation of the case. At a minimum, for a modest cost PAM provides you with the opportunity to have a neutral party listen to the arguments and help both you and Appeals reassess the reasonableness of your positions, and it allows you one more settlement opportunity with your Appeals Officer and her supervisor.
Kendall C. Jones is a member of Sutherland's Tax Practice Group. He has more than 32 years of tax controversy experience, including IRS procedural, controversy, and dispute resolution matters, as well as tax litigation. Before entering private practice, Mr. Jones spent 15 years with the IRS, serving as a Large Case Program Manager, National Office Special Trial Attorney, IRS National Tax Shelter Coordinator, a Technical Assistant to the Deputy Chief Counsel, and the Acting District Counsel (Foreign Operations). He received his B.S. degree from the University of Colorado, and his J.D. degree from the University of San Diego. He may be contacted at kendall. email@example.com.
Thomas A. Cullinan is a member of the Tax Practice Group of Sutherland Asbill & Brennan LLP. He focuses on tax controversies against the Internal Revenue Service (IRS) and has represented a large number of corporations, partnerships, and high net-worth individuals in all phases of tax controversy. He received his B.A. degree from the State University of New York (Geneseo), his M.S. degree from the State University of New York (Albany), and his J.D. degree from Vanderbilt University. He may be contacted at firstname.lastname@example.org.
Joseph M. DePew, a member of Sutherland's Tax Practice Group, focuses on tax litigation and controversy, corporate taxation, and income tax with an emphasis on federal and state procedures, dispute resolution, collection, and tax litigation. He received his B.A. degree from the State University of New York (Oswego), his J.D. degree from Ohio Northern University, and his LL.M. degree (Taxation) from the University of Florida. He may be contacted at email@example.com.
1. Stephanie Smith & Janet Martinez, An Analytic Framework for Dispute Systems Design, 14 Harvard Negotiation L. Rev. 123 (Winter 2009). See IRM 18.104.22.168.3.
2. Announcement 95-2, 1995 -2 I.R.B. 59; Announcement 95-86, 1995-44 I.R.B. 27.
3. Rev. Proc. 2009-44, 2009-2 C.B. 462; IRM 22.214.171.124, et seq. Very few issues are excluded from PAM; excluded issues include those designated for litigation, issues docketed in court, frivolous issues, and issues where the taxpayer is perceived to have not negotiated in good faith. Section 3465 of the Internal Revenue Service Restructuring and Reform Act of 1998, Public Law No. 105-206, added section 7123 to Internal Revenue Code, requiring the IRS to establish procedures for mediation of any unresolved issues at Appeals. In 1998 and subsequent years, the IRS made various changes to the program that were generally designed to make it available to more taxpayers. Announcement 98-99, 1998-2 C.B. 652; Announcement 2001-9, 2001-1 C.B. 357; Announcement 2002- 60, 2002-2 C.B. 28; Rev. Proc. 2002-44, 2002-2 C.B. 10.
4. Appeals received 32 Post Appeals Mediation requests in FY2008, 38 in 2009, 87 in 2010, and 106 in 2011. See Appeals Handout, New York University 3rd Annual Tax Controversy Forum (June 10, 2011); Appeals – The IRS Perspective, Boston Bar Association (May 3, 2012).
5. See Rev. Proc. 2009-44, § 4.02. IRM 126.96.36.199.1 should be used as a checklist for a mediation request.
6. There are many other possible factors to be considered before requesting mediation. For example, will a mediation request alienate the Appeals Officer who you may have to deal with in the future? Will Appeals ask a technical expert or someone from Chief Counsel to attend the mediation? Have similar issues been mediated, and how were they resolved?
7. See Exhibit 2 to Rev. Proc. 2009-44 (Model Agreement to Mediate); IRM Exhibit 8.26.5-1.