Rule2025-00426
Resolution of Federal Tax Controversies by the Independent Office of Appeals
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 15, 2025
Effective
January 15, 2025
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations that provide guidance on the resolution of Federal tax controversies by the IRS Independent Office of Appeals (Appeals) under the Taxpayer First Act of 2019 (TFA). The final regulations provide that while the Appeals resolution process is generally available to all taxpayers to resolve Federal tax controversies, there are certain exceptions to consideration by Appeals. The final regulations also address certain procedural and timing rules that must be met before Appeals consideration is available. The regulations affect taxpayers requesting Appeals consideration of Federal tax controversies.
Full Text
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<title>Federal Register, Volume 90 Issue 9 (Wednesday, January 15, 2025)</title>
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[Federal Register Volume 90, Number 9 (Wednesday, January 15, 2025)]
[Rules and Regulations]
[Pages 3645-3665]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-00426]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 10030]
RIN 1545-BP72
Resolution of Federal Tax Controversies by the Independent Office
of Appeals
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
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SUMMARY: This document contains final regulations that provide guidance
on the resolution of Federal tax controversies by the IRS Independent
Office of Appeals (Appeals) under the Taxpayer First Act of 2019 (TFA).
The final regulations provide that while the Appeals resolution process
is generally available to all taxpayers to resolve
[[Page 3646]]
Federal tax controversies, there are certain exceptions to
consideration by Appeals. The final regulations also address certain
procedural and timing rules that must be met before Appeals
consideration is available. The regulations affect taxpayers requesting
Appeals consideration of Federal tax controversies.
DATES:
Effective date: These regulations are effective on January 15,
2025.
Applicability date: The regulations in Sec. Sec. 301.7803-2 and
301.7803-3 apply to all requests for consideration by Appeals that are
received on or after February 14, 2025.
FOR FURTHER INFORMATION CONTACT: Joshua P. Hershman at (202) 317-4311
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document contains amendments to the Procedure and
Administration Regulations under 26 CFR part 301 to implement section
7803(e) of the Internal Revenue Code (Code), which Congress enacted in
the TFA (final regulations). The final regulations are issued under
section 7805(a) of the Code, which expressly delegates to the Secretary
of the Treasury or her delegate (Secretary) the authority to
``prescribe all needful rules and regulations for the enforcement of
[the Code], including all rules and regulations as may be necessary by
reason of any alteration of law in relation to internal revenue.''
Background
Section 7803(e)(3) provides that it is the function of Appeals to
resolve Federal tax controversies without litigation on a basis that is
fair and impartial to both the Government and the taxpayer, promotes a
consistent application and interpretation of, and voluntary compliance
with, the Federal tax laws, and enhances public confidence in the
integrity and efficiency of the IRS. Section 7803(e)(4) states that the
resolution process to resolve Federal tax controversies described in
section 7803(e)(3) ``shall be generally available to all taxpayers.''
On September 13, 2022, the Treasury Department and the IRS
published in the Federal Register (87 FR 55934) a notice of proposed
rulemaking (REG-125693-19) proposing amendments to implement section
7803(e) (proposed regulations). The proposed regulations proposed to
adopt the function of Appeals as stated in section 7803(e)(3) and that
the Appeals resolution process is generally available to all taxpayers
to resolve Federal tax controversies as stated in section 7803(e)(4).
The proposed regulations defined what constitutes a Federal tax
controversy involving disputes over administrative determinations made
by the IRS and, consistent with the historical practice and functions
of Appeals, listed certain additional topics involving disputes over
administrative determinations by the IRS that are treated as Federal
tax controversies. Proposed Sec. 301.7803-2(c)(1) through (24) also
proposed an exclusive list of twenty-four exceptions to consideration
of a Federal tax controversy by Appeals, almost all of which existed
before the enactment of the TFA. This preamble refers to the exceptions
in proposed Sec. 301.7803-2(c), such as proposed Sec. 301.7803-
2(c)(1), (2), and (3), for example, as ``Exception 1,'' ``Exception
2,'' and ``Exception 3.''
Additionally, the proposed regulations proposed certain procedural
and timing rules that must be met before Appeals consideration is
available: the originating IRS office must have completed its review; a
taxpayer must have submitted the request for Appeals consideration in
the prescribed time and manner; and Appeals must have had sufficient
time remaining on the appropriate limitations period for it to consider
the matter. Further, if a Federal tax controversy is eligible for
consideration by Appeals and the procedural and timing requirements are
followed, a taxpayer would generally have only one opportunity for
Appeals consideration. The proposed regulations also proposed two
special rules for docketed cases. First, if Appeals issued a notice of
deficiency, notice of liability, or other determination, without having
fully considered one or more issues because of an impending expiration
of the statute of limitations on assessment, Appeals may choose to have
the Office of Chief Counsel (Chief Counsel) return the case to Appeals
for full consideration of the issue or issues once the case is docketed
in the United States Tax Court (Tax Court). Second, Appeals and Chief
Counsel may determine how settlement authority is transferred between
the two offices. Similar prerequisites to Appeals consideration as
those described in this paragraph existed before the enactment of the
TFA.
Besides soliciting public comments on the rules in the proposed
regulations, the Treasury Department and the IRS also solicited public
comments in the proposed regulations on whether certain exclusions from
Appeals' consideration currently provided in the Internal Revenue
Manual (IRM) relating to requests for relief under Sec. Sec. 301.9100-
1 through 301.9100-22 (9100 relief) and requests for a change in
accounting method (CAM) should be included in the list of exceptions in
the regulations.
Lastly, the proposed regulations proposed requirements to implement
section 7803(e)(5). Enacted by the TFA, section 7803(e)(5) requires the
IRS to follow the special notification procedures set forth in section
7803(e)(5) if a taxpayer who is in receipt of a notice of deficiency
under section 6212 of the Code requests to have the Federal tax
controversy referred to Appeals and that request is denied.
The Summary of Comments and Explanation of Revisions of these final
regulations summarizes the provisions of the proposed regulations,
which are explained in greater detail in the preamble to the proposed
regulations. In response to the proposed regulations, the Treasury
Department and the IRS received fourteen comments. A public hearing was
requested and held on November 29, 2022.
After careful consideration of the comments and hearing testimony,
the Treasury Department and the IRS adopt the proposed regulations, as
modified by this Treasury decision, in response to such comments as
described in the Summary of Comments and Explanation of Revisions. The
final regulations also include minor typographical and editorial edits,
including non-substantive clarifications, to the proposed regulations.
Summary of Comments and Explanation of Revisions
I. Proposed Sec. 301.7803-2
A. Intent of the TFA To Grant Authority To Make Exceptions
Numerous comments addressed the scope of the proposed exceptions to
Appeals consideration in proposed Sec. 301.7803-2(c) or the authority
of the Treasury Department and the IRS to make exceptions that exclude
or limit access to Appeals.
Several comments agreed that the TFA generally authorizes the
Treasury Department and the IRS to provide exceptions to Appeals
consideration. A comment agreed that the statutory text and legislative
history of the TFA confirm Congress did not intend for Appeals access
to be universally available. This comment supported the proposed
regulations' identification of particular situations in which Appeals
access should not be available. While disagreeing with Exception 19
(Challenges Alleging That a Treasury Regulation Is Invalid) and
Exception 20 (Challenges Alleging That a Notice or Revenue Procedure Is
Invalid) and exceptions for 9100 relief and CAMs, another comment
generally agreed with
[[Page 3647]]
the Treasury Department and the IRS that not every case is appropriate
for Appeals consideration. The comment also stated that the TFA did not
require that the IRS grant all requests for Appeals to consider any
dispute because the Secretary may provide exceptions to Appeals
consideration. Another comment stated there was ``ample reason, rooted
in logic and past practice, for the majority of [the] proposed
exceptions.'' It opined that some of the proposed exceptions, which
were not identified, were not necessary to the proper administration of
the Appeals process or were not consistent with the statute's mandate
that the Appeals process be generally available. Another comment stated
that some of the historic exclusions in the proposed regulations should
be accepted and specifically mentioned penalties and determinations
under sections 6702 or 6682 of the Code. Other comments stated that the
proposed exceptions or exceptions framework laid out in the proposed
regulations generally ran afoul of the intent of the TFA by limiting
access to Appeals, or that certain proposed exceptions such as
Exception 18 (Challenges Alleging That a Statute Is Unconstitutional),
Exception 19, and Exception 20 did so. These comments gave several
reasons in support of their arguments, as described in greater detail
in section I.D. of this Summary of Comments and Explanation of
Revisions. Two comments claimed that providing exceptions to review by
Appeals would deny taxpayers a statutory right to Appeals, and two
comments claimed exceptions to review by Appeals would inappropriately
restrict Appeals access and suggested the proposed regulations should
instead expand Appeals access.
As explained in more detail in section I.C. of the proposed
regulations' Explanation of Provisions, Congress did not provide for an
absolute right to administrative consideration by Appeals, which is
reflected in the statute and the TFA's legislative history. Rather,
Appeals review is ``generally available,'' under section 7803(e)(4) and
the Treasury Department and the IRS may provide reasonable exceptions
in their discretion, whether existing or new. In addition to this
statutory language, TFA's legislative history also reflects the
intention of Congress that the Treasury Department and the IRS retain
their historical discretion to determine whether the resolution of
particular types of disputes is appropriate for the Appeals resolution
process, and for the IRS to retain the discretion to determine whether
a particular Federal tax controversy is appropriate for the Appeals
resolution process:
Independent Appeals is intended to perform functions similar to
those of the current Appeals. Independent Appeals is to resolve tax
controversies and review administrative decisions of the IRS in a
fair and impartial manner, for the purposes of enhancing public
confidence, promoting voluntary compliance, and ensuring consistent
application and interpretation of Federal tax laws. Resolution of
tax controversies in this manner is generally available to all
taxpayers, subject to reasonable exceptions that the Secretary may
provide. Thus, cases of a type that are referred to Appeals under
present law remain eligible for referral to Independent Appeals.
See H.R. Rep. No. 39, Part 1, 116th Cong., 1st Session (House TFA
Report), 30-31 (2019) (emphasis added).
Contrary to one comment's suggestion, the Committee reports for the
IRS Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat.
685, 689 (July 22, 1998)), and any earlier version of the TFA that
Congress did not enact, are not informative when interpreting the TFA.
The legislative history of the TFA reflects Congressional intent that
the Treasury Department and the IRS retain their historical discretion
to determine whether the resolution of particular types of disputes is
appropriate for Appeals, and the discretion of the IRS to determine
whether a particular Federal tax controversy is appropriate for the
Appeals resolution process. See House TFA Report, at 29.
Several comments expressed concern that excluding a matter from
Appeals consideration adversely affects the independence or
impartiality of Appeals. Some of the comments specifically asserted
that prohibiting Appeals from considering validity challenges to a
regulation, notice, or revenue procedure as set forth in Exception 19
or Exception 20 undermines its independence. The Treasury Department
and the IRS disagree with this comment. Exceptions from review by
Appeals do not inhibit the independence or impartiality of Appeals for
matters or issues under consideration. If a matter is not reviewed by
Appeals, there is no independent analysis to be performed. Appeals
still would be free to settle a Federal tax controversy that is
referred to it using its own standards and an exception to review by
Appeals would have no bearing on the cases or issues that are referred
to Appeals.
One comment opined that the proposed exceptions in general are not
reasonable or narrowly construed. The Treasury Department and the IRS
disagree with this comment. As reflected in the proposed regulations'
Explanation of Provisions in section I.C., the proposed exceptions are
narrowly tailored and are based on reasonable rationales. Additionally,
the proposed regulations and these final regulations reinforce the
statutory presumption that Federal tax controversies may be considered
by Appeals and require a regulatory exception for consideration to be
unavailable.
The same comment suggested there would be no ``whipsaw'' if Appeals
settles any of the cases or issues outlined in the proposed exceptions
because Appeals settlements are not binding on any other taxpayer or on
Chief Counsel's litigation position. It is unclear what is intended by
this comment. The term whipsaw refers to the situation produced when
the Government is subjected to conflicting claims of taxpayers. The
issue of whipsaw has no bearing on the Appeals exceptions listed in the
proposed regulations nor on the rationales set forth in the proposed
regulations that support these exceptions and so the Treasury
Department and the IRS do not agree that revisions to the proposed
regulations are necessary.
A few comments focused on costs and opined that Congress intended
for Appeals to resolve Federal tax controversies without expensive
litigation. A comment asserted the establishment of Appeals was an
attempt by Congress to make resolving controversies less cost-
prohibitive for lower income individuals. Another comment stated the
proposed regulations' approach granting exceptions to Appeals
consideration would be a waste of resources of the Government and
taxpayers. The Treasury Department and the IRS agree that part of
Appeals' mission is to resolve Federal tax controversies without
litigation, but do not agree that exceptions to review by Appeals will
result in a waste of resources. There is no reason to assume that the
cost to litigate a particular Federal tax controversy will
significantly increase as a result of the proposed regulations, or that
litigation expenses will increase at all in circumstances in which an
exception existed before the TFA. Appeals consideration will still be
available for most cases, which can be resolved without litigation (or
without further litigation if the taxpayer has petitioned the Tax
Court). The proposed regulations' procedural requirements, timing
requirements, and almost all of the exceptions to consideration by
[[Page 3648]]
Appeals already exist in previously established guidance regarding
Appeals. As in the past, the proposed exceptions are limited in number
and scope. The vast majority of taxpayers, including low-income
taxpayers, will have the opportunity to have Appeals consider their
Federal tax controversies.
Similarly, two comments asserted that Exception 18, Exception 19,
and/or Exception 20 waste taxpayer and Government resources. As
discussed in more detail in sections I.D.11.a. and 12. of this Summary
of Comments and Explanation of Revisions, in contrast to a single
decision by Appeals that is applicable and communicated only to one
taxpayer, a final decision from a Federal court is publicly available
and applied consistently to all taxpayers. As a result, these
exceptions promote efficiency rather than wasting taxpayer and
Government resources. Furthermore, even if Appeals were to review the
matter covered by these exceptions, there is no guarantee that Appeals
would settle or resolve it.
One comment recommended that the Treasury Department and the IRS
should take a conservative approach to Appeals exceptions because
recent Supreme Court decisions such as CIC Services, LLC v. Internal
Revenue Service, 593 U.S. 209 (2021) and Boechler, P.C. v.
Commissioner, 596 U.S. 199 (2022) defined limits on the IRS's
contentions concerning its prerogatives under the Administrative
Procedure Act (APA), equitable tolling, and Tax Court jurisdiction. The
Treasury Department and the IRS disagree with the premise of this
comment that a more conservative approach is needed or that the
referenced cases are relevant in construing section 7803(e). The
exceptions in these regulations are reasonable and narrowly tailored to
achieve their purposes. None of the cited cases addressed the meaning
of section 7803(e) or the availability of Appeals review. Instead,
these cases address different issues and have no bearing on these
regulations.
Another comment noted that litigation arguing that the TFA provides
taxpayers with access to Appeals is pending in the Hancock and Rocky
Branch cases in the United States Court of Appeals for the Eleventh
Circuit (Eleventh Circuit), implying that the regulations should be
withheld due to the litigation. The Treasury Department and the IRS
disagree that these two cases serve to limit or prevent the publication
of regulations. Neither case is pending any longer. In Hancock, the
U.S. District Court for the Northern District of Georgia held that the
taxpayer had no absolute right to Appeals consideration under the
circumstances. The Eleventh Circuit upheld the decision on Anti-
Injunction Act grounds (see section 7421 of the Code), and the Supreme
Court denied certiorari. See Hancock County Land Acquisitions LLC, et.
al. v. United States, 553 F. Supp. 3d 1284, 1294 fn. 9 (N.D. Ga. 2021),
aff'd 130 AFTR 2d 2022-5529 (11th Cir. Aug. 17, 2022), cert. denied 143
S.Ct. 577 (January 9, 2023). Rocky Branch has facts similar to the
facts in Hancock, and as in Hancock the Eleventh Circuit upheld the
decision on Anti-Injunction grounds, and the Supreme Court denied
certiorari. See Rocky Branch Timberlands LLC, et. al. v. United States,
129 AFTR 2d 2022-2137 (N.D. Ga. 2022), aff'd 132 AFTR 2d 2023-5788
(11th Cir. Sept. 6, 2023), cert. denied 144 S.Ct. 812 (Feb. 20, 2024).
One comment asserted that some of the exceptions in the proposed
regulations, in particular, Exception 3 (Whistleblower Awards);
Exception 4 (Administrative Determinations Made by Other Agencies);
Exception 7 (Denial of Access Under the Privacy Act); and Exception 14
(Authority Over the Matter Rests With Another Office) leave a taxpayer
without any administrative recourse. The comment suggested an
interagency discussion over how and whether administrative appeals
processes, whether residing in the IRS Independent Office of Appeals or
outside of the IRS, could be developed for these types of cases. The
Treasury Department and the IRS agree with the comment's premise that
the language of section 7803(e) does not cover Exception 3, Exception
4, and Exception 7, or cover Exception 14 with respect to referrals to
the Department of Justice (Justice Department). See sections I.D.2.,
3., 4., and 8. of this Summary of Comments and Explanation of
Revisions. The disputes involved in Exception 3, Exception 4, and
Exception 7 are not Federal tax controversies, and Appeals lacks
settlement authority after a referral of a case to the Justice
Department, as described in Exception 14. The inclusion of Exception 3,
Exception 4, Exception 7, and Exception 14 in the list of proposed
exceptions in proposed Sec. 301.7803-2(c) was to clarify these points.
These exceptions to Appeals consideration all existed before the TFA.
Expanding the role of Appeals as suggested is not administratively
feasible and is outside the scope of these regulations and section
7803. Furthermore, lack of consideration by Appeals does not leave the
taxpayer without an administrative option to resolve a controversy as
issues can always be resolved during an examination. Accordingly, these
final regulations do not adopt this comment.
B. Definition of a Federal Tax Controversy: Proposed Sec. 301.7803-
2(b)(2)
Section 7803(e)(3) provides that the function of Appeals is ``to
resolve Federal tax controversies without litigation,'' without
defining the term ``Federal tax controversy.'' Proposed Sec. 301.7803-
2(b)(1), consistent with the statutory text of section 7803(e)(4),
provides that the Appeals resolution process is generally available to
all taxpayers to resolve Federal tax controversies. Proposed Sec.
301.7803-2(b)(2) defined a Federal tax controversy as a dispute over an
administrative determination with respect to a particular taxpayer made
by the IRS in administering or enforcing the internal revenue laws,
related Federal tax statutes, and tax conventions to which the United
States is a party (collectively referred to as internal revenue laws)
that arises out of the examination, collection, or execution of other
activities concerning the amount or legality of the taxpayer's income,
employment, excise, or estate and gift tax liability; a penalty; or an
addition to tax under the internal revenue laws.
As proposed in the proposed regulations and consistent with the
statute, the definition of a Federal tax controversy is broad. Although
the proposed definition does not specifically refer to tax-exempt
organizations, it includes an IRS determination that an organization is
not tax-exempt because the determination concerns whether the
organization has or will have a tax liability in some amount.
Similarly, determinations of private foundation or qualified employee
plan status and tax-exempt or other tax-advantaged bond status are
included in the proposed regulations' definition of a Federal tax
controversy because these determinations concern whether there is or
will be a tax liability for the foundation; plan, or its participants;
or bond issuers or holders. In these final regulations, the Treasury
Department and the IRS have modified the definition of a Federal tax
controversy to clarify that such determinations are included in the
definition.
Consistent with section 7803(e), the definition of Federal tax
controversy means that determinations that Appeals historically may not
have considered may now be considered by Appeals. These determinations
include the classification or reclassification of a non-exempt
charitable trust under
[[Page 3649]]
section 4947(a)(1) of the Code as described in section 509(a)(3) of the
Code; the classification or reclassification of the organization as an
exempt operating foundation under section 4940(d)(2) of the Code;
relief from retroactive revocation or modification of a determination
letter under section 7805(b) of the Code; denials of relief requested
under Sec. 301.9100-3 to permit the organization to be recognized and
treated as tax-exempt effective as of a date earlier than the date of
application; and pursuant to section 7611 of the Code relating to
restrictions on church tax inquiries and examinations, revocation of
the exempt or church status of an organization that is listed as, or
claims to be, a church.
C. Disputes Not Meeting the Definition of a Federal Tax Controversy
That Are Treated as Federal Tax Controversies: Proposed Sec. 301.7803-
2(b)(3)
Proposed Sec. 301.7803-2(b)(3) provided that notwithstanding the
definition of a Federal tax controversy, disputes over administrative
determinations made by the IRS with respect to a particular person
regarding certain topics listed in proposed Sec. 301.7803-2(b)(3) are
treated as Federal tax controversies.
1. Additional Disputes Treated as Federal Tax Controversies: Proposed
Sec. 301.7803-2(b)(3)(iv) Through (vi)
As explained previously in section I.B. of this Summary of Comments
and Explanation of Revisions, the final regulations clarify that the
definition of Federal tax controversy includes determinations
concerning the status of tax-exempt organizations, private foundations,
and qualified plans, and the status of tax-exempt or other tax-
advantaged bonds. Accordingly, the final regulations delete these items
from proposed Sec. 301.7803-2(b)(3)(iv) through (vi), because
inclusion would be unnecessary and duplicative. The final regulations
retain the language in proposed Sec. 301.7803-2(b)(3)(vi) referring to
arbitrage claims, because such claims do not involve a tax and
therefore do not meet the definition of a Federal tax controversy, as
defined in Sec. 301.7803-2(b)(2). That language is now included in the
final regulations and redesignated as Sec. 301.7803-2(b)(3)(iv).
2. FOIA Cases Treated as Federal Tax Controversies: Proposed Sec.
301.7803-2(b)(3)(ii)
One comment was received on proposed Sec. 301.7803-2(b)(3)(ii)
relating to a request under the Freedom of Information Act (5 U.S.C.
552) (FOIA). This comment recommended removing proposed Sec. 301.7803-
2(b)(3)(ii) because FOIA does not affect the collection of taxes or the
liability for taxes of the FOIA requester. The Treasury Department and
the IRS do not adopt this recommendation. Appeals consideration of IRS
administrative determinations listed in proposed Sec. 301.7803-
2(b)(3), including in proposed Sec. 301.7803-2(b)(3)(ii), is
consistent with the historical practice and functions of Appeals as
codified in section 7803(e)(3). See Sec. 301.7803-2(b)(3)(i) through
(vi). As a matter of tax policy and administration, it is important
that FOIA requesters have, consistent with past practice, the
opportunity for consideration by Appeals. The TFA does not prohibit
Appeals from reviewing determinations by the IRS that are not Federal
tax controversies, and retaining the ability for review by Appeals is
beneficial to the public.
D. Exceptions to Appeals Consideration: Exception 1 Through Exception
24
The Treasury Department and the IRS received several comments
concerning the exceptions to Appeals consideration listed in proposed
Sec. 301.7803-2(c)(1) through (24). The exceptions that were subject
to the greatest number of comments were Exception 19 and Exception 20.
1. Frivolous Position and Penalties Related to Frivolous Positions and
False Information: Exception 1 and Exception 2
Two comments were received on Exception 1 and Exception 2.
Exception 1 provides that Appeals consideration is not available for an
administrative determination made by the IRS with respect to a
particular taxpayer in which the IRS rejects a frivolous position.
Similarly, Exception 2 provides that Appeals consideration is not
available regarding a penalty assessed by the IRS with respect to a
particular taxpayer for asserting a frivolous position, for making a
frivolous submission, or for providing false information.
One comment agreed with excepting from Appeals consideration
penalties and determinations under section 6702 or section 6682 of the
Code. A second comment alleged the exceptions would curtail the
independence of Appeals by eliminating its right to review
determinations of frivolousness because such determinations are not
infallible. That comment recommended Appeals should have the option,
but not the obligation, to decide whether positions have been wrongly
labeled frivolous to strike a balance between its independence and the
IRS's need to weed out frivolous arguments.
The Treasury Department and the IRS do not adopt this
recommendation to give Appeals the option to consider whether the IRS
has mistakenly labeled a taxpayer's position as frivolous or wrongly
imposed a frivolous filing penalty. Referring every frivolous argument
to Appeals upon the request of a taxpayer, for Appeals to then
determine whether or not to grant consideration, would be unnecessarily
resource intensive and inconsistent with the historic, reasonable
limitations on access to Appeals. Section I.C.1. of the proposed
regulations' Explanation of Provisions identified similar existing
restrictions precluding the consideration of frivolous positions by
Appeals that can be found in Sec. 601.106(b) of the Statement of
Procedural Rules (26 CFR part 601) (regarding appeal procedures not
extending to cases involving solely the failure or refusal to comply
with tax laws because of frivolous moral, religious, political,
constitutional, conscientious, or similar grounds), IRM 5.14.3.3(1)
(10-20-2020) (relating to installment agreement requests made to delay
collection action), and IRM 8.22.5.5.3 (11-08-2013) (relating to
frivolous issues). There are sound policy reasons for these historic
limitations. As explained in sections I.C.1. and 2. of the proposed
regulations' Explanation of Provisions, Appeals consideration of
frivolous positions would facilitate abuse of the tax system by
allocating IRS and Appeals resources to reviewing positions that have
already been designated as frivolous. Penalties imposed under section
6702 or section 6682 are designed to deter frivolous behavior or
improper conduct by a taxpayer. If Appeals does not consider the merits
of a taxpayer's frivolous position, it follows that Appeals should not
consider the IRS's assessment of a penalty with respect to the taxpayer
as well. The exceptions are consistent with the restriction in section
7803(e)(5)(D) that the notice and protest procedures under section
7803(e)(5) do not apply to a request if the issue is frivolous within
the meaning of section 6702(c). Also, as explained in section I.A. of
this Summary of Comments and Explanation of Revisions, excluding a
matter from Appeals consideration has no bearing on its independence.
2. Whistleblower Awards: Exception 3
Two comments were received on Exception 3, which provides that
Appeals consideration is not available for any administrative
determination made by the IRS under section 7623 of
[[Page 3650]]
the Code relating to awards to whistleblowers.
The first comment suggested creating an interagency administrative
review process, and it is discussed in section I.A. of this Summary of
Comments and Explanation of Revisions.
The second comment asserted that the authority relied upon for
Exception 3 is the proposed definition of Federal tax controversy in
the proposed regulations and alleged that the language of the TFA
authorizes Appeals to review whistleblower matters. The Treasury
Department and the IRS do not adopt this comment. The exception for
whistleblower awards under section 7623 in Exception 3 is a historic
exception that has existed before the enactment of the TFA. For
example, section 7623 was one of the exclusions listed in section 4 of
Rev. Proc. 2016-22, 2016-15 IRB 577 (April 11, 2016), which provides
procedures for Chief Counsel referrals of cases docketed in the Tax
Court to Appeals for settlement. Its inclusion in the list of proposed
exceptions was to clarify the point that section 7803(e) does not cover
whistleblower awards because they do not involve a Federal tax
controversy. In a whistleblower case, the IRS determination involves
whether the whistleblower is entitled to an award. The whistleblower's
tax liability is not at issue, and Appeals is not reviewing a
determination by the IRS in its examination, collection, or execution
of other activities with respect to the whistleblower's tax liability.
This award determination is separate and distinct from a determination
of tax liability.
3. Administrative Determinations Made by Other Agencies: Exception 4
One comment concerned Exception 4, which provides that Appeals
consideration is not available for an administrative determination
issued by an agency other than the IRS. An example is a determination
by the Alcohol and Tobacco Tax and Trade Bureau (TTB) concerning an
excise tax administered by and within its jurisdiction. The comment
suggested creating an interagency administrative review process, and it
is discussed in section I.A. of this Summary of Comments and
Explanation of Revisions.
4. Denials of Access Under the Privacy Act: Exception 7
One comment was received on Exception 7, which provides that
Appeals consideration is not available for any dispute regarding a
determination of the IRS resulting in denial of access under the
Privacy Act (5 U.S.C. 552a(d)(1)) (relating to access to records) to a
particular person. The comment suggested creating an interagency
administrative review process, and it is discussed in section I.A. of
this Summary of Comments and Explanation of Revisions.
5. IRS Erroneously Returns or Rejects an Offer in Compromise: Exception
9
Exception 9 provides that Appeals consideration is not available
regarding the application of section 7122(f) of the Code when the IRS
erroneously returns or rejects a taxpayer's offer in compromise (OIC)
submitted under section 7122 as nonprocessable. As explained in section
I.C.9. of the proposed regulations' Explanation of Provisions,
Exception 9 includes, for example, the claim that the IRS's mistaken
rejection or return was in bad faith. Because the IRS returned or
rejected the offer without making a determination regarding the OIC,
there is no administrative determination made by the IRS for Appeals to
review.
Two comments were received concerning OICs. The first comment
recommended that Appeals should be authorized to review when the IRS
erroneously returns or rejects a taxpayer's OIC as nonprocessable or no
longer processable. The comment stated that such a return or rejection
is an administratively reviewable determination, that not allowing
Appeals review is a significant loss of rights for the taxpayer
including low-income taxpayers in particular, that excepting this issue
from Appeals review circumvents section 7122(f), and that Appeals
review would promote consistency.
The Treasury Department and the IRS do not adopt this comment.
Appeals has not historically reviewed such returned or rejected OICs.
Exception 9 is narrow, and it is consistent with the pre-existing OIC
regulations. Section 301.7122-1(f)(5)(ii) states, in part, that if an
OIC is returned following a ``determination'' that the offer was
nonprocessable, that return of the OIC ``does not constitute a
rejection of the offer for purposes of this provision and does not
entitle the taxpayer to appeal the matter to appeals under the
provisions of this paragraph (f)(5) . . .'' Also, the comment's
recommendation is not consistent with the function of Appeals, which is
to weigh litigation hazards in applying the law to specific facts.
Reviewing the completeness of an OIC is not a weighing of hazards.
There would be no hazards of litigation for Appeals to consider or
merits to weigh--either the OIC request is complete or not complete.
Further, the recommendation, if adopted, would conflict with the OIC
regulations. The return of an OIC as nonprocessable is an example of a
premature review in Sec. 301.7803-2(d)(1) because the originating IRS
office has not completed its action. It has been a longstanding
practice of the IRS to return incomplete or otherwise nonprocessable
OICs that taxpayers fail to perfect. See for example, sec. 5 of Rev.
Proc. 2003-71, 2003-36 I.R.B. 517 (September 8, 2003) (relating to
offers in compromise).
The second comment opined that Exception 9 is too loosely defined
and its focus should be limited to those taxpayers who are abusing the
process such as by creating undue delay. This comment is not adopted.
Exception 9 is narrowly limited to a case in which the IRS erroneously
returns or rejects an OIC as nonprocessable or no longer processable
and the taxpayer requests Appeals consideration to assert that the OIC
should be deemed to be accepted under section 7122(f). This exception
is narrowly defined to sufficiently meet the administrative goals of
the rule.
6. Criminal Prosecution Is Pending Against Taxpayer: Exception 10
One comment was submitted on Exception 10, which provides that
Appeals consideration is not available for a Federal tax controversy
with respect to a taxpayer while a criminal prosecution or a
recommendation for criminal prosecution is pending against the taxpayer
for a tax-related offense other than with the concurrence of Chief
Counsel and the Justice Department, as applicable.
The comment recommended that the final regulations should limit
Exception 10 to only cases in which the pending criminal matter
pertains to the same subtitle of the Code and that Exception 10 not be
applied to matters within a single subtitle that are completely
unrelated to each other and do not involve common facts or tax
transactions. The Treasury Department and the IRS do not adopt this
comment. Exception 10 allows for Appeals consideration with the
concurrence of Chief Counsel and the Justice Department, as applicable.
Such concurrence is fact-based and case specific and would accommodate
the situations addressed in the comment because if they were to arise,
Chief Counsel and/or the Justice Department could determine whether
concurrence would be appropriate under the facts and circumstances of
the particular case. Limiting the exception as suggested in the comment
could require that Appeals consideration be afforded, when such
consideration could interfere
[[Page 3651]]
with a pending criminal matter. It would also be contrary to
regulations under 26 CFR part 601, which provide general procedural
rules for Appeals functions and limit Appeals' authority to act in a
case in which criminal prosecution is recommended, except with the
concurrence of Chief Counsel. See Sec. 601.106(a)(2)(vi).
7. IRS's Automated Process of Certifying a Seriously Delinquent Tax
Debt: Exception 12
One comment was received on Exception 12, which provides that
consideration by Appeals is not available for the certification or
issuance of a notice of certification of a seriously delinquent Federal
tax debt of a particular taxpayer to the Department of State (State
Department) under section 7345 of the Code (relating to the revocation
or denial of a taxpayer's passport in the case of serious tax
delinquencies). According to the comment, if Appeals consideration is
not available for certification or issuance of a notice of
certification of a seriously delinquent tax debt, the taxpayer lacks an
important check on the automated system and does not have an
opportunity to contest whether the statutory requirements for passport
certification have been met under section 7345(b).
The Treasury Department and the IRS do not adopt this comment. In
the event of a mistake in the automated process, a taxpayer has the
opportunity to contact the IRS personnel identified in the notice,
which provides a check on the automated process. Specifically, the
taxpayer receives Notice CP508C, Notice of certification of your
seriously delinquent Federal tax debt to the State Department,
informing the taxpayer to contact the IRS at the phone number in that
notice to request reversal of the certification if the taxpayer
contends the certification is erroneous. The role of Appeals is to
review administrative determinations and to weigh the hazards of
litigation, not to provide a backstop to an automated process. This
exception existed before the TFA. See Notice 2018-1, 2018-3 I.R.B. 299
(January 16, 2018).
The comment also alleged Exception 12 violates the Taxpayer Bill of
Rights (TBOR). See <a href="https://www.irs.gov/taxpayer-bill-of-rights">https://www.irs.gov/taxpayer-bill-of-rights</a>. The
Treasury Department and the IRS do not adopt this comment; this
exception is consistent with the TBOR. The TBOR does not grant new
enforceable rights but instead it obligates the IRS to ensure that its
employees are familiar with and act in accord with rights established
in other Code provisions. See Facebook, Inc. v. Internal Revenue
Service, 2018 WL 2215743, at *13-14 (N.D. Cal. 2018). See also Hancock
County Land Acquisitions LLC, et. al. v. United States, 553 F. Supp. 3d
1284, 1296 n. 11 (N.D. Ga. 2021). As discussed in section I.A. of this
Summary of Comments and Explanation of Revisions, section 7803(e)(4)
does not confer an absolute right to Appeals consideration.
8. Authority Over the Matter Rests With Another Office: Exception 14
One comment was received on Exception 14. Exception 14 provides
that consideration by Appeals is not available for any case,
determination, matter, decision, request, or issue with respect to a
particular taxpayer that Appeals lacks the authority to settle.
Proposed Sec. 301.7803-2(c)(14)(i) through (v) provides a non-
exclusive list of examples illustrating this rule, including the
example in proposed Sec. 301.7803-2(c)(14)(i) that Appeals does not
have authority to resolve an issue with respect to a particular
taxpayer in a docketed case after a referral has been made to the
Justice Department. The comment suggested creating an interagency
administrative review process, which is discussed in section I.A. of
this Summary of Comments and Explanation of Revisions. The settlement
authority for any litigation under the jurisdiction of the Justice
Department already vests with the Justice Department.
9. Certain Technical Advice Memoranda and Technical Advice From an
Associate Office in a Docketed Case: Exception 15 and Exception 16
One comment was submitted concerning Exception 15 and Exception 16.
Exception 15 provides that Appeals consideration is not available for
certain adverse actions related to the initial or continuing
recognition of tax-exempt status, an entity's classification as a
foundation, the initial or continuing determination of employee plan
qualification, or a determination involving an obligation and the
issuer of an obligation under section 103 of the Code, when the adverse
action is based upon a technical advice memorandum (TAM) issued by an
Associate Office of Chief Counsel (Associate Office) before an appeal
is requested. Similarly, Exception 16 provides that Appeals
consideration is not available for any case docketed in the Tax Court
if the notice of deficiency, notice of liability, or final adverse
determination letter is based upon a TAM issued by an Associate Office
in that case involving an adverse action described in Exception 15.
The comment asserted that granting an exception for an appeal in
cases of tax-exempt status in which a TAM has been issued would
unnecessarily narrow an already small area of appeal rights, and
suggested that it would be beneficial to all parties to bring the
matter to Congress' attention if this is more a matter in need of
statutory clarification.
The Treasury Department and the IRS do not adopt this comment,
which suggested a change but did not provide a rationale for a change,
refute the rationale given in the proposed regulations, or explain its
conclusion that the two proposed exceptions would unnecessarily narrow
Appeals review. As reflected in the proposed regulations' Explanation
of Provisions in sections I.C.15. and 16., these two exceptions are
supported by reasonable rationales and are narrowly tailored to achieve
their purposes. If the legal issues and determinations in Exception 15
and Exception 16 are the subject of a TAM from an Associate Office,
they are excepted from Appeals consideration because traditionally
Chief Counsel has exclusive authority over the dispute administratively
or upon litigation. A TAM is advice furnished by an Associate Office in
a memorandum that responds to any request for assistance on any
technical or procedural legal question involving the interpretation and
proper application of any legal authority that is submitted in
accordance with an applicable revenue procedure. Chief Counsel's
decision with respect to the issues related to the initial or
continuing recognition of tax-exempt status, an entity's classification
as a foundation, the initial or continuing determination of employee
plan qualification, or a determination involving an obligation and the
issuer of an obligation under section 103 is the legal position of the
IRS with respect to the particular facts and circumstances that are the
subject of the TAM. These exceptions are important to preserving Chief
Counsel's authority to resolve these sensitive legal issues. As noted
in section I.C.15. of the proposed regulations' Explanation of
Provisions, these exceptions are consistent with historical practice as
found in Sec. 601.106(a)(1)(v)(a) and IRM 8.1.1.2.1(1)(c.) (02-10-
2012) (currently found in IRM 8.1.1.3.1 (01-09-2024)). Furthermore, a
broad range of tax-exempt status issues are reviewable by Appeals under
these final regulations.
10. Letter Rulings Issued by Associate Office: Exception 17
Two comments were received on Exception 17, which excepts from
[[Page 3652]]
Appeals consideration a decision by an Associate Office regarding
whether to issue a letter ruling or the content of a letter ruling.
However, the subject of the letter ruling may be considered by Appeals
if all other requirements in Sec. 301.7803-2 are met. For example, if
the taxpayer subsequently files a return taking a position that is
contrary to the letter ruling and that position is examined by the IRS,
Appeals could consider that Federal tax controversy if all other
requirements in Sec. 301.7803-2 are met.
The first comment stated that the provision in Exception 17
helpfully makes clear that the subject of the letter ruling may be
considered by Appeals if all other requirements in proposed Sec.
301.7803-2 are met, and recommended that this provision should be
strengthened to offer an affirmative safe harbor for appeals for
taxpayers who in good faith attempt to fulfill the terms of Sec.
301.7803-2. The Treasury Department and the IRS do not adopt this
recommendation. The criteria for a ``safe harbor'' would not be
practical because meeting some but not all of the requirements would
not be sufficient. A taxpayer must comply with all the requirements in
Sec. 301.7803-2 in order to have Appeals consider the taxpayer's
Federal tax controversy. The second comment on Exception 17 relates to
9100 relief and CAMs and is discussed in section I.H. of this Summary
of Comments and Explanation of Revisions.
11. Challenges Alleging That a Statute Is Unconstitutional: Exception
18
Exception 18 provides that Appeals consideration is not available
for any issue based on a taxpayer's argument that a statute violates
the United States Constitution unless there is an unreviewable decision
from a Federal court holding that the cited statute is
unconstitutional. Exception 18 does not preclude Appeals from
considering a Federal tax controversy based on arguments other than the
constitutionality of a statute, such as whether the statute applies to
the taxpayer's facts and circumstances.
Proposed Sec. 301.7803-2(c)(18) defined the phrase unreviewable
decision as a decision of a Federal court that can no longer be
appealed to any Federal court because all appeals in a case have been
exhausted or the time to appeal has expired and no appeal was filed,
and no further action can be taken in the case by any Federal court
once there is an unreviewable decision. An unreviewable decision means
an unreviewable decision of any Federal court, regardless of where the
taxpayer resides. The proposed language ``and no further action can be
taken in the case by any Federal court once there is an unreviewable
decision'' has been deleted in the final regulations because it is
inaccurate in certain circumstances. For example, even if a district
court grants a motion to dismiss and the decision is appealed and a
reversal of that motion becomes unreviewable, the case would have
further action such as discovery, dispositive motions, or trial. See
Sec. 301.7803-2(c)(18).
The Treasury Department and the IRS received several comments on
Exception 18. One comment agreed with Exception 18 to not allow Appeals
to consider constitutional challenges to Federal tax statutes unless
there is an unreviewable court decision. It recommended the final
regulations should strengthen the concept of an ``unreviewable
decision.'' See section I.D.11.a. of this Summary of Comments and
Explanation of Revisions regarding the phrase unreviewable decision.
Two comments objected to Exception 18 as inconsistent with the TFA
and recommended Appeals should be allowed to consider constitutional
challenges to Federal tax statutes in the absence of an unreviewable
decision. One objected that denial of Appeals consideration in
Exception 18 strips taxpayers of a statutory right to Appeals. The
other objected that Exception 18 improperly restricts access to Appeals
and forces taxpayers to sacrifice legal arguments.
The Treasury Department and the IRS do not adopt these two
comments; Exception 18 is consistent with the TFA. As discussed
previously, the TFA does not provide an absolute statutory right to an
administrative appeal. Rather, the Treasury Department and the IRS have
the statutory authority to provide exceptions to Appeals consideration.
Exception 18 is one such exception, and it is narrowly tailored and
supported with reasonable rationales. As proposed, Exception 18 does
not exclude the constitutionality issue from Appeals consideration
totally but merely provides that Appeals will not be the first forum to
hear such a challenge because it is not the appropriate forum without a
final decision from a Federal court. The Treasury Department and the
IRS still agree with the rationales in section I.C.18. of the proposed
regulations' Explanation of Provisions, namely that questions within
the IRS regarding the constitutionality of a statute, and positions
taken by the IRS in light of such questions, are determinations of
general applicability resolved at the highest levels of the Treasury
Department and the IRS, in consultation with the Office of Legal
Counsel of the Justice Department, and subject to the ultimate
resolution by a court of relevant jurisdiction. Moreover, a
constitutional determination should be communicated and applied
consistently to all taxpayers. It would be inappropriate for Appeals to
consider the constitutionality of a statute for a particular taxpayer
in the absence of an unreviewable court decision, which is accessible
to all taxpayers and the IRS.
A comment asserted Appeals has historically analyzed legal
arguments concerning tax statutes, regulations, and IRS procedures and
so Appeals is capable of considering these arguments. This comment
insinuated that Exception 18, Exception 19, and Exception 20 are
premised on Appeals' training, skills, or competency to review legal
arguments related to statutes, regulations, or IRS procedures. The
rationales for Exception 18, Exception 19, and Exception 20 provided in
sections I.C.18., 19., and 20. of the proposed regulations' Explanation
of Provisions do not relate to Appeals' training, skills, or
competency. Appeals will continue to review taxpayer arguments about
whether the relevant statutes, regulations, or IRS procedures apply to
the taxpayer's factual circumstances just as Appeals has historically
done.
A comment construed the definition of an unreviewable decision to
mean an unreviewable decision only from a Federal court within the
circuit in which the taxpayer resides. Neither the proposed
regulations, nor these final regulations, require the unreviewable
decision to be in the taxpayer's own circuit. Another comment
recommended eliminating Exception 19 and Exception 20 but, in the
alternative, it recommended clarifying the phrase unreviewable
decision. The comment interpreted the phrase as the proposed
regulations intended, that is, as an unreviewable decision of any
Federal court, regardless of where the taxpayer resides, but stated it
was unclear and should be clarified. In response to these comments, the
language in the proposed regulations, ``a decision of a Federal
court,'' is clarified in the final regulations to ``a decision of any
Federal court regardless of where the taxpayer resides.'' See Sec.
301.7803-2(c)(18).
A comment recommended the final regulations modify the definition
of unreviewable decision to provide the decision must be one that would
govern the taxpayer's case. In other words, the final regulations
should ensure, according to the comment, that Appeals access is
available only if there is a
[[Page 3653]]
relevant decision that would bind the taxpayer and the Government if
the dispute proceeded to litigation. The Treasury Department and the
IRS do not adopt this comment because it is too limiting. If the only
unreviewable decision that Appeals should consider is one that is
binding on the IRS and the taxpayer, then it would not be a matter of
Appeals weighing the hazards of litigation because that decision would
be controlling on the taxpayer. Also, such a rule would prevent Appeals
from weighing the hazards of litigation by evaluating how a court in
another circuit ruled on the issue. Like the proposed regulations would
have done, the final regulations allow Appeals to consider that final
decision in considering the hazards of litigation.
A comment stated that the Treasury Department and the IRS have no
basis to hold Appeals to a different, and higher standard than that of
the Justice Department or the Solicitor General. The comment's
reference to the Justice Department and Solicitor General appeared to
be a reference to those offices resolving cases in a manner that
Appeals could not under Exception 19 and Exception 20. The comment
appeared to suggest that Appeals should be able to do the same in
fulfilling its function of considering hazards of litigation.
The Treasury Department and the IRS do not adopt this comment
because the authority of employees of the Justice Department and the
Solicitor General to take certain actions in fulfilling their distinct
functions and roles does not mean employees of Appeals, like Appeals
Officers (AO), can take the same actions. As explained in section
I.D.12. of this Summary of Comments and Explanation of Revisions,
questions regarding the validity of a regulation, or the procedural
validity of a notice or revenue procedure, involve determinations of
general applicability resolved at the highest levels of the Treasury
Department and the IRS and must be followed by all IRS employees,
including AOs. Such validity decisions should be communicated and
applied consistently to all taxpayers. It would be inappropriate for
Appeals to act in contravention with those decisions in a specific case
involving one taxpayer and consider validity issues in the absence of
an unreviewable court decision.
Three comments recommended Appeals be allowed to consider the
hazards of litigation on a validity issue for a notice or regulation
based on a similar or analogous court decision on a different notice or
regulation. The comments mentioned Green Valley Investors v.
Commissioner, 159 T.C. 5 (2022) (Tax Court setting aside Notice 2017-
10, 2017-4 IRB 544 for failure to comply with the Administrative
Procedure Act's (APA's) notice and comment requirements) as an example
and suggested that if a court decision invalidated a notice for the
same APA reason that a taxpayer is raising to challenge the validity of
other guidance, Appeals should consider the hazards of litigation in
the taxpayer's analogous case.
The Treasury Department and the IRS do not adopt these comments
because it would defeat the purposes of Exception 18, Exception 19, and
Exception 20. Appeals consideration is limited to unreviewable
decisions involving the validity of the particular regulation, notice,
or revenue procedure being challenged. As described previously, in this
Summary of Comments and Explanation of Revisions and sections I.C.18.,
19., and 20. of the proposed regulations' Explanation of Provisions,
the promulgation of a regulation, notice, or revenue procedure consists
of multiple levels of review at the highest levels within the Treasury
Department and the IRS, and taxpayers are not well-served by
confidential decisions by Appeals on a validity matter that is
applicable to only a single taxpayer. Appeals does not have the
authority to unilaterally contradict the decisions made through the
regulatory or subregulatory process. In addition, there may be other
defenses to APA challenges that the IRS might assert, and therefore the
Tax Court having ruled on an unrelated notice or regulation is not a
reason to provide the carve-out suggested here.
A comment recommended eliminating the unreviewable decision
requirement and allowing Appeals to consider a judicial decision in
weighing the hazards of a case. Similarly, another comment recommended
allowing Appeals to consider hazards pending the appeal of a decision.
The Treasury Department and the IRS do not adopt these recommendations
because they would defeat the purpose of the unreviewable decision rule
in Exception 18, Exception 19, and Exception 20. Until the pending
decision becomes unreviewable by a Federal court, as described in
proposed Sec. 301.7803-2(c)(18), it would not be sufficiently final.
The finality of the judicial decision is important because the judicial
branch is charged with independently interpreting Federal statutes and
a Federal court's decision on the merits may reject the determinations
made by the Treasury Department or the IRS. There must be a final
decision, however, before Appeals can weigh the hazards of litigation
with respect to these specific challenges because a lower court
decision that is not final might be overturned on appeal and the
challenges under Exception 18, Exception 19, and Exception 20 relate to
determinations of general applicability resolved at the highest levels
of the Treasury Department and the IRS. Until a judicial decision is
unreviewable and final, Appeals must respect the decision of the
Secretary and the Commissioner of Internal Revenue (Commissioner). In
that regard, the final regulations clarify that the definition of
unreviewable decision includes decision of any Federal court regardless
of where the taxpayer resides.
12. Challenges Alleging That a Treasury Regulation Is Invalid and
Challenges Alleging That a Notice or Revenue Procedure Is Invalid:
Exception 19 and Exception 20
Exception 19 provides that Appeals consideration is not available
for any issue based on a taxpayer's argument that a Treasury regulation
is invalid unless there is an unreviewable decision from a Federal
court invalidating the regulation as a whole or the provision in the
regulation that the taxpayer is challenging. Exception 20 provides that
Appeals consideration is not available for any issue based on a
taxpayer's argument that a notice or revenue procedure published in the
Internal Revenue Bulletin is procedurally invalid unless there is an
unreviewable decision from a Federal court holding it to be invalid. As
proposed, Exception 19 and Exception 20 do not preclude Appeals from
considering a Federal tax controversy based on arguments other than the
validity of a regulation, or procedural validity of a notice or revenue
procedure, such as whether the regulation, notice, or revenue procedure
applies to the taxpayer's facts and circumstances.
The Treasury Department and the IRS received several comments on
Exception 19 and Exception 20. In response to these comments, the
Treasury Department and the IRS have modified the language in proposed
Sec. 301.7803-2(c)(19) and (20), as explained below.
A comment agreed with the rationales described in the proposed
regulations for Exception 19 and Exception 20 that Appeals should not
consider these types of challenges. Another comment made the same
objection it made to Exception 18 that denial of Appeals consideration
in Exception 19 and Exception 20 strips taxpayers of a statutory right
to Appeals. Another comment made the same objection it made to
Exception 18 that
[[Page 3654]]
Exception 19 and Exception 20 improperly restrict access to Appeals and
forces taxpayers to sacrifice legal arguments.
Like Exception 18, Exception 19 and Exception 20 are consistent
with the TFA, which does not provide an absolute statutory right to an
administrative appeal, and permits the Treasury Department and the IRS
to provide exceptions. The rationales for Exception 19 and Exception 20
are similar to the rationales for Exception 18, as discussed
previously. See sections I.C.18., 19., and 20. of the proposed
regulations' Explanation of Provisions. Questions regarding the
validity of a regulation, or the procedural validity of a notice or
revenue procedure, involve determinations of general applicability
resolved at the highest levels of the Treasury Department and the IRS
and must be followed by IRS employees, including AOs. Such validity
decisions also should be communicated and applied consistently to all
taxpayers. It therefore would be inappropriate for Appeals to act in
contravention with those institutional decisions in a specific case
involving one taxpayer and consider the validity issues in the absence
of an unreviewable court decision.
A comment stated Exception 19 and Exception 20 are not narrowly
tailored because they encompass any challenge to almost any level of
published guidance. The Treasury Department and the IRS do not adopt
this comment. Exception 19 and Exception 20 are narrowly tailored and
expressly allow Appeals to consider arguments other than the validity
of a regulation, or procedural validity of a notice or revenue
procedure, such as whether the regulation, notice, or revenue procedure
applies to the taxpayer's facts and circumstances. They do not exclude
the validity challenges from Appeals consideration totally but merely
provide Appeals will not be the first forum to hear these challenges
because it is not the appropriate forum for such challenges without an
unreviewable decision of a court. Further, Exception 20 is even
narrower in scope, applying only to a taxpayer's argument that a notice
or revenue procedure published in the Internal Revenue Bulletin is
procedurally invalid.
A comment asserted that Exception 19 and Exception 20 did not exist
prior to the TFA and taxpayers historically could at least raise
validity challenges to published IRS guidance and have those challenges
be considered by Appeals; therefore Exception 19 and Exception 20
appear contrary to the TFA's intent to expand taxpayer access to
Appeals. As explained previously, Exception 19 and Exception 20 are
consistent with the intent of the TFA to grant the Treasury Department
and the IRS the authority to make exceptions, which includes the
authority to provide new exceptions that did not exist before the
enactment of the TFA.
A comment asserted that Exception 19 and Exception 20 are contrary
to Appeals' mission or function because they will force the parties
into litigation instead of providing an opportunity for Appeals to
resolve the case. Another comment similarly stated that Exception 20
tries to cast the validity determination as a high-level policy
decision, while Appeals' function is to hear and settle cases and in
doing so it is not making policy.
The Treasury Department and the IRS do not adopt these comments.
Unlike most Appeals analyses that weigh litigation hazards in applying
the law to specific facts, Appeals' potential consideration of the
validity of a regulation or the procedural validity of a notice or
revenue procedure does not necessarily involve taxpayer-specific facts.
As explained in section I.C.20. of the proposed regulations'
Explanation of Provisions, the issue of whether an IRS notice or
revenue procedure is procedurally valid involves a determination
regarding whether specific IRS subregulatory guidance complied with
administrative law requirements, such as notice and comment under 5
U.S.C. 553. Whether a notice or revenue procedure was properly issued
involves facts solely related to the Treasury Department and the IRS
and is unlike the application of the tax law to a taxpayer's specific
facts. Furthermore, the procedurally validity of a notice or revenue
procedure is a determination of general applicability resolved at the
highest levels of the Treasury Department and the IRS and such a
determination would not be appropriate for Appeals to consider in a
specific case involving one taxpayer.
The latter comment regarding Exception 20 did not address the other
rationale in support of Exception 20, namely, that the issue of whether
a notice or revenue procedure failed to comply with administrative law
requirements should be communicated and applied consistently. As
explained in the proposed regulations, an unreviewable decision of a
Federal court is the appropriate means of accomplishing this objective
because a settlement before Appeals is specific to a taxpayer and
cannot be made available to other taxpayers. An unreviewable decision
makes information accessible to all taxpayers and the IRS regarding
whether a notice or revenue procedure was prescribed in accordance with
applicable Federal law. A determination by the judicial branch on the
merits of the validity challenge may reject the determinations made by
the Treasury Department or the IRS with regard to the validity of a
regulation or the procedural validity of a notice or revenue procedure,
thereby providing a basis for Appeals to consider those issues. If no
unreviewable decision has been issued on the validity challenge,
Appeals would not be weighing hazards with respect to that particular
guidance of general applicability because it has not been successfully
challenged in court yet. Instead, absent an unreviewable decision,
Appeals would be contravening the decision made at the highest levels
of the Treasury Department and the IRS.
Four comments related to Appeals' competency to consider validity
challenges to a regulation, notice, or revenue procedure. A comment
alleged Appeals has historically analyzed legal arguments concerning
statutes, tax regulations, and IRS procedures. A similar comment
asserted that under Exception 19 and Exception 20 Appeals is unable to
assess the hazards of litigation in a way that a Chief Counsel trial
attorney is not restricted and that specialists within Appeals are
competent to consider these arguments when evaluating other hazards of
litigation in the case. A comment stated that AOs have the training and
qualifications to consider all hazards of litigation, including
challenges to the validity of regulations, notices, or revenue
procedures, or if they lack such training and qualifications, the IRS
should provide them instead of preventing Appeals from considering
these issues. Another comment asserted Appeals is familiar with
considering all arguments made by a taxpayer regarding the
applicability of regulations, notices, and revenue procedures, and it
should be able to consider in docketed cases credible arguments about
hazards involving validity challenges to a regulation, notice, or
revenue procedure because the APA and ordinary judicial methods for
review of legislative rules apply to tax cases.
The Treasury Department and the IRS do not adopt these comments.
None of these exceptions relate to Appeals' training, skills, or
competency. Appeals' competency does not pertain to the rationales of
Exception 19 and Exception 20 to prevent a decision for one taxpayer
regarding guidance of general applicability, which has been approved at
the highest levels within
[[Page 3655]]
the Treasury Department and the IRS. Also, like Appeals employees,
Chief Counsel attorneys handling docketed cases in Tax Court must
follow regulations, notices, and revenue procedures. See Chief Counsel
Directives Manual (CCDM) or IRM 32.1.1.2.5(1) (08-02-2018) (relating to
Treasury decisions); CCDM/IRM 32.2.2.10 (08-11-2004) (relating to force
and effect of specified publications). Further, Appeals applying the
APA and ordinary judicial methods to invalidate guidance would lack
consistency because Appeals' action, unlike an unreviewable decision,
is not public and is applicable to only that taxpayer challenging the
guidance. A final court decision is applicable to, and accessible by,
all taxpayers and the IRS, which promotes consistency. Furthermore, a
final, unreviewable court decision ensures that Appeals does not act in
contravention of a decision made at the highest levels of the Treasury
Department and the IRS. In the absence of an unreviewable decision,
Appeals would not have a court decision with respect to a particular
document to weigh or evaluate any hazards.
Two comments recommended that if the Justice Department has
conceded that an unrelated notice was invalid on the same basis as in
the holding by the United States Court of Appeals for the Sixth Circuit
(Sixth Circuit) in Mann Construction Inc. v. United States, 27 F.4th
1138 (6th Cir. 2022) (holding a different notice invalid because it was
required to follow APA notice and comment procedures and failed to do
so), Appeals should consider the hazards of litigation on a notice
validity issue in a taxpayer's case involving a different notice.
Similarly, another comment recommended allowing Appeals to consider the
hazards of litigation on a regulation validity issue in a taxpayer's
case if the Justice Department has settled or conceded that an
unrelated regulation was invalid.
The Treasury Department and the IRS do not adopt these comments for
the same reasons they disagree with the similar comments regarding
analogous court decisions. See section I.D.11.a. of this Summary of
Comments and Explanation of Revisions. If adopted, these
recommendations would defeat the purposes of Exception 19 and Exception
20. Moreover, there are numerous factors that go into determining
whether a case should be settled, and a recommendation for a settlement
in one case may not dictate the same result in another case. There may
be other defenses to APA challenges that the IRS might assert and
therefore the Justice Department having settled an issue based on
hazards of litigation involving an unrelated notice or regulation is
not a reason to provide the suggested carve-out. Regarding the
transaction in the case cited by the comment, for cases within the
Sixth Circuit, the Treasury Department and the IRS have represented in
court that APA matters conceded by the Government in the Mann case
would not be subject to examination by the IRS in other listed
transaction cases and therefore such cases would not come up for
Appeals review.
A comment agreed with the policy expressed in Exception 19, but
with a caveat that ``invalidity'' should be further defined.
Specifically, the comment asked whether a change in the law would make
regulations invalid or would fit within the provision in proposed Sec.
301.7803-2(c)(19) that states Exception 19 would not prevent a taxpayer
from arguing that a regulation does not apply to their position.
Generally, a regulation would still be valid for prior tax years before
any repeal of or amendment to the statute upon which the regulation is
based, and a change in the statute would have precedent over the
regulation for tax years after the change. These regulations do not
prohibit a taxpayer from arguing whether the statute applies to the
taxpayer's own facts and circumstances. In that case, Appeals is
considering the applicability of the statute to the taxpayer for the
relevant period. In response to this comment, the Treasury Department
and the IRS have revised the language in Exception 19 and Exception 20
by adding a reference to the statute to clarify that Appeals may
consider arguments based on whether a statute applies to the taxpayer's
facts and circumstances. See Sec. 301.7803-2(c)(19) and (20). Also,
for the sake of clarity, Exception 19 is revised to define the term
invalid. See Sec. 301.7803-2(c)(19).
The same comment asked that if regulations overlap in a factual
situation whether reconciliation of such a situation would involve a
determination that a regulation is invalid. As proposed, Exception 19
would still allow Appeals to consider whether the regulations apply to
a taxpayer's facts and circumstances, but to the extent the taxpayer
argues that the regulations are invalid, Exception 19 would preclude
Appeals from considering that validity issue in the absence of an
unreviewable decision. The concern raised in this comment appeared to
relate to ensuring consistency. Appeals is not the only administrative
function within the IRS; there are other offices and other ways within
the IRS to ensure such consistency short of consideration by Appeals or
litigating the issue.
A comment on Exception 20 expressed some confusion as to the
meaning of the term procedurally invalid and stated the comment had
little concern regarding Exception 20 if its intent is only that
Appeals would not be allowed to consider whether a notice or revenue
procedure was properly adopted or promulgated. As explained in section
I.C.20. of the proposed regulations' Explanation of Provisions, the
term procedurally invalid in proposed Sec. 301.7803-2(c)(20) was
intended to mean challenges to procedural determinations regarding
notices and revenue procedures, including determinations regarding
compliance with administrative law requirements. This comment
recommended defining the term procedurally invalid for the sake of
clarity. The Treasury Department and the IRS adopt this recommendation
and have defined the term to mean ``any determination regarding whether
a notice or revenue procedure failed to comply with administrative law
requirements, such as notice and comment under 5 U.S.C. 553.'' See
Sec. 301.7803-2(c)(20).
The same comment noted that the rationale behind Exception 19 is
generally sound but opined that that rationale does not support
Exception 20 because a notice or revenue procedure does not undergo the
public notice and comment process under the APA, lacks the same
approval process, and does not carry the same weight or level of
authority of a regulation. The Treasury Department and the IRS do not
adopt this comment. The same rationale for Exception 19 applies to
Exception 20 because whether a notice or revenue procedure is
procedurally valid is a determination of general applicability resolved
at the highest levels of the Treasury Department and the IRS. As
discussed previously, such a determination would not be appropriate for
Appeals to consider in a specific case involving one taxpayer.
A comment asserted that Appeals has historically heard arguments
about the application of Treasury regulations and that the meaning of a
regulation, notice, or revenue procedure is not exclusively determined
by senior officials at the Treasury Department and the IRS. This
comment appears to misperceive the scope of Exception 19 and Exception
20. These exceptions do not preclude Appeals from considering a Federal
tax controversy based on arguments other than the validity of a
Treasury regulation or procedural validity of a notice or revenue
procedure. As stated
[[Page 3656]]
in the text of Exception 19 and Exception 20, such arguments include
whether the Treasury regulation, notice, or revenue procedure applies
to the taxpayer's facts and circumstances. Appeals may resolve the
Federal tax controversy by weighing the likelihood a court would agree
with the position of the taxpayer or the Government. As for the
comment's suggestion that guidance is not exclusively determined by
senior officials at the Treasury Department and the IRS, the final
regulations do not adopt this comment. While employees of all levels of
the Treasury Department and the IRS have a role in promulgating a
regulation, notice, or revenue procedure, such guidance is reviewed and
approved by senior officials in the Treasury Department and the IRS,
including the Assistant Secretary of the Treasury (Tax Policy) and the
Deputy Commissioner of the IRS as appropriate. See generally IRM 32.1.1
(November 13, 2019).
Two comments related to consistency by Appeals. A comment alleged
the proposed regulations did not explain why consistency cannot be
accomplished if Appeals reviews the validity issues. The same comment
argued Exception 19 and Exception 20 will result in bad policy because
they will make the Appeals process more inconsistent, random, and less
responsive to legal developments, causing additional costs and delay
for taxpayers who otherwise could access Appeals while invalidity
arguments work through the court system. Another comment stated that
Appeals can reach a coordinated position on validity challenges and
forcing taxpayers to litigate will decrease uniformity of tax
administration because the IRS can settle or concede issues to avoid
adverse opinions and because years may pass before there is an
unreviewable judicial decision deciding the validity challenge.
Sections I.C.18., 19., and 20. of the proposed regulations'
Explanation of Provisions, provides the Treasury Department and the
IRS' position on consistency. Any determinations with respect to
constitutional challenges to a statute, the validity of a regulation,
or procedural validity of a revenue procedure or notice should be
communicated and applied consistently to all taxpayers. An unreviewable
decision of a Federal court is the appropriate means of making
information accessible to taxpayers, and the Treasury Department and
the IRS do not agree that Exception 19 and Exception 20 will result in
bad policy. A court's unreviewable decision on the validity of a
regulation, or procedural validity of a revenue procedure or notice
ensures the judicial branch decides questions of law. The Treasury
Department and the IRS recognize the deliberateness of the judicial
process, but absent that process, Appeals lacks the authority to take
actions contrary to the reasoned decisions of the Secretary and the
Commissioner. An unreviewable decision is publicly available, and
generally applicable, to all taxpayers and the IRS, which promotes
consistency and uniformity. Having Appeals weigh hazards of litigation
based on an unreviewable decision that is publicly available and
generally applicable to all taxpayers is sounder policy than a
confidential decision by Appeals on a matter that is applicable to only
a single taxpayer. The question of whether Appeals can reach a
coordinated position on validity challenges is irrelevant because under
these exceptions the issues would not be considered by Appeals in the
first place in the absence of an unreviewable decision.
A comment opined that Appeals should have the right to determine
all hazards of litigation, including challenges to all levels of IRS
published guidance on an unlimited basis and including rationale from
all court opinions because this approach is consistent with the
Treasury Department's 2019 Policy Statement on the Tax Regulatory
Process (Policy Statement). Policy Statement on the Tax Regulatory
Process (March 5, 2019), <a href="https://home.treasury.gov/policy-issues/tax-policy/tax-regulatory-process">https://home.treasury.gov/policy-issues/tax-policy/tax-regulatory-process</a>. The Treasury Department and the IRS do
not adopt this comment. An unreviewable decision is necessary because
it is publicly available to the IRS and taxpayers and generally
applicable, which promotes consistency and uniformity. The Policy
Statement is unrelated to Exception 19 and Exception 20 because it
concerns the tax regulatory process and does not address Appeals or its
function. The Policy Statement also explicitly states it does not
create any right or benefit, either substantive or procedural.
A comment alleged that Exception 19 and Exception 20 undercut the
key focus area for Appeals in fiscal year 2023 to improve taxpayer
experience. To the contrary, Exception 19 and Exception 20 are
consistent with the TFA as it relates to taxpayer experience. Section
1101 of the TFA requires the IRS to develop a comprehensive strategy
for customer service and submit the plan to Congress. The strategy will
include best practices of customer service provided in the private
sector, including, online services, telephone call back, and training
of employees, and the strategy must incorporate best practices of
businesses to meet reasonable customer expectations. The strategic
plan, updated guidance, and training materials must also be available
to the public. The taxpayer experience requirement does not address
whether a taxpayer can have the taxpayer's case or issue considered by
Appeals. The strategic plan addresses topics like communications with
the IRS and taxpayer information services, such as expanded digital
services, guides to taxpayer resources and IRS communication channels,
and outreach and education. See Publication 5426, Taxpayer First Act
Report to Congress (January 2021).
A comment alleged that Appeals' consideration of all of a
taxpayer's arguments, including validity challenges, does not harm the
Government but instead provides the taxpayer and the Government the
opportunity to resolve the issue without litigation. Appeals'
consideration of validity challenges would harm the Government because
in the absence of an unreviewable decision, such consideration would
undermine the decisions based on the regulatory and subregulatory
guidance process as described in sections I.C.19. and I.C.20. of the
proposed regulations' Explanation of Provisions, and result in a
decision by Appeals for one taxpayer on an issue that is not related to
the taxpayer's specific facts and that would not be publicly available
to other taxpayers and the IRS.
Another comment recommended that Appeals should consider APA
challenges as part of its weighing of hazards of litigation. The
comment argued that Treasury regulations are not necessarily in
compliance with the APA because they go through an extensive review
process involving numerous offices within the Treasury Department and
the IRS. The comment alleged that challenges to a regulation's validity
is taxpayer specific because any controversy before Appeals will
involve the IRS enforcing an agency rule against a taxpayer based on
that taxpayer's facts. Finally, the comment also suggested that the
exceptions would prove unworkable because final, unreviewable decisions
may be limited to one district court or circuit.
The Treasury Department and the IRS do not adopt this comment. As
explained previously in this section and section I.D.12. of this
Summary of Comments and Explanation of Revisions, the promulgation of a
regulation, or publication of a notice or revenue procedure goes
through multiple levels of review within the
[[Page 3657]]
Treasury Department and the IRS. An individual AO does not have the
authority to unilaterally contradict the decisions made through the
regulatory or subregulatory process. Furthermore, as explained above
and in section I.C.20. of the proposed regulations' Explanation of
Provisions, the validity of a regulation or the procedural validity of
a notice of revenue procedure does not involve taxpayer-specific facts.
The validity of a regulation or the procedurally validity of a notice
or revenue procedure is a determination of general applicability and
does not involve the application of tax law to a specific set of facts
and circumstances. Lastly, as explained in section I.D.11. of this
Summary of Comments and Explanation of Revisions, the Treasury
Department and the IRS have clarified the final regulations to specify
that an unreviewable decision means ``a decision of any Federal court
regardless of where the taxpayer resides.'' See Sec. 301.7803-
2(c)(18).
13. Cases or Issues Designated for Litigation or Withheld From Appeals:
Exception 21
Four comments were received on Exception 21, which provides that
Appeals consideration is not available for any case or issue designated
for litigation, or withheld from Appeals consideration in a Tax Court
case, in accordance with guidance regarding designating or withholding
a case or issue. As proposed, designation for litigation means that the
Federal tax controversy, comprising an issue or issues in a case, will
not be resolved without a full concession by the taxpayer or by
decision of the court.
A comment proposed that Chief Counsel attorneys should have the
flexibility to refer all docketed cases to Appeals for resolution. This
comment is not adopted. To the extent this comment invites a Chief
Counsel attorney to disregard the Office of Chief Counsel's decision to
designate or withhold a case, trial attorneys do not operate
independently of managerial direction. In addition, such flexibility
would defeat the exception's purpose. As explained in section I.C.21.
of the proposed regulations' Explanation of Provisions, cases are
designated for litigation or withheld in the interest of sound tax
administration to establish judicial precedent, promote consistency,
conserve resources, or reduce litigation costs for the taxpayers and
the IRS. Moreover, section 3.01 of Rev. Proc. 2016-22 provides that
docketed cases are not referred to Appeals if Appeals issued the notice
of deficiency or made the determination that is the basis of the Tax
Court's jurisdiction. This exclusion also is set forth in Exception 22,
see Sec. 301.7803-2(c)(22), and prevents duplicative review by
Appeals.
Two comments stated that Exception 21 provides too much deference
to Chief Counsel and recommended that the exception delete the
reference to withheld cases. The Treasury Department and the IRS do not
adopt these comments. The withholding of cases or issues from Appeals
has been, and will continue to be, limited and rare.\1\ The
determination to withhold a case or issue from Appeals requires a high-
level review, with the decision ultimately resting with the Division
Counsel or a higher-level Chief Counsel official. See section 3.03 of
Rev. Proc. 2016-22. When Congress enacted the TFA, it was aware of the
historic exceptions to Appeals consideration, including Chief Counsel's
authority to designate a case for litigation or withhold a case from
Appeals consideration on the basis of a referral not being in the
interest of sound tax administration under Rev. Proc. 2016-22. Congress
recognized that the Treasury Department and the IRS retain their
historical discretion to determine whether the resolution of particular
types of disputes is appropriate for Appeals, and the discretion of the
IRS to determine whether a particular Federal tax controversy is
appropriate for the Appeals resolution process. As proposed, Exception
21 is narrowly tailored, and it does not encroach on Appeals'
independence for the reasons discussed previously in section I.A. of
this Summary of Comments and Explanation of Revisions.
---------------------------------------------------------------------------
\1\ Since the TFA was enacted on July 1, 2019, the IRS has
denied three requests for referral to Appeals, as described in
section 7803(e)(5)(A), on the basis of sound tax administration.
Because section 7803(e)(5)(A) is limited to denials of a request for
referral to Appeals by those taxpayers in receipt of a notice of
deficiency authorized under section 6212, fewer than 130 cases not
subject to section 7803(e)(5)(A) were otherwise withheld from
Appeals review during that period by Division Counsel under section
3.03 of Rev. Proc. 2016-22. For example, these cases include cases
involving partnerships in which a final partnership administrative
adjustment was issued instead of a notice of deficiency.
---------------------------------------------------------------------------
Two comments that objected to Exception 19 and Exception 20, in the
alternative, recommended the regulations provide notice and protest
rules for any taxpayer with a case or issue withheld or designated for
litigation. One of the comments recommended at least requiring meetings
with Chief Counsel executives to explain the decision. Similarly,
another comment recommended that low-income taxpayers should receive a
written explanation and given an opportunity to object.
The Treasury Department and the IRS do not adopt these comments. If
Chief Counsel determines that a docketed case or issue will be withheld
from Appeals, Chief Counsel will notify the taxpayer that the case will
not be referred to Appeals. See section 3.03 of Rev. Proc. 2016-22.
Taxpayer cases that are withheld from Appeals consideration under
Exception 21 and meet the requirements of proposed Sec. 301.7803-3
already would receive a written notice detailing the facts of the case,
the reason for the denial, and the opportunity to protest the denial
pursuant to section 7803(e)(5). As discussed in section 2 of this
Summary of Comments and Explanation of Revisions, section 7803(e)(5)
only requires notice and denial protest rights be given to a taxpayer
in receipt of a notice of deficiency. Consistent with the statute,
these final regulations do not extend notice and denial protest rights
to taxpayers who did not receive a notice of deficiency. With respect
to situations involving low-income taxpayers, as described by the
comment, such taxpayers would similarly receive an explanation and
opportunity to protest under proposed Sec. 301.7803-3 after they
receive a notice of deficiency.
Another comment alleged that the designation of cases or issues for
litigation is not rare and prevents sound tax administration in
thousands of cases because Appeals could arrive at the correct amount
of tax or a deduction and the IRS's approach of settling a designated
case only if taxpayers concede all issues, including all penalties, has
created a backlog in the IRS and the court. The comment is factually
incorrect because designation of a case or issue is rare. The IRS has
designated fewer than 10 cases since 2013.
A comment recommended the IRS make public a list of all designated
cases docketed in Tax Court and all designated issues and publish the
total number of taxpayers affected by cases or issues being designated
for litigation. The Treasury Department and the IRS do not adopt this
comment. The comment raises potential disclosure concerns under section
6103 of the Code relating to the prohibition of the disclosure of
return information. Even if such disclosure was not prohibited by law,
it is beyond the scope of these regulations.
[[Page 3658]]
14. Appeals Consideration Is a Prerequisite to Jurisdiction of the Tax
Court: Exception 23
One comment was received on Exception 23. Exception 23 provides
that Appeals consideration is not available for a case in which timely
consideration by Appeals must be requested before a petition is filed
in the Tax Court because exhaustion of administrative review, including
Appeals consideration, is a prerequisite for the Tax Court's
jurisdiction, and the taxpayer failed to timely request Appeals
consideration.
The comment opined the heading for this exception in the proposed
regulations' preamble (that is, Appeals Consideration is a Prerequisite
to the Jurisdiction of Tax Court) did not mention whether there could
be exceptions to the requirement to exhaust administrative remedies.
The comment recommended adding language to the regulation's text to
explicitly indicate that Exception 23 does not apply when there is an
exception to the requirement to exhaust administrative remedies as
provided in a statute or other guidance. The Treasury Department and
the IRS do not adopt this recommendation. The text of the regulation
adequately covers the comment's point, as the text makes clear that
this exception applies only when timely Appeals consideration itself is
a prerequisite to the Tax Court's jurisdiction.
E. Procedural and Timing Requirements Are Followed: Proposed Sec.
301.7803-2(e)
One comment was received on proposed Sec. 301.7803-2(e), which
provides the procedural and timing requirements that a taxpayer must
meet before Appeals may consider the taxpayer's Federal tax
controversy. Specifically, proposed Sec. 301.7803-2(e) provides that a
request for Appeals consideration must be submitted in the time and
manner prescribed in applicable forms, instructions, or other
administrative guidance and that all procedural requirements must be
complied with for Appeals to consider a Federal tax controversy.
The comment recommended that the final regulations explicitly
direct the IRS to list specific requirements that the IRS must meet for
accessibility, to explain the processes in a way that is easy to
understand for the unrepresented taxpayer and feasible for all
taxpayers, including low-income taxpayers who may face financial and
other barriers to following traditional mailing processes. The comment
suggested including notices with appeal rights delivered by mail and to
a taxpayer's online IRS account if they have one; deadlines to file an
appeal should be clearly and accurately stated in plain language on the
first page of a notice that has an appeal right; the IRS should have an
easy-to-understand fill-in form that contains all required elements to
request an appeal, and the form should be available for every level of
appeal; each notice from the IRS that carries an appeal right should
enclose a copy of the simple form along with an envelope and
instructions for certified mailing to prove the mailing date; and each
notice from the IRS that carries an appeal right should also include
both a simple URL link and QR code link to the online simplified form,
the form should be easily fillable on a computer or a smartphone and be
available in multiple languages, and the taxpayer should be able to
submit this form online to meet the deadline for the Appeals request.
The Treasury Department and the IRS do not adopt this comment's
recommendations because they are outside the scope of these final
regulations. The comment is better suited to be addressed in the
specific correspondence sent from the IRS to taxpayers. Promoting
taxpayer communication, understanding, and efficiency, including in
accessing Appeals, are important topics that the IRS will continue to
look at as it improves and develops its systems and procedures. In that
regard, the IRS will carefully consider the suggestions in this comment
as part of that process.
F. One Opportunity for Consideration by Appeals: Proposed Sec.
301.7803-2(f)
One comment was received with a suggestion relating to the general
rule of one opportunity for Appeals consideration in proposed Sec.
301.7803-2(f)(1). Another comment was received on the exceptions to
that general rule. Those comments are addressed in this section I.F. of
the Summary of Comments and Explanation of Revisions.
1. In General. Proposed Sec. 301.7803-2(f)(1)
Proposed Sec. 301.7803-2(f)(1) provides that if a Federal tax
controversy is eligible for consideration by Appeals and the procedural
and timing requirements are followed, a taxpayer generally has one
opportunity for Appeals to consider such matter or issue in the same
case for the same period or in any type of future case for the same
period. The comment on proposed Sec. 301.7803-2(f)(1) recommended that
the final regulations should explicitly include the situation in which
the taxpayer and the Government have run out of time for Appeals
consideration prior to the expiration of the statute of limitations and
a notice of deficiency being issued, thereby confirming that a
taxpayer's case can be heard by Appeals either before or after a case
is docketed (although not both).
The Treasury Department and the IRS agree that if there is
insufficient time remaining on the limitations period for Appeals
consideration, a taxpayer in receipt of a notice of deficiency would
have the opportunity to have Appeals consider the taxpayer's case after
the taxpayer has filed a petition with the Tax Court and the case is
docketed, assuming the issue being considered by Appeals is not subject
to an exception described in the final regulations. An example has been
added to Sec. 301.7803-2(e) to illustrate this point, which is a more
appropriate place in the regulations for this addition.
2. Exceptions. Proposed Sec. 301.7803-2(f)(1) and (2)
There are several exceptions to the general rule in proposed Sec.
301.7803-2(f)(1). Proposed Sec. 301.7803-2(f)(1) provides an exception
to the proposed general rule in a case in which the Tax Court remands a
collection due process (CDP) case for reconsideration. Proposed Sec.
301.7803-2(f)(2) provides an exception for a taxpayer that participated
in an Appeals early consideration program but did not reach an
agreement with Appeals. Proposed Sec. 301.7803-2(f)(2) also provides
an exception to the general rule in proposed Sec. 301.7803-2(f)(1) for
taxpayers who provide new information to the IRS and who meet the
conditions and requirements for audit reconsideration or for
reconsideration of liability issues previously considered by Appeals.
Appeals may consider the new information.
A comment recommended clarifying in proposed Sec. 301.7803-2(f)(2)
that a new development in the law is ``new information'' that would
allow Appeals reconsideration of the same matter. The Treasury
Department and the IRS recognize that the original phrasing in the
paragraph was unclear. For purposes of these final regulations, new
information is intended to mean additional facts that the taxpayer did
not provide during the original examination. It is not intended to mean
a new development in the law. Additional language has been added to
Sec. 301.7803-2(f)(2) in the final regulations to clarify the intended
meaning.
[[Page 3659]]
G. Special Rules. Proposed Sec. 301.7803-2(g)
A comment suggested that Chief Counsel delaying Appeals review of a
case was tantamount to a denial of Appeals review. The Treasury
Department and the IRS disagree. As explained in section I.H.2. of the
proposed regulations' Explanation of Provisions regarding the special
rule in proposed Sec. 301.7803-2(g), Chief Counsel may delay
forwarding a docketed case to Appeals when Chief Counsel anticipates
filing a dispositive motion such as a motion for summary or partial
summary judgment, or a motion to dismiss for lack of jurisdiction, in
which case Chief Counsel will retain jurisdiction over the case until
the Tax Court rules on the motion. This flexibility to respond to the
needs of specific Federal tax controversies promotes the efficient
disposition of a taxpayer's case, including developing or narrowing the
issues in dispute. The taxpayer will continue to be eligible for
consideration by Appeals if the litigation continues and all other
requirements in Sec. 301.7803-2 are met. Accordingly, these final
regulations do not adopt this comment.
H. Section 9100 Relief and Change of Accounting Method
The list of exclusions in proposed Sec. 301.7803-2(c) does not
include certain exclusions from Appeals consideration currently
provided in the IRM relating to requests for 9100 relief and CAMs. In
the proposed regulations, the Treasury Department and the IRS requested
comments on whether these items should be included in the list of
exclusions. Specifically, comments were requested on whether the binary
nature of decisions by an Associate Office regarding 9100 relief or CAM
requests makes these decisions unsuitable for Appeals review; whether a
different review standard should apply if Appeals considers the
decisions; and what impact would Appeals review of the decisions have
on later years that are not before Appeals.
In response, the Treasury Department and the IRS received four
comments. One comment in support of adopting an Appeals exception
recommended that Exception 17 relating to letter rulings issued by an
Associate Office be finalized as proposed so that the regulations
ensure, consistent with the historical IRS position, that Appeals not
be permitted to consider an Associate Office decision concerning
whether to issue 9100 relief or CAM letter rulings. See section I.D.10.
of this Summary of Comments and Explanation of Revisions regarding
Exception 17. According to this comment, letter ruling decisions
regarding 9100 relief and CAMs should not be considered by Appeals for
the reasons described in the proposed regulations that apply to other
types of letter rulings. In particular, a letter ruling interprets
internal revenue laws and applies them to the taxpayer's specific set
of facts. A voluntary request for a letter ruling is not an
administrative determination that is a part of the IRS's compliance
function. A taxpayer receiving a letter ruling is not obligated to file
a return consistent with that letter ruling. Generally, the program is
designed instead to provide taxpayers with information regarding
whether the IRS will accept a position to be taken on the taxpayer's
return. For letter rulings responding to a taxpayer's request for a
CAM, the letter ruling grants or denies consent under section 446(e) of
the Code. The Treasury Department and the IRS adopt this recommendation
for those reasons and added language to clarify this point that
Exception 17 includes Associate Office decisions on 9100 relief
requests and CAM requests. See Sec. 301.7803-2(c)(17). While Appeals
cannot consider an Associate Office's decision on whether to issue a
letter ruling or the content of a letter ruling, Exception 17
recognizes that Appeals may consider the subject of the letter ruling
if all other requirements in Sec. 301.7803-2 are met. For example, if
an Associate Office issues an adverse letter ruling to a taxpayer, the
taxpayer cannot immediately appeal the issuance of the adverse letter
ruling. If the taxpayer later files a return taking a position that is
contrary to the letter ruling and that position is examined by the IRS,
Appeals can consider that Federal tax controversy if all other
requirements in Sec. 301.7803-2 are met.
The comment also recommended a separate exclusion for Appeals
consideration of decisions by an Associate Office regarding 9100 relief
or CAM requests. The Treasury Department and the IRS do not adopt this
recommendation. As previously described, if a taxpayer files a tax
return contrary to the Associate Office's decision and a Federal tax
controversy arises that involves the subject of the adverse decision,
Appeals could consider the subject of that Associate Office's decision
in the dispute if all other requirements in Sec. 301.7803-2 are met.
Another comment suggested the final regulations should empower
Appeals to consider an Associate Office's decisions regarding 9100
relief or CAM requests because Appeals consideration would protect
taxpayer rights. Two comments suggested the final regulations should
allow Appeals to consider such cases because judicial review is costly
and time consuming and Appeals consideration would reduce litigation.
The Treasury Department and the IRS agree Appeals review as described
in the preceding paragraph is consistent with the function of Appeals
to resolve Federal tax controversies without litigation and is
consistent with the provision that such resolution be generally
available to all taxpayers. A comment suggested the final regulations
should empower Appeals to consider such cases because Appeals
consideration would promote impartial resolution. The Treasury
Department and the IRS disagree with this reasoning because, as
explained previously in this Summary of Comments and Explanation of
Revisions, impartiality presupposes that the matter is being considered
by Appeals in the first place. Once a Federal tax controversy is
referred to Appeals, Appeals will consider the hazards of litigation
while impartially considering the positions of the taxpayer and of the
IRS.
A comment asserted accounting method issues do not have to be
viewed as binary and noted Appeals already reviews adjustments
initiated by the IRS through an examination. According to this comment,
Appeals should review accounting method issues consistently regardless
of whether the originating function was through an IRS examination or
an Associate Office. Similarly, another comment asserted that Appeals
consideration of a CAM letter ruling denial that was issued on the
basis that the requested change would not clearly reflect income or
would otherwise not be in the interest of sound tax administration
would allow Appeals review of the substantive positions in these cases,
similar to Appeals review of the substantive issue in cases arising in
examination or a docketed case, and that foreclosing Appeals
consideration would create inconsistencies and be counterproductive to
tax administration. The Treasury Department and the IRS agree that
Appeals should have the ability to review accounting method issues
arising in an examination, even when the accounting method issue
relates to an Associate Office's denial of a CAM letter ruling request.
Another comment suggested Appeals consideration of an Associate
Office's decisions regarding 9100 relief or CAM requests would promote
consistent application of laws and public confidence in the IRS.
Appeals consideration of an Associate Office's
[[Page 3660]]
decisions regarding 9100 relief or CAM requests would promote public
confidence in the IRS and is consistent with the purpose of the TFA.
A comment asserted the ultimate decision may be binary, in that an
Associate Office either does or does not permit 9100 relief or a CAM.
According to this comment, the binary nature of decisions on these
matters should not automatically exclude them from Appeals review. To
the extent an Associate Office's decision regarding a 9100 relief or
CAM request is viewed as a binary decision, the Treasury Department and
the IRS agree with the comment's general premise that the binary nature
of such decisions would not automatically exclude them from Appeals
review. If a taxpayer files a tax return contrary to the Associate
Office's decision and a Federal tax controversy arises that involves
the subject of the adverse decision, Appeals may consider the subject
of that Associate Office's decision in the dispute if all other
requirements in Sec. 301.7803-2 are met.
The IRM currently provides that Appeals will not partially or fully
concede an issue in a case in which an Associate Office's decision
would be reviewed by a court using an abuse of discretion standard. One
comment urged that if Appeals is permitted to consider a decision by an
Associate Office that denied a 9100 relief or a CAM request, then the
final regulations should apply a different standard of review than the
abuse of discretion standard used for other administrative
determinations. The comment recommended that Appeals should only be
permitted to make concessions if it determines there is a significant
risk that, if litigated, a court would find that the IRS abused its
discretion in issuing an adverse letter ruling. Another comment
observed that a CAM request may be denied by an Associate Office for
many different reasons, including, for example, on the basis of
substantive issues or due to procedural issues when the Associate
Office determines that the taxpayer has not complied with all the
procedural terms and conditions, such as filing requirements and
deadlines. The comment urged the Treasury Department and the IRS to
look through the superficial similarities of these denials to the
underlying legal issues when determining whether Appeals review is
warranted. The Treasury Department and the IRS agree that an Associate
Office may issue a denial letter on a 9100 relief request or CAM
request for a variety of different reasons, which are generally
expressed in the applicable statute, regulations, or other guidance
published in the Internal Revenue Bulletin. A decision to deny such a
request, whether on a procedural or a substantive basis, is based on
all the facts and circumstances. The final regulations do not provide a
standard of review because it is outside the scope of these
regulations, and the Treasury Department and the IRS expect the
existing review standard would be used by Appeals for such cases.
A comment stated Appeals may need to enter into closing agreements
with taxpayers to ensure that future taxable years are consistent with
the request that was denied by the Associate Office, but that closing
agreements would be more difficult for the taxpayer and the Government
to reverse in future years compared to a letter ruling issued by an
Associate Office. These regulations do not alter the authority
delegated to the Associate Offices over 9100 relief or CAM requests or
to restrict Appeals' ability to use its existing settlement authority
to review or settle such cases. See, e.g., Rev. Proc. 2002-18, 2002-1
C.B. 678 (regarding procedures relating to the settling of method
change issues). Likewise, these regulations do not alter the IRS's
authority to review these issues during an examination of a taxpayer's
Federal income tax return.
I. Miscellaneous Recommendations Regarding Proposed Sec. 301.7803-2
A comment expressed concern that the proposed regulations could
make the Appeals review process more confusing and stressful for
taxpayers, including low-income taxpayers, but did not specify how or
why this could happen. The Treasury Department and the IRS disagree
with this comment. The procedural requirements, timing requirements,
and almost all of the exceptions to consideration by Appeals already
exist in previously established guidance regarding Appeals. As in the
past, the proposed exceptions are limited in number and the vast
majority of taxpayers, including low-income taxpayers, would have the
opportunity to have Appeals consider their Federal tax controversies.
The same comment suggested considering the impact of the
regulations on closed cases in Appeals. To the extent this comment is
suggesting these regulations should cover procedures for reopening a
closed case, that topic is beyond the scope of these regulations.
Procedures for reopening closed Appeals cases already exist in other
guidance. See IRM 8.6.1.7 (09-25-2019).
A comment suggested that the proposed regulations overlap with
Sec. 601.106. To the extent that the Treasury Department and the IRS
are not repealing or revising Sec. 601.106, the comment recommended
Treasury explicitly harmonize areas of overlap and consolidate all
Appeals regulations into adjacent sections of the regulations to
prevent ambiguity and controversy. In the alternative, even if no
actual or perceived conflict exists, the comment recommended adding
cross-references in Sec. 301.7803-2 to avoid creating a trap for the
unwary.
The Treasury Department and the IRS do not agree with this comment
and do not adopt these recommendations. The Statement of Procedural
Rules, 26 CFR part 601, are procedural rules governing internal IRS
affairs. Those rules do not concern the substantive resolution of
Federal tax controversies by Appeals.
Two comments recommended additional funding, including funding for
Appeals in order to more effectively and fairly serve taxpayers, and
limit the need for the exceptions in these regulations. The
recommendation addresses operational matters of Appeals and is beyond
the scope of these regulations because it does not address the proposed
regulations or recommend any changes.
One comment addressed the Interim Guidance (IG) Memorandum (Control
Number AP-08-0922-0011) that Appeals issued on September 14, 2022,
relating to validity challenges to regulations and relating to
procedural validity challenges to notices or revenue procedures. This
comment alleged that the IRS has already begun to make the substance of
Exception 19 and Exception 20 effective even though, as proposed in the
proposed regulations, they would not take effect until 30 days after
the publication of a final regulation. The comment recommended that
Appeals pause using these exceptions before the regulations are
finalized.
The Treasury Department and the IRS decline to adopt the comment's
recommendation because it is outside the scope of these regulations.
The IG Memorandum provides interim guidance by Appeals to AOs and does
not have bearing on these final regulations.
II. Notice and Protest of Denial Procedures Following Issuance of a
Notice of Deficiency: Proposed Sec. 301.7803-3
Two comments were received on proposed Sec. 301.7803-3, which
implements the notice and protest procedures of section 7803(e)(5). As
proposed, these procedures apply if any taxpayer requests Appeals
consideration of a matter or issue, the request is denied, and the
taxpayer meets the
[[Page 3661]]
requirements of proposed Sec. 301.7803-3(a)(1) through (5). Proposed
Sec. 301.7803-3(a)(1) adopts the statutory language in section
7803(e)(5)(A), which refers to any taxpayer in receipt of a notice of
deficiency authorized under section 6212 (relating to notice of
deficiency).
The comments recommended that the notice and protest procedures
should not be limited to taxpayers in receipt of a notice of
deficiency. The Treasury Department and the IRS do not adopt this
recommendation because it is contrary to the TFA. Section 7803(e)(5)
does not grant the right to notice and protest a denial to all
taxpayers. That statute requires the provision of such rights when the
taxpayer is in receipt of a notice of deficiency, the taxpayer requests
referral to Appeals, and that request is denied. Thus, a taxpayer would
not be entitled to notice and protest procedures under section
7803(e)(5) and proposed Sec. 301.7803-3 in the absence of a notice of
deficiency.
A comment described the notice and protest procedures in proposed
Sec. 301.7803-3 as not applying when a taxpayer is ineligible for
Appeals consideration because one of the exceptions listed in proposed
Sec. 301.7803-2(c) applies to the taxpayer. This description is
incorrect. As written and intended, proposed Sec. 301.7803-3 does not
except such cases or issues from the notice and protest procedures.
Thus, that one of the exceptions listed in proposed Sec. 301.7803-2(c)
applies to a taxpayer does not prevent these procedures from applying
if the taxpayer otherwise meets the requirements of proposed Sec.
301.7803-3(a)(1) through (5), although it may be a reason why the
request for referral to Appeals was denied. In response to the
comments, the final regulations make clarifying edits to the text of
Sec. 301.7803-3(a).
III. Comments on Topics That Are Outside the Scope of These Regulations
Although the Explanation of Provisions of the proposed regulations
discussed other new sections of the TFA, such as section 7803(e)(6)
relating to Appeals' authority to obtain legal assistance and advice
from Chief Counsel attorneys with regard to cases pending at Appeals,
the proposed regulations stated that sections 7803(e)(4) and 7803(e)(5)
were the primary focus of the guidance provided in the proposed
regulations. Some comments received in response to the proposed
regulations concerned topics and issues that are outside the scope of
these final regulations.
One such comment recommended that these final regulations include
the assurances currently provided in subregulatory guidance regarding
the ex parte rules; limitations on the IRS examination function or
Appeals raising new issues; conference rights; or the longstanding
policies regarding the reopening of mutual concession cases. A comment
was offered on access to administrative files under new section
7803(e)(7). Another comment recommended that the Treasury Department
should adopt the National Taxpayer Advocate's proposal that a taxpayer
has the right to a conference with Appeals that does not include
personnel from Chief Counsel or the IRS examination function unless the
taxpayer specifically consents to the participation of those parties in
the conference, and another comment recommended that neither Appeals
nor any IRS personnel involved in the Appeals conference should offer
``nuisance'' settlement offers of zero or small numbers.
The Treasury Department and the IRS do not adopt these comments
because their topics are outside the scope of sections 7803(e)(4) and
7803(e)(5), which were the primary focus of the proposed regulations.
Section 7803(e)(4) provides for the general availability of Appeals
consideration for taxpayers and section 7803(e)(5) provides for the
limitation on designation of cases as not eligible for referral to
Appeals. These comments do not address those areas and are already
contained in other existing guidance. The IRS will consider and
evaluate the comments for inclusion in the IRM or other guidance, as
appropriate.
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Regulatory Flexibility Act
In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.) it is hereby certified that these regulations will not have a
significant economic impact on a substantial number of small entities.
These regulations affect any person who would like to have a
Federal tax controversy considered by Appeals, including any small
entity. Because any small entity could potentially request
consideration by Appeals, these regulations are expected to affect a
substantial number of small entities. However, the IRS has determined
that the economic impact on small entities affected by these
regulations would not be significant.
The regulations provide procedural and timing requirements for
consideration by Appeals. The regulations also establish the general
availability of consideration by Appeals and exceptions to that
consideration. The procedural requirements, timing requirements, and
the vast majority of the exceptions to eligibility for consideration by
Appeals already exist in previously established guidance regarding
Appeals. The regulations also provide rules regarding certain
circumstances in which a written explanation will be provided regarding
why Appeals consideration was not provided. None of the regulations
affect entities' substantive tax liability nor do they affect the
process that Appeals follows when it considers an eligible Federal tax
controversy. Any significant economic impact on small entities will
result from the application of the substantive tax provisions and will
not be a result of these final regulations. Accordingly, the Secretary
hereby certifies that these regulations will not have a significant
economic impact on a substantial number of small entities.
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking was submitted to the Chief Counsel for the Office of
Advocacy of the Small Business Administration for comment on its impact
on small business, and no comments were received.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Indian tribal government, in the aggregate, or by the
private sector, of $100 million (updated annually for inflation). These
final regulations do not include any Federal mandate that may result in
expenditures by State, local, or Indian tribal governments, or by the
private sector in excess of that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and
[[Page 3662]]
local governments, and is not required by statute, or preempts State
law, unless the agency meets the consultation and funding requirements
of section 6 of the Executive order. These final regulations do not
have federalism implications and do not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
V. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a major rule as defined by 5 U.S.C. 804(2).
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings notices, and other guidance
cited in this document are published in the Internal Revenue Bulletin
(or Cumulative Bulletin) and are available from the Superintendent of
Documents, U.S. Government Publishing Office, Washington, DC 20402, or
by visiting the IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal author of these regulations is Joshua Hershman of the
Office of the Associate Chief Counsel (Procedure and Administration).
Other personnel from the Treasury Department and the IRS participated
in their development.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, the Treasury Department and the IRS amend 26 CFR part
301 as follows:
PART 301--PROCEDURE AND ADMINISTRATION
0
Paragraph 1.The authority citation for part 301 is amended by adding
entries in numerical order for Sec. Sec. 301.7803-2 and 301.7803-3 to
read, in part, as follows:
Authority: 26 U.S.C. 7805.
* * * * *
Section 301.7803-2 is also issued under 26 U.S.C. 7803(e).
Section 301.7803-3 is also issued under 26 U.S.C. 7803(e).
* * * * *
0
Par. 2. Sections 301.7803-2 and 301.7803-3 are added to read as
follows:
Sec. 301.7803-2 Internal Revenue Service Independent Office of
Appeals resolution of Federal tax controversies without litigation.
(a) Function of the Internal Revenue Service Independent Office of
Appeals. The Internal Revenue Service Independent Office of Appeals
(Appeals) resolves Federal tax controversies without litigation on a
basis that is fair and impartial to both the Government and the
taxpayer, promotes a consistent application and interpretation of, and
voluntary compliance with, the Federal tax laws, and enhances public
confidence in the integrity and efficiency of the Internal Revenue
Service (IRS).
(b) Consideration of a Federal tax controversy by Appeals--(1) In
general. The Appeals resolution process is generally available to all
taxpayers to resolve Federal tax controversies.
(2) Definition of Federal tax controversy. For purposes of this
section, a Federal tax controversy is defined as a dispute over an
administrative determination with respect to a particular taxpayer made
by the IRS in administering or enforcing the internal revenue laws,
related Federal tax statutes, and tax conventions to which the United
States is a party (collectively referred to as internal revenue laws)
that arises out of the examination, collection, or execution of other
activities concerning the amount or legality of the taxpayer's income,
employment, excise, or estate and gift tax liability; a penalty; or an
addition to tax under the internal revenue laws. For purposes of this
section, a Federal tax controversy includes, for example, a dispute
over an administrative determination made by the IRS concerning a
taxpayer's proposed deficiency, a taxpayer's claim for credit or
refund, the tax-exempt nature of a particular organization, private
foundation, or qualified employee plan under the internal revenue laws,
or the status of a tax-exempt or other tax-advantaged bond.
(3) Other administrative determinations treated as Federal tax
controversies. Notwithstanding the definition of a Federal tax
controversy in paragraph (b)(2) of this section, disputes over
administrative determinations made by the IRS with respect to a
particular person regarding the following topics are treated as Federal
tax controversies for purposes of this section:
(i) Liabilities and penalties administered by the IRS that are
outside the Internal Revenue Code (Code), such as a liability or
penalty pursuant to 31 U.S.C. 5321 (relating to Report of Foreign Bank
and Financial Accounts or Bank Secrecy Act civil penalties);
(ii) A request under the Freedom of Information Act (5 U.S.C. 552);
(iii) Application to become, or the sanction of, an Electronic
Return Originator or Authorized IRS e-file Provider;
(iv) An IRS-proposed determination to a bond issuer that denies a
claim for recovery of an asserted overpayment of arbitrage rebate,
yield reduction payment, or penalty in lieu of rebate under section 148
of the Code (relating to arbitrage) with respect to tax-exempt bonds or
under section 148 as modified by relevant provisions of the Code with
respect to other tax-advantaged bonds;
(v) Administrative costs under section 7430 of the Code (relating
to awarding of costs and certain fees); or
(vi) Any other topic that the IRS has determined may be considered
by Appeals.
(c) Exceptions to consideration by Appeals. The following are
Federal tax controversies that are excepted from consideration by
Appeals or matters or issues that are otherwise ineligible for
consideration by Appeals because they are neither a Federal tax
controversy nor treated as a Federal tax controversy under paragraph
(b)(3) of this section. If a matter or issue not eligible for
consideration by Appeals is present in a case that otherwise is
eligible for consideration by Appeals, the ineligible matter or issue
will not be considered by Appeals during resolution of the case. The
exceptions are:
(1) Any administrative determination made by the IRS rejecting a
position of a taxpayer that the IRS has identified as frivolous for
purposes of section 6702(c) of the Code (regarding listing of frivolous
positions) and any case solely involving the taxpayer's failure or
refusal to comply with the internal revenue laws because of frivolous
moral, religious, political, constitutional, conscientious, or similar
grounds.
(2) Penalties assessed by the IRS under section 6702 (relating to
frivolous tax submissions) or section 6682 of the Code (relating to
false information with respect to withholding) or any other penalty
imposed for a frivolous position or false information. Appeals,
however, may obtain verification that the assessment of the penalties
complied with sections 6203 (relating to method of assessment) and
6751(b) (relating to supervisory approval of assessment) of the Code in
a collection due process (CDP) hearing under sections 6320 (relating to
a hearing upon filing of a notice of lien) and 6330 (relating to a
hearing before levy) of the Code.
[[Page 3663]]
Appeals also may consider a non-frivolous substantive challenge to a
section 6702 or section 6682 penalty in a CDP hearing.
(3) Any administrative determination made by the IRS under section
7623 of the Code (relating to awards to whistleblowers).
(4) Any administrative determination issued by an agency other than
the IRS, such as a determination by the Alcohol and Tobacco Tax and
Trade Bureau (TTB) concerning an excise tax administered by and within
the jurisdiction of TTB.
(5) Any decision made by the IRS not to issue a Taxpayer Assistance
Order (TAO) under section 7811 of the Code (relating to TAOs).
(6) Any decision made by the IRS concerning material to be deleted
from the text of a written determination pursuant to section 6110 of
the Code (relating to public inspection of written determinations)
unless the written determination is otherwise being considered by
Appeals.
(7) Any denial of access under the Privacy Act (5 U.S.C.
552a(d)(1)).
(8) Any issue resolved in an agreement described in section 7121 of
the Code (regarding closing agreements) that the taxpayer entered into
with the IRS, and any decision made by the IRS to enter into or not
enter into such agreement. Appeals may consider the question of whether
an item or items are covered, and how the item or items are covered, in
a closing agreement.
(9) Any case in which the IRS erroneously returns or rejects an
offer in compromise (OIC) submitted under section 7122 of the Code
(relating to compromises) as nonprocessable or no longer processable
and the taxpayer requests Appeals consideration to assert that the OIC
should be deemed to be accepted under section 7122(f).
(10) Any case in which a criminal prosecution, or a recommendation
for criminal prosecution, is pending against the taxpayer for a tax-
related offense, except with the concurrence of the Office of Chief
Counsel or the Department of Justice, as applicable.
(11) Any issues relating to allocation among different fee payers
of the branded prescription drug and health insurance providers fees in
section 9008 of the Patient Protection and Affordable Care Act (PPACA),
Public Law 111-148 (124 Stat. 119 (2010)), as amended by section 1404
of the Health Care and Education Reconciliation Act of 2010 (HCERA),
Public Law 111-152 (124 Stat. 1029 (2010)), and section 9010 of PPACA,
as amended by section 10905 of PPACA, and as further amended by section
1406 of HCERA.
(12) Any certification or issuance of a notice of certification of
a seriously delinquent Federal tax debt to the Department of State
under section 7345 of the Code (relating to the revocation or denial of
a passport in the case of serious tax delinquencies).
(13) Any issue barred from consideration under section 6320 or
section 6330, Sec. Sec. 301.6320-1 and 301.6330-1, or any other
administrative guidance related to CDP hearings or equivalent hearings.
(14) Any case, determination, matter, decision, request, or issue
that Appeals lacks the authority to settle. The following is a non-
exclusive list of examples:
(i) Any case or issue in a case that has been referred to the
Department of Justice.
(ii) Any competent authority case (including a competent authority
resolution previously accepted by the taxpayer) under a United States
tax treaty that is within the exclusive authority of the United States
Competent Authority.
(iii) Any decision of the Commissioner of Internal Revenue or the
Commissioner's delegate to not rescind a penalty under section 6707A of
the Code for a non-listed reportable transaction.
(iv) Any request for relief under section 6015 of the Code
(relating to relief from joint and several liability on a joint return)
when the nonrequesting spouse is a party to a docketed case in the
United States Tax Court (Tax Court) and does not agree to granting full
or partial relief under section 6015 to the requesting spouse.
(v) Any criminal restitution-based assessment under section
6201(a)(4) of the Code (relating to certain orders of criminal
restitution and restriction on challenge of assessment).
(15) Any adverse action related to the initial or continuing
recognition of tax-exempt status, an entity's classification as a
foundation, the initial or continuing determination of employee plan
qualification, or a determination involving an obligation and the
issuer of an obligation under section 103 of the Code. The exception in
this paragraph (c)(15) applies only if the tax-exempt recognition,
classification, determination of employee plan qualification, or
determination involving an obligation and the issuer of an obligation
under section 103 is based upon a technical advice memorandum issued by
an Office of Associate Chief Counsel before an appeal is requested.
(16) Any case docketed in the Tax Court if the notice of
deficiency, notice of liability, or final adverse determination letter
is based upon a technical advice memorandum issued by an Office of
Associate Chief Counsel in that case involving an adverse action
described in paragraph (c)(15) of this section.
(17) Any decision by an Office of Associate Chief Counsel regarding
whether to issue a letter ruling or the content of a letter ruling.
This includes decisions regarding requests for relief under Sec. Sec.
301.9100-1 through 301.9100-22 and requests for a change in method of
accounting. The subject of the letter ruling may be considered by
Appeals if all other requirements in this section are met. For example,
if an Office of Associate Chief Counsel issues an adverse letter ruling
to a taxpayer, the taxpayer cannot immediately appeal the issuance of
the adverse letter ruling. If the taxpayer subsequently files a return
taking a position that is contrary to the letter ruling and that
position is audited by the IRS, Appeals may consider that Federal tax
controversy if all other requirements in this section are met.
(18) Any issue based on a taxpayer's argument that a statute
violates the United States Constitution unless there is an unreviewable
decision from a Federal court holding that the cited statute is
unconstitutional. For purposes of this paragraph (c)(18), an argument
that a statute violates the United States Constitution includes any
argument that a statute is unconstitutional on its face or as applied
to a particular person. The exception in this paragraph (c)(18) does
not preclude Appeals from considering a Federal tax controversy based
on arguments other than the constitutionality of a statute, such as
whether the statute applies to the taxpayer's facts and circumstances.
For purposes of this section, the phrase unreviewable decision is a
decision of any Federal court regardless of where the taxpayer resides
that can no longer be appealed to any Federal court because all appeals
in a case have been exhausted or the time to appeal has expired and no
appeal was filed.
(19) Any issue based on a taxpayer's argument that a Treasury
regulation is invalid unless there is an unreviewable decision from a
Federal court invalidating the regulation as a whole or the provision
in the regulation that the taxpayer is challenging. The exception in
this paragraph (c)(19) does not preclude Appeals from considering a
Federal tax controversy based on arguments other than the validity of a
Treasury regulation, such as whether the Treasury regulation applies to
the taxpayer's facts and circumstances. For purposes of this paragraph
(c)(19), the term invalid means any challenge to
[[Page 3664]]
validity, whether substantively invalid or procedurally invalid in
scope. See paragraph (c)(20) of this section for definition of the term
procedurally invalid.
(20) Any issue based on a taxpayer's argument that a notice or
revenue procedure published in the Internal Revenue Bulletin is
procedurally invalid unless there is an unreviewable decision from a
Federal court holding it to be invalid. This exception does not
preclude Appeals from considering a Federal tax controversy based on
arguments other than the procedural validity of a notice or revenue
procedure, such as whether the notice or revenue procedure applies to
the taxpayer's facts and circumstances. For purposes of this section,
the term procedurally invalid is defined as any determination regarding
whether a notice or revenue procedure failed to comply with
administrative law requirements, such as notice and comment under 5
U.S.C. 553.
(21) Any case or issue designated for litigation, or withheld from
Appeals consideration in a Tax Court case, in accordance with guidance
regarding designating or withholding a case or issue. For purposes of
this section, designated for litigation means that the Federal tax
controversy, comprising an issue or issues in a case, will not be
resolved without a full concession by the taxpayer or by decision of
the court.
(22) Any case docketed in the Tax Court if the notice of
deficiency, notice of liability, or other determination was issued by
Appeals unless the exception in paragraph (f)(1) of this section
(regarding when the Tax Court remands a CDP case for reconsideration)
applies.
(23) Any case in which timely Appeals consideration must be
requested before a petition is filed in the Tax Court because
exhaustion of administrative review, including consideration by
Appeals, is a prerequisite for the Tax Court to have jurisdiction, and
the taxpayer failed to timely request Appeals consideration. For
example, Appeals consideration must be requested before a petition is
filed in the Tax Court regarding a declaratory judgment request under
section 7428 (relating to declaratory judgment on the classification of
specified organizations), section 7476 (relating to declaratory
judgment on qualification of certain retirement plans), or section 7477
(relating to declaratory judgment on the value of certain gifts) of the
Code.
(24) Any administrative determination made by the IRS to deny or
revoke a Certified Professional Employer Organization certification.
(d) Originating office has completed its review--(1) In general.
Appeals consideration of a matter or issue is appropriate only after
the originating IRS office has completed its action on the Federal tax
controversy and issued an administrative determination or a proposed
administrative determination accompanied by an offer for consideration
by Appeals. If the originating office has not completed its action
regarding the Federal tax controversy, the request for Appeals
consideration is premature. Appeals may consider the Federal tax
controversy if the taxpayer requests consideration after the
originating office's action is complete and if all requirements in this
section are met.
(2) Exception for early consideration programs. If administrative
guidance permits the originating office to engage Appeals prior to
completing its action regarding the Federal tax controversy, Appeals
may consider the Federal tax controversy under the terms of that
administrative guidance, such as mediation under a fast track
settlement program or early consideration of some issues under an early
referral program.
(e) Procedural and timing requirements are followed--(1) In
general. A request for Appeals consideration of a Federal tax
controversy must be submitted in the time and manner prescribed in
applicable forms, instructions, or other administrative guidance. All
procedural requirements must be complied with before Appeals will
consider a Federal tax controversy. In addition, there must be
sufficient time remaining on the appropriate limitations period for
Appeals to consider the Federal tax controversy, as provided in
administrative guidance. In a case docketed in the Tax Court, if the
Office of Chief Counsel has recalled the case from Appeals or, if not
recalled, Appeals has returned the case to the Office of Chief Counsel
so that it is received by the Office of Chief Counsel prior to the date
of the calendar call for the trial session, further consideration by
Appeals will not be available if there is insufficient time for such
consideration.
(2) Example. The following example illustrates the application of
the rule of insufficient time remaining on the limitations periods for
Appeals consideration: The IRS examines Taxpayer X's Form 1040, U.S.
Individual Income Tax Return, and determines a deficiency in income tax
due to the IRS disallowing some of the deductions reported on the
return. Because the expiration date of the assessment period of
limitations with respect to the proposed deficiency is imminent, there
is insufficient time for Appeals to receive the case and determine
whether the case is susceptible to settlement. Consequently, the IRS
issues a notice of deficiency under section 6212 of the Code to
Taxpayer X. Under section 6213(a) of the Code, the issuance of this
notice suspends the running of the assessment period while a taxpayer
seeks judicial review of the notice. Taxpayer X timely files a petition
with the Tax Court. After the case is docketed in the Tax Court,
Taxpayer X generally would have the opportunity to have Appeals
consider the case.
(f) One opportunity for consideration by Appeals--(1) In general.
If a Federal tax controversy is eligible for consideration by Appeals
and the procedural and timing requirements are followed, a taxpayer
generally has one opportunity for Appeals to consider such matter or
issue in the same case for the same period or in any type of future
case for the same period, unless the Tax Court remands for
reconsideration in a CDP case. Appeals has considered a Federal tax
controversy if the Federal tax controversy was before Appeals for
consideration and Appeals issued a determination or made a settlement
offer, Appeals decided the Federal tax controversy was not susceptible
to settlement, or the person who requested consideration was issued and
failed to respond to Appeals' communications and as a result of that
failure Appeals issued or made a determination. Appeals also has
considered a Federal tax controversy if the taxpayer notified the
Office of Chief Counsel or the IRS that the taxpayer wanted to
discontinue settlement consideration by Appeals or requested to
transfer from Appeals to the Office of Chief Counsel settlement
consideration of a Federal tax controversy that is currently before the
Tax Court.
(2) Exceptions. Notwithstanding paragraph (f)(1) of this section,
taxpayers retain the opportunity for a traditional appeal after
participating in an early consideration program as described in
paragraph (d)(2) of this section if no agreement was reached between
the taxpayer and the IRS originating office. Taxpayers may be able to
request post-Appeals mediation under the terms of administrative
guidance after a traditional appeal if no agreement was reached between
the taxpayer and Appeals. Notwithstanding paragraph (f)(1), taxpayers
who provide new factual information to the IRS and who meet the
conditions and requirements for audit reconsideration or for
reconsideration of issues
[[Page 3665]]
previously considered by Appeals may have an opportunity for Appeals
consideration, as provided in administrative guidance.
(g) Special rules. The following special rules apply to this
section:
(1) Appeals reconsideration. Notwithstanding the exception in
paragraph (c)(22) of this section, if Appeals issued a notice of
deficiency, notice of liability, or other determination without having
fully considered one or more issues because of an impending expiration
of the statute of limitations on assessment, Appeals may choose to have
the Office of Chief Counsel return the case to Appeals for full
consideration of the issue or issues once the case is docketed in the
Tax Court.
(2) Coordination between Office of Chief Counsel and Appeals.
Appeals and the Office of Chief Counsel may determine how settlement
authority in a Federal tax controversy that is before the Tax Court is
transferred between the two offices.
(h) Applicability date. This section is applicable to requests for
consideration by Appeals made on or after February 14, 2025.
Sec. 301.7803-3 Requests for referral to the Internal Revenue Service
Independent Office of Appeals following the issuance of a notice of
deficiency.
(a) Notice and protest. If any taxpayer requests consideration by
the Internal Revenue Service Independent Office of Appeals (Appeals) of
any matter or issue under section 7803(e)(5) of the Internal Revenue
Code (Code) (relating to limitation on designation of cases as not
eligible for referral to Appeals) and the request is denied, the
Commissioner of Internal Revenue (Commissioner) or the Commissioner's
delegate must provide the taxpayer a written notice that provides a
detailed description of the facts involved, the basis for the decision
to deny the request, a detailed explanation of how the basis for the
decision applies to such facts, and the procedures for protesting the
decision to deny the request, but only if the requirements of
paragraphs (a)(1) through (5) of this section are met:
(1) Notice of deficiency. The taxpayer received a notice of
deficiency authorized under section 6212 of the Code (relating to
notice of deficiency) before the taxpayer requested consideration by
Appeals.
(2) Frivolous positions. The issue involved is not a frivolous
position within the meaning of section 6702(c) of the Code (regarding
listing of frivolous positions).
(3) Multiple requests for referral to Appeals. The taxpayer has not
previously requested consideration by Appeals, pursuant to section
7803(e)(5), of the same matter or issue in a taxable year or period.
(4) Previous Appeals consideration. Appeals has not previously
considered the matter or issue in a taxable year or period that is the
subject of the request and determined that the matter or issue could
not be settled or a settlement offer was rejected, except as provided
in Sec. 301.7803-2(f)(2) with respect to a taxpayer participating in
an early consideration program.
(5) Notice of deficiency with more than one matter or issue. If the
notice of deficiency for which the taxpayer requests Appeals
consideration includes more than one matter or issue in a taxable year
or period, the taxpayer must request referral for Appeals consideration
and submit all such matters or issues at the same time.
(b) Applicability date. This section is applicable to relevant
requests for consideration by Appeals made on or after February 14,
2025.
Douglas W. O'Donnell,
Deputy Commissioner.
Approved: January 3, 2025.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2025-00426 Filed 1-14-25; 8:45 am]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on January 15, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.