The Taxpayer First Act (TFA), signed into law on July 1, 2019, established the new IRS Independent Office of Appeals. While most of the new provisions simply formalized current Appeals practice and procedure, the TFA specifically codified [in the new IRC section 7803(e)] the right to an IRS appeal when a taxpayer has received a statutory notice of deficiency, commonly referred to as the 90-day letter. In addition, the TFA also provides that “specified taxpayers” are entitled to the non-privileged portions of their files, no later than 10 days before their scheduled Appeals conference. Though this discussion primarily focuses on those two provisions, it also covers other aspects of the TFA—notably, the prohibition on ex parte communications and the IRS’s plans to issue guidance on implementing the new provisions.

The Right to Appeal

Perhaps the TFA’s most significant provision is the establishment of a “general” right to appeal, which applies only to taxpayers who have been issued a statutory notice of deficiency. Conspicuously absent are assessable penalties (IRC section 6671), the imposition of which bypasses the traditional notice-of-deficiency process. Even with this caveat, however, the codification is a meaningful step forward for taxpayer rights.

The new “right” is set against the backdrop of a recent, high-profile court decision that held, despite the language in the Taxpayer Bill of Rights under IRC section 7803(a)(3) that says taxpayers have a right to an IRS appeal…taxpayers do not, in fact, have such a right. The decision, Facebook v. IRS, concluded that the Taxpayer Bill of Rights contained merely aspirational objectives and, on its own, did not create any separate enforceable rights. To be enforceable against the IRS, the rights enumerated in the Taxpayer Bill of Rights must be specifically provided for in other statutory provisions of the IRC.

Facebook had actually received a statutory notice of deficiency and, in turn, filed a petition for determination of that deficiency with the Tax Court. After that, Facebook sought an IRS Appeal in hopes of a pre-trial settlement of the controversy. The IRS, surprisingly, refused to refer the matter to Appeals. The IRS stated that, in those circumstances, an appeal “was not in the best interest of tax administration.” No further explanation was provided. Facebook, in an equally surprising turn, filed a lawsuit in district court that sought a court order directing the IRS to refer its case to Appeals.

While the outcome of its case may not change if that case were filed today, Facebook would undoubtedly benefit from the TFA’s new Office of Appeals procedures. Most significantly, instead of reliance on the provisions contained in the Taxypayer Bill of Rights, new IRC section 7803(e)(4) specifically provides the taxpayer a general right of appeal. Furthermore, if the IRS denied the requested appeal, IRC section 7803(e)(5)(A) requires the taxpayer to be provided with a written explanation for the denial. In addition, in the expected future guidance, a mechanism to protest that denial must be made available for the taxpayer. Armed with a written denial, courts can then review the appropriateness of the IRS’s denial rather than the more ambiguous question of whether the taxpayer had a right to an appeal at all.

Interestingly, despite the broad contours of the expressed right, the IRS can still can deny an Appeal in two specific circumstances—

• if the taxpayer’s case involves a position common to those in other cases currently being litigated by the IRS and, as in the Facebook case,
• if it is not in the best interest of tax administration.

Importantly, the TFA requires that the IRS report to Congress, on an annual basis, all the appeal requests that were denied and the reasons behind those denials, per IRC section 7803(e)(5)(B). Presumably, those reported metrics will eventually be made available to the public.

Access to the Administrative File

The second significant taxpayer benefit enacted by the TFA is the mandatory access to the non-privileged portions of the administrative file. This provision applies to “specified taxpayers”—defined as individuals with adjusted gross income below $400,000 or business with gross receipts below $5 million for the taxable year of the dispute —and requires that the information be made available no later than 10 days prior to the scheduled appeals conference. (Moreover, taxpayers can elect to waive the 10-day period and expedite the time of the conference by agreeing to receive the case file by the date of the conference.)While 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 request. In fact, taxpayers who do not qualify, so called non-specified taxpayers, can still (and, undoubtedly should) seek to access to the non-privileged information in their files via timely Information Act requests.

In addition to providing broader access to administrative files, the TFA also 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, per IRC section 7803(e)(6)(B). 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. However, the TFA did not address the matter of ex parte communications between Appeals and any other IRS offices or employees.

In the absence of any further guidance from the TFA, the existing IRS procedures governing ex parte communications are still applicable, contained in Revenue Procedure 2012-18. It 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.” 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.

Generally, the ex parte communication rules do not apply to the transmittal of the taxpayer’s administrative file to Appeals; 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, the Tax Court had to decide whether a revenue officer’s notes in the administrative file— expressing how the taxpayer’s counsel was “uncooperative” and “unwilling to provide financial information on the petitioner’s behalf”—constituted an impermissible ex parte communication.

The taxpayer argued that the “gratuitous” inclusion of the information about his attorney was an impermissible ex parte communication and required his case be remanded to Appeals for consideration before an Appeals officer who had not “been exposed to the alleged ex parte communication.” The IRS contended that it has been a permissible transmittal of the administrative file. In holding for the IRS, the Tax Court observed that the revenue officer’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, the Tax Court held the notes were not a prohibited ex parte communication and sustained the Appeals determination.

Looking Ahead

In October, the IRS released its 2019–2020 Priority Guidance Plans, which specifically referred to regulations on implementing the TFA’s Independent Office of Appeals provision. In addition, the IRS has announced that it’s currently examining what constitutes “non-privileged” information and, more broadly, what constitutes “access to the administrative” as part of the expected guidance to be released. The forthcoming definitional guidance on access to administrative files aside, hopefully the proposed regulations will also detail the process whereby taxpayers can formally protest the denial of an appeal request. It is encouraging that the IRS has approached the Appeals guidance project proactively, because the effective date of the transparency provisions is July 1, 2020.

Frank G. Colella, Esq., LLM, CPA, is a clinical professor in legal studies & taxation at Pace University’s Lubin School of Business and a practicing attorney.  His law practice is focused primarily on federal taxation, estate planning and administration, and corporate transactions.  He teaches courses in tax practice & procedure, business law, and constitutional law.  Mr. Colella has published and lectured extensively on tax-related matters, including testimony before the Internal Revenue Service.