Key takeaway

Impact of increased IRS focus on ADR programs is likely to depend on their willingness to address the broader challenges present in the appeals process.

In more detail

Since 1926, the government has provided an independent appeals process inside the Treasury Department to help resolve tax disputes prior to resorting to litigation. Making sure both sides get a fair process involves many safeguards, but unfortunately what appears to some as velvet ropes feels like red tape to others.

The appeals process can be long and challenging. In 2023, in states where the IRS had a substantial appeals presence, the average number of days for a taxpayer to get an appeals conference was 146, even after the IRS had assigned an appeals officer. In states without a substantial IRS appeals presence, the average length to get an appeals conference was 243 days. The length of time it takes to get to the first appeals conference though is just one of a myriad of challenges highlighted by the Taxpayer Advocate Service in its 2023 Annual Report to Congress. Other challenges include a perceived lack of independence, inexperienced appeals officers, and a lack of transparency and autonomy with respect to settlement decisions. These challenges can lead to a breakdown of the IRS appeals process, pushing taxpayers to litigation.

Over the past century, the IRS accreted a portfolio of administrative dispute resolution procedures, collectively called Alternative Dispute Resolution (ADR). With names like Fast Track Settlement, Fast Track Mediation, and Rapid Appeals Process, these voluntary programs are meant to be just that – a faster, simpler, more resource efficient approach to resolving taxpayer disputes. And they can be. However, uptake on these alternatives, which has never been high, has been recently declining. In 2014, at its peak, the IRS only closed 429 ADR cases. By 2022, that number had decreased to 119. For context, IRS Appeals closed over 948,000 cases from 2013-2022. Less than 0.5% of cases used an ADR program. The failure to use these ADR programs to their full potential is one of the challenges with the appeals process identified by the Taxpayer Advocate Service in its report.

The Government Accountability Office (GAO) also took note of the decline in the use of these ADR programs. In response to its report and public comments on improving ADR processes, the IRS announced the creation of a new office as an arm of its Independent Office of Appeals. The ADR PMO will house the ADR programs – a consolidation effort aimed at increasing taxpayer uptake of such programs, removing barriers to participating in post-appeals mediation, and piloting changes to the Fast Track Settlement program. It will also have a self-reflective role by tracking statistics on ADR programs that the IRS has not previously collected – such as how many taxpayers are denied access to the Fast Track Settlement program – so that the IRS can make more informed changes going forward.
 
Heading this new office will be Michael Bailiff, whose career has spanned decades in both public and private practice as Associate General Counsel of Ernst & Young and as an Attorney Advisor to the National Taxpayer Advocate Service. The IRS has given the office a tall order. Even if it increases the number of disputes resolved via ADR by ten times, that would still only account for a little over 1% of all of the appeals workload the IRS handles. 

The changes the IRS makes to these ADR programs, including to the IRS’ ability to deny taxpayers access to these programs – a problem highlighted by the Taxpayer Advocate Service – will hopefully provide some insight into the genuineness of the IRS’ commitment to make these programs work. Taxpayers who have already experienced the problems highlighted by the Taxpayer Advocate Service with the current traditional appeals process will undoubtedly be skeptical about the potential benefits of these ADR programs. Unless these programs address some of the challenges that already exist within the traditional appeals process, it is unclear whether they will be able to have any meaningful impact. If they do make those changes, taxpayers may be enticed to see if the ADR programs will achieve their desired goal of allowing taxpayers and the government to resolve disputes in a faster, simpler, and more efficient manner.

We would like to thank Jessica Garda and Ryan Murphy, summer associates at Baker McKenzie for their assistance on this article.