How to Avoid New Issues or a Reopened Case in Tax Appeals

One of the greatest concerns of a taxpayer in the tax appeal process is that the appeals officer will discover new issues to investigate or choose to reopen a closed case. In 2012, the IRS released a new set of protocols for tax appeals Officers to follow. Under the appeals Judicial Approach and Culture Program (AJAC), the IRS stressed that the job of appeals is not to raise additional issues or legal arguments (1). In fact, under the new standards, tax appeals officers are specifically instructed not to raise additional issues or legal arguments. The reason for this change is that the appeals office is not an extension of the compliance function at the level of the IRS revenue office. Instead, the focus of the tax appeals office is to resolve disputes between the taxpayer and the IRS compliance function.

When Can the Tax Appeals Office Raise a New Issue?

Despite the language under the AJAC, there are some nuances and exceptions. Under the new definitions, a “new issue” is a narrower concept, and does not include a new theory or argument regarding a preexisting question. In addition, tax appeals officer may “consider new theories and/or alternative legal arguments that support the parties’ positions when evaluating the hazards of litigation . . . but the officer will not develop evidence that is not in the case file.” In docketed cases, tax appeals officers may consider new issues as warranted by the pleadings of the parties. If the appeals officer finds an issue requiring a change to an established IRS program or policy, and likely impact numerous taxpayers, then that issue should be brought before an Area Director under AJAC. If the Area Director believes that the issue warrants additional review, then he will elevate the matter to the level of the Compliance Office. Note, that the appeals officer can still put forth new arguments on existing matters.

When Can the IRS Appeals Office Reopen Closed Issues?

Historically, the IRS would not allow a closed issue to be reopened if the taxpayer and the local office were in agreement about the issue. The same rule applied for new issues. The only exception to these rules were if the grounds for action were “substantial” and the potential effect on tax liability was “material” (2). Under these prior rules, a new issue was broadly defined as anything related to a taxpayer’s return that was not previously raised in the examiner’s report or statutory notice of deficiency, and which the taxpayer did not raise in a written protest or a petition. According to the Internal Revenue Manual, appeals officers were instructed to never raise a new issue “casually, haphazardly, or indiscriminately,” and never for the purposes of increasing the appeals office’s bargaining power.

In order to raise a new issue under prior rule, the IRS appeals Officer would have to have a very strong reason with real merit; simply having a suspicion was not enough to warrant raising a new issue. In addition, in order to be raised as a new issue, the appeals officer would have to demonstrate that the issue would have a material effect on the tax liability, in terms of sheer amount rather than percentage of the taxpayer’s liability. Although some of the new rules set forth in AJAC differ from previous IRS, policy, official IRS publications interpreting and applying AJAC are limited. As such, prior guidance and cases might be helpful to provide context and analysis if conflict arises with the appeals Officer under AJAC. A practitioner would be wise to familiarize himself with pre-AJAC cases, and understand how those cases can either help or harm the taxpayer’s position.

Unfortunately, there is little recourse for the taxpayer under both the prior rules and AJAC. If the taxpayer and representative disagree with the tax appeals office’s determination about a new issue, then that determination can be internally appealed to the appeals officer’s supervisor. First, the representative should complain to the appeals officer himself on the grounds that the appeals officer did not follow the Internal Revenue Manual. If that path is unsuccessful, then the practitioner can request that the complaint be referred up to the supervisor. However, even complaining to the appeals officer’s supervisor does not guarantee a positive outcome for the taxpayer. There are no clear guidelines under the Internal Revenue Manual or the AJAC for taxpayer recourse in this situation.

When Can a Taxpayer Raise a New Issue?

When a taxpayer raises a new issue, the evidence will generally be considered by the appeals Officer and, if necessary, the matter will be sent back to the local office for verification. In non-docketed cases, the appeals Office will typically outline the issue and send it to the Compliance Office for development. In a docketed case, the appeals Office will follow the same protocol of outlining the issue and will send the results to Counsel, who will then decide whether additional pleading is required.

How a Tax Attorney Can Help with Appeals

Understanding how the IRS views new issues is important for practitioners and taxpayers pursuing appeals. If you think that your tax situation might make you a candidate for an appeals process, you should consult with a The Tax Lawyer - William D Hartsock Tax Attorney Inc. has been successfully helping clients with appeals since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.

Tax Law Referneces:

1. Memorandum for Appeals Employees, AP-08-0713-03 (July 18, 2013), found at http://www.irs.gov/pub/foia/ig/spder/AP-08-0713-03.pdf.
2. IRM 1.2.17.1.2, Policy Statement 8-2 (formerly P-8-49) (approved Jan. 5, 2007); IRM 8.6.1.6, New Issues and Reopening Closed Issues (Oct. 1, 2012).