Bloomberg INDG - April 2024

• Vinson & Elkins’ Stephen Josey examines IRS’s ADR program
• ADR’s success depends on better training, officer independence

The IRS Independent Office of Appeals’ renewed focus on alternative dispute resolution, or ADR, should be a welcome development to taxpayers because it will, in theory, provide additional opportunities to settle tax disputes without litigation.

New acting office chief Elizabeth Askey announced this renewed focus in late March, stating that various ADR pilot programs would be rolled out by the end of the fiscal year. This follows the IRS’s 2023 request for public input on ways the agency can improve its ADR programs.

While the appeals office has long offered ADR, the success and effectiveness of these programs is lukewarm at best. A 2023 report from the Government Accountability Office noted that, from 2013 to 2022, less than half of 1% of all cases reviewed by its Independent Office of Appeals were resolved through ADR.

In her 2023 annual report to Congress, the National Taxpayer Advocate stated that the IRS appeals office doesn’t require that its officers have litigation experience, and that appeals officers often “face challenges in determining how to correctly assess the hazards of litigation.” Many officers come up through the ranks of the IRS’s examination and collection functions, where hazards of litigation typically may not be considered.

To be effective, any expanded ADR initiative should be coupled with litigation training programs for appeals officers. The appeals office also should consider hiring officers with experience representing taxpayers and shouldn’t primarily rely on an internal pipeline of candidates from the IRS’s examination and collection functions to fill its ranks.

Askey’s helm at the top of the appeals office is welcome in this respect as, unlike her most recent predecessors, most of her career was spent in private practice representing taxpayers and not in government back halls. She thus brings a different perspective and background to appeals leadership that has been missing in recent years.

Moreover, appeals officers need to be given wide discretion in their role as mediators to consider and debate specific risks the IRS faces in various disputes. The IRS has long attempted to chip away at the independence of the appeals office by seeking to preclude appeals officers from, among other things, considering challenges to the validity of statutes, regulations, and subregulatory guidance.

Such restrictions create an artificial environment that diminishes the effectiveness of ADR. Successful mediation requires the parties and the mediator to explore the full range of possible litigation outcomes, not just those that the IRS views as salient.

Finally, the IRS must fully commit to using the appeals office’s ADR programs. Taxpayer enthusiasm for ADR programs won’t move the needle if the IRS declines to engage meaningfully in the process. It’s important that when taxpayers request access to the ADR programs, the IRS makes mediation the rule and not the exception.

It can do this by implementing discernable standards for when it will decline to participate in ADR programs, requiring internal controls such as supervisory approval for declining ADR participation, and providing taxpayers with a written explanation of why ADR isn’t appropriate for a particular matter.

There are current IRS initiatives, such as the Compliance Assurance Process, where taxpayers aren’t permitted to decline ADR if the IRS requests participation, but where the IRS has no reciprocal obligation. With expanded ADR programs, the IRS should commit under these initiatives to providing taxpayers the same right to force an issue into mediation.

Askey has her work cut out for her in implementing expanded ADR programs. But adopting the above suggestions would go a long way in building taxpayer confidence in the programs.