Since enactment of the Taxpayer First Act (TFA)[1] in July 2019, the IRS has issued subregulatory guidance to implement the major new provisions affecting appeals, including a memorandum on taxpayer access to the appeals office and a memorandum on taxpayer access to case files prior to scheduled appeals conferences.  In addition, recent court decisions have also dealt with appeals-related issues, including challenges over the scope of the right to appeal under the TFA. Although it can be argued the TFA simply rebranded the IRS Independent Office of Appeals”[2] because most of the appeals-related provisions formalized current IRS practice and procedure, the TFA has provided significant taxpayer rights. 

The TFA did, specifically, codify a taxpayer’s right to an appeal when in receipt of a statutory notice of deficiency (SNOD, or 90-day letter). The TFA ensures that taxpayers denied access to appeals are now entitled to a written explanation of the denial and an opportunity to challenge the denial. A second major provision of the TFA provides that “specified taxpayers” are entitled to receive the non-privileged portions of their case files no later than 10 days before the scheduled appeals conference. This article reviews the IRS guidance issued to implement those two provisions. In addition, it also covers select judicial developments, including the recent judicial decision on prohibited ex parte communications.

Right to an Appeal

One of the most significant provisions of the TPA is the establishment of a general right to appeal.[3]  The newly enacted TFA right to an appeal applies to taxpayers issued a statutory notice of deficiency.[4]  Conspicuously absent, however, are assessable penalties,[5] which can be imposed without the issuance of a statutory notice of deficiency. Still, even with that caveat, the codification of a right and limited right to challenge the denial of that right, are meaningful steps forward for taxpayer rights.

The new right bolsters similar language contained in the Taxpayer Bill of Rights[6] (TBOR), which claims taxpayers have the right to an IRS appeal.  However, Facebook v. IRS,[7] held the TBOR was merely aspirational and, on its own, did not create separate enforceable rights. The rights enumerated in the TBOR, to be enforceable against the IRS, must be specifically provided for in other statutory provisions of the Internal Revenue Code.[8]  IRC Section 7804 serves that function.

Instead of the aspirational TBOR, new code section 7804(e)(4) specifically provides a general right of appeal.  Furthermore, if the IRS denies the taxpayer’s requested appeal, the statute requires the taxpayer to be provided with a written explanation for the denial[9] and an opportunity to protest that denial.[10] Despite the seemingly broad contours of the expressed right, the IRS can still can deny access to the appeals office, if the taxpayer’s case involves a position common to those in other cases currently being litigated by the IRS.[11] 

On August 24, 2020, the IRS published a memorandum, Interim Guidance on Designation of Cases for Litigation,[12] that also included guidance on how taxpayers can challenge the denial of request for an appeal.  Whenever a taxpayer seeks to appeal an issue that has been designated for litigation, the IRS (1) “must review and either approve or deny the request in writing within 30 days of receiving the request.” If the request is denied, the IRS (2) “must provide the taxpayer a written notice with a detailed description of the facts involved, the basis for the decision to deny the request, and a detailed description of how the basis of such decision applies to such facts, and the procedures for protesting the decision to the Deputy Commissioner for Services and Enforcement (DCSE)[13] with 30 days of receiving the taxpayer’s request.”

The taxpayer can then protest that denial in writing, within 30 days, to the DCSE. The IRS (DCSE) “has 30 days to review the taxpayer’s protest and communicate a written decision sustaining or reversing the decision to deny the taxpayer’s protest, and the rationale for the decision.” Neither the TFA, nor the IRS Memorandum, provides for an appeal of the DCSE’s denial of the taxpayer’s protest. On May 24, 2021, the IRS further extended the interim guidance until August 24, 2022.[14]

In Hancock County Land Acquisitions LLC v. United States (Hancock County),[15] the taxpayer argued, inter alia, that the IRS could not deny it access to appeals. The case echoed the pre-TFA Facebook litigation over taxpayer access to appeals; instead of the TBOR, however, Hancock County (La.) sought to enforce provisions of the TFA. In addition to the action in district court, Hancock County also filed a petition with the Tax Court challenging the IRS’s denial of its charitable deduction for a conservation easement.

The District Court for the Northern District of Georgia dismissed the complaint for lack of subject matter jurisdiction and mootness, but in dictum referred to similarities between the case and the Facebook decision. In a thorough analysis, the Facebook Court determined the [TBOR] did not grant new enforceable rights but instead imposed an obligation on the Commissioner to ensure that IRS employees act in accordance with preexisting taxpayer rights. Plaintiffs here rely heavily on the 2019 TFA’s language identifying a “right to appeal.” But as articulated in the Facebook decision, the inclusion of the word “right” cannot be read out of context to confer new enforceable and absolute rights.[16] The court noted, however, that despite dismissal of the complaint taxpayer was not without a remedy because the case was also docketed in tax court, which could provide the taxpayer with relief against the IRS denial of the claimed charitable deduction.

Access to Case Files

The second significant benefit enacted by the TFA is the now mandatory access to the taxpayer’s non-privileged portion of the administrative case file. This provision applies only to “specified taxpayers,”[17] and requires that the case file information be made available no later than 10 days prior to the scheduled appeals conference.[18]  The statute defines “specified taxpayers” as those individuals with adjusted gross income below $400,000[19] or those business with gross receipts below $5,000,000 for the taxable year of the dispute.[20]  Although this access is a certainly a boon for most taxpayers, the statute merely codified access to information that practitioners had previously obtained via a Freedom of Information Act (FOIA) request. Taxpayers who do not statutorily qualify can still (and undoubtedly, should) seek access to their case files via timely FOIA requests.[21]

On June 17, 2020, the IRS issued a memorandum, “Taxpayer First Act (TFA) Access to Case Files,” to appeals employees that provided interim guidance on access to case files. It provides that, prior to the initial contact with taxpayer to schedule an appeals conference, “the ATE [Appeals Technical Officer] will determine if the taxpayer meets the definition of a specified taxpayer[.]” If the taxpayer satisfies the statutory definition, “the ATE will notify the taxpayer of the right to access the non-privileged portion of the case file regarding the disputed issues.” If so requested, the ATE will provide the documents to the taxpayer at least 10 days prior to the conference.

On September 15, 2020, the IRS supplemented the June guidance with an additional memorandum, “Taxpayer First Act Access to Case Files via Temporary Email Procedures.”[22] This memorandum specifically authorized ATEs to provide access to redacted case files via email. On December 22, 2020, the September interim guidance, “Reissuance of Taxpayer First Act Access to Case Files via Temporary Email Procedures,”[23] was published. This was done primarily to ensure ATEs were aware that email, as an additional format for transmitting the redacted case file to taxpayers and their authorized representatives, is permissible under the TFA.  Then, on June 9, 2021, the December interim guidance was reissued, “Reissuance of Interim Guidance Taxpayer First Act Access to Case Files via Temporary Email Procedures.”[24]  The June memorandum extends appeals authority to transmit taxpayer case files via email until December 2021.

It should be note that the TFA case files provisions are not retroactive.  In Elkins v. Commissioner,[25] the taxpayer argued that his case should be remanded to appeals for reconsideration as a result of “materially changed” circumstances, namely the TFA right to case files. The tax court was unpersuaded by this argument because, “Dr. Elkins’ CDP hearing was held approximately three years before enactment of [the TFA], and thus he cannot avail himself of its benefits.”[26]

Prohibited Ex Parte Communications

The TFA specifically clarified that the IRS would not be engaged in prohibited ex parte communications when appeals officers contacted and communicated with the chief counsel’s office for legal assistance and advice.[27] The statute cautions, however, that to the extent practical, such assistance and advice should be provided to appeals by attorneys who were not involved in the case with respect to which the legal assistance and advice is sought.[28] The TFA did not, however, address the matter of ex parte communications between appeals and any other IRS offices or employees.

In the absence of guidance from the TFA, the existing IRS procedures governing ex parte communications are still applicable; and are contained in Revenue Procedure 2012-18.[29]  The Rev. Proc. defines ex parte communication as “a communication that takes place between any Appeals employee … and employees of other IRS functions, without the taxpayer/representative being given an opportunity to participate in the communication.”[30]  In other words, the prohibition does not apply if the taxpayer or her representative is part of the communication, or she had an opportunity to participate in the communication.[31]

Generally, the ex parte communication rules do not apply to the transmittal of the taxpayer’s administrative file to appeals.[32] However, some information contained in the file, may trigger the ex parte communication concerns. A post-TFA tax court decision recently addressed this issue. In Stewart v. Commissioner,[33] the tax court had to decide whether a revenue officer’s (RO’s) notes in the administrative file that expressed how the taxpayer’s counsel was “uncooperative” and “unwilling to provide financial information on the petitioner’s behalf”[34] constituted an impermissible ex parte communication.

The taxpayer argued “gratuitous” inclusion of information about his attorney was an impermissible ex parte communication and required his case be remanded to appeals for consideration before a different appeals officer, one who had not “been exposed to the alleged ex parte communication.”[35] The IRS contended that it was a permissible transmittal of the administrative file. The tax court agreed with the IRS and observed that the RO’s notes were made as part of his duties and were recorded on the same day that he met with the taxpayer’s counsel. Accordingly, it held the notes were not a prohibited ex parte communication and sustained the appeals determination.[36]

On June 8, 2021, the Eight Circuit Court of Appeals affirmed the tax court’s decision.[37] It held that while the RO’s statement may have been “generally prohibited” communications in a different context: “Under the administrative-file rule, ‘contemporaneous’ statements may ‘permissibly’ be included in the file as long as they ‘are pertinent to the revenue officer’s consideration of the case,’ even if they would otherwise be prohibited.”[38]  The decision may, in fact, rise in significance because of the anticipated increase in case file transmittals under the TFA provisions.

Future Guidance

On November 24, 2020, the IRS released its 2020-2021 Priority Guidance Plan, which specifically referred to the issuance “Regulations” to implement the TFA “Independent Office of Appeals” provisions.  The 2020-21 Plan essentially repeated the language contained in the 2019-20 Plan.[39] The appeals guidance issued to date, however, has been sub-regulatory, in the form of memoranda. Formal regulations to implement the TFA provision have not yet been promulgated. When the IRS issues its 2021-22 Priority Guidance Plan this fall, regulatory guidance for appeals may, once again, be included–with the expectation that those regulations will supplant the current interim guidance.

Frank G. Colella, Esq., LLM, CPA, is a clinical professor in legal studies & taxation at Pace University’s Lubin School of Business. He teaches graduate courses in tax practice & procedure, estate taxation, and tax-exempt organizations.  He also teaches undergraduate classes in business law and constitutional law. Mr. Colella has published and lectured extensively on tax matters, including testimony before the Internal Revenue Service.