In more detail

Congress formally codified the establishment and function of an Independent Office of Appeals in the Taxpayer First Act of 2019.¹  Section 7803(e)(3) sets out the purpose of Appeals, which serves to resolve Federal tax controversies without litigation on a basis that: (1) is fair and impartial to both the government and the taxpayer; (2) promotes a consistent application and interpretation of, and voluntary compliance with, the federal tax laws; and (3) enhances public confidence in the integrity and efficiency of the IRS. Section 7803(e)(4) explicitly provides that the right to access the Appeals resolution process should "be generally available to all taxpayers." Section 7803(e)(5) imposes special notification and protest procedures that Appeals must follow if it denies a taxpayer's request for appeal.

In September 2022, Treasury and the IRS issued proposed regulations to implement section 7803(e) (the "Proposed Regulations").² The proposed regulations defined the term "Federal tax controversy" and carved out 24 exceptions to consideration by Appeals.³ Treasury and the IRS published the final regulations in January 2025 (the "Final Regulations"), which largely mirror the Proposed Regulations.⁴ Notably, despite comments requesting greater access to Appeals and concerns regarding agency authority to curtail such access, the Final Regulations adopted all 24 of the proposed exceptions (the "Exceptions") to Appeals access with only minor changes.⁵

In particular, Exceptions 18, 19, and 20 of the Final Regulations present interesting limitations to the categories of disputes Appeals may consider.

Exception 18 limits Appeals from hearing issues based on a taxpayer's argument that a statute is unconstitutional unless a Federal court has held that the statute at issue is unconstitutional in an unreviewable decision.⁶ In the preamble to the Final Regulations, Treasury and the IRS stressed that Appeals is not the appropriate body to consider the constitutionality of a statute for a particular taxpayer unless a court has already made a final determination as to its constitutional status, which would be accessible to all taxpayers. The regulation clarifies that Appeals can still consider whether a statute applies to a taxpayer's specific facts and circumstances "just as Appeals has historically done."⁷

Exceptions 19 and 20 of the Final Regulations deal with challenges based on the invalidity of regulations and items published in the Internal Revenue Bulletin (IRB) respectively.⁸ Exception 19 forecloses taxpayers from raising arguments in Appeals challenging either the procedural or substantive validity of Treasury regulations unless there is an unreviewable Federal court decision holding the regulation to be invalid. Similarly, Exception 20 precludes Appeals from considering disputes regarding the procedural validity of a notice or revenue procedure published in the IRB unless a federal court holds it procedurally invalid in an unreviewable decision. Treasury and the IRS did adopt one comment on Exception 20 noting the lack of clarity as to the meaning of "procedurally invalid." The final regulations define "procedurally invalid" as failure of a notice or revenue procedure to comply with administrative law requirements, such as notice and comment, under the Administrative Procedures Act.

For both Exceptions 19 and 20, Treasury and the IRS maintain that Appeals may still consider whether a regulation or revenue procedure applies to a taxpayer's individual set of facts and circumstances. Additionally, Treasury and the IRS apply the same rationale to Exceptions 19 and 20 as to Exception 18, asserting that Appeals is not the appropriate forum to resolve such validity issues.

Taxpayers seeking to bring disputes to Appeals may also experience difficulty given the estimated 27% reduction in Appeals staff as well as the overall 18% reduction in all IRS staff expected to be implemented by May 15, 2025.⁹ The limited resources and personnel may impact what taxpayer controversies are considered at Appeals.

For example, Exceptions 1 and 2 of the Final Regulations prohibit Appeals from considering cases where the IRS has determined that the taxpayer's position is frivolous or has imposed related penalties for frivolity respectively.¹⁰ One comment to these exceptions suggested that Appeals should retain its right to review determinations of frivolousness because "such determinations are not infallible."¹¹ The IRS and Treasury rejected this comment based on concerns for use of Appeals resources and the historic limitations on consideration of tax objectors for "frivolous moral, religious, political, constitutional, conscientious, or similar grounds."¹² While it seems unlikely that IRS Exam or Appeals will reject legitimate tax claims as frivolous, it will be interesting to see if the pressures on IRS resources leads to an increase in the number of cases that are deemed to fall within Exceptions 1 and 2.

More broadly, it is noteworthy that Appeals has broad discretion regarding how it handles the cases that do not fall into an explicit exception under the Final Regulations. Appeals is generally required to consider matters that qualify as a Federal tax controversy, but there is no obligation for them to resolve it. For example, the Final Regulations clarify that "Appeals has considered a Federal tax controversy if the Federal tax controversy was before Appeals for consideration and Appeals issued a determination or made a settlement offer, Appeals decided the Federal tax controversy was not susceptible to settlement, or the person who requested consideration was issued and failed to respond to Appeals' communications and as a result of that failure Appeals issued or made a determination."¹³ As Appeals faces increasing resource constraints, case resolution times will inevitably increase, and it may become increasingly more difficult to achieve what taxpayers view as acceptable resolutions at Appeals.

The final regulations apply to all requests made to Appeals on or after February 14, 2025.

1 Public Law 116-25, 133 Stat. 981, § 1001. The IRS first established Appeals in 1927 but its status as an independent body and its mission statement were not codified until 2019. See REG-125693-19, 87 Fed. Reg. 55934 (Sept. 13, 2022).

2 87 Fed. Reg. 55935. (Sept. 13, 2022).

3 Prop. Treas. Reg. § 301.7803-2(b)(2) and –2(c).

4 TD 10030, 90 Fed. Reg. 3645 (Jan. 15, 2025).

5 Treas. Reg. § 301.7803-2(c).

6 Treas. Reg. § 301.7803-2(c)(18).

7 TD 10030, 90 Fed. Reg. 3645.

8 Treas. Reg. § 301.7803-2(c)(19)-(20).

9 Erin Slowey & Naomi Jagoda, IRS Planned Worker Cuts Would Hit Advocate, Filing Tool Staff, BLOOMBERG (Mar. 17, 2025), https://www.bloomberglaw.com/product/tax/bloombergtaxnews/us-law-week/X3S7O03K000000.

10 Treas. Reg. § 301.7803-2(c)(1)-(2).

11 TD 10030, 90 Fed. Reg. 3649.

12 Id.

13 Treas. Reg. § 301.7803-2(f)(1).