In a civil appeals matter, Appeals Officers typically have brought authority to reach settlement agreements with taxpayers by considering the various hazards of litigation. The hazards of litigation standard used by Appeals states that Appeals Officers can consider the potential outcome at trial when deciding whether to settle a controversy with the taxpayer. The IRS has summed up this approach in official publications: “a tax appeals officer will ordinarily give consideration to an offer to settle a tax controversy on a basis which fairly reflects the relative merits of the opposing views in light of the hazards which would exist if the case were litigated” (1). As such, the general goal of any Appeals conference is to come to a fair and impartial resolution that accurately takes into account the hazards of tax court litigation. The IRS further defines a fair and impartial settlement as one which “reflects on an issue-by-issue basis the probable result in event of tax litigation, or one which reflects mutual concessions for the purpose of settlement based on the relative strength of the opposing positions where there is a substantial uncertainty of the result in event of tax litigation.”
Despite the broad settlement authority granted to tax Appeals officers through the tax appeals process, their power to reach agreements with taxpayers is not absolute. In fact, the final authority for approving a settlement lies with another reviewing officer in the Appeals Office. Thus, coming to an agreement with the Appeals officer assigned to your case is just the first step. There is no final settlement until a “higher up” reviews the settlement and gives it final approval. Once the settlement is finalized, it should be memorialized by a form which is either received by the Commissioner (Form 870) or is accepted by or on behalf of the Commissioner (Form 870-AD). These forms are typically used in a non-docketed case in which the taxpayer protests the 30-day letter directly to the Appeals Division.
In a docketed case, or one in which the taxpayer files a petition in Tax Court, settlement authority is shared between the Appeals Office and the IRS counsel handling the litigation. If the taxpayer and the Appeals officer and unable to reach a settlement, the IRS counsel then has to make a decision to either pursue litigation or attempt to settle with the taxpayer. If there is evidence that a settlement is near, the agreement may sometimes be enforced even if it was never recorded on a Form 870-AD (2). The lesson from some of these cases is that contract principles may be used against either the taxpayer or the IRS to enforce a settlement that was not formally approved upon.
What is the Hazards of Litigation Standard?
At the Appeals phase, the Appeals officer assigned to the case will often evaluate the merits under the “hazard-of-litigation” standard. The purpose of using this standard is to allow the Appeals officer to consider what a court might decide should the case ever proceed to the litigation process. Under this process, the Appeals officer will evaluate:
- the provable facts;
- the effect of the testimony likely to be presented; and
- the expected interpretation and application by the court of the Code provisions and applicable regulations in the light of decided cases.
The Appeals officer will consider the following factors under the hazards-of-litigation standard:
- Probative value of the evidence likely to be presented;
- Credibility of witnesses (e.g., the taxpayer);
- Availability of witnesses;
- Ability of the taxpayer to carry his burden of going forward with evidence;
- Likelihood that the evidence the taxpayer can present will carry his burden of proof;
- Doubt as to an issue of fact; and
- Doubt as to a conclusion of law (e.g., the law in the circuit to which the case will be appealed or in which it will be tried).
In considering the evidence that might be presented in court, the Appeals officer typically does not concern himself with whether or not the evidence would actually be admissible in court. Instead, the Appeals officer simply considers all the evidence – both good and bad – and how it might weigh upon the ultimate resolution of the matter in litigation. Appeals Officers also typically consider the applicable law under the hazards-of-litigation approach. Although tax court cases and federal district court cases are persuasive, Appeals officers tend to give special weight to official pronouncements of law made by the IRS. Statutes and regulations are binding upon the Appeals officer. Though they are not binding, IRS revenue rulings can be very persuasive to the Appeals officer when deciding your case. At the same time, the Appeals officer may very well disregard an IRS revenue ruling by distinguishing facts or concluding that a court is unlikely to follow the ruling. Thus, there are opportunities for taxpayers and their representatives to dissuade Appeals officers from relying too heavily on certain IRS publications and decisions.
How a Tax Attorney Can Help with Appeals
Understanding how the Appeals Officer weighs evidence before making a settlement agreement can go a long way to achieving a favorable outcome for the taxpayer. If you think that your tax situation might make you a candidate for an Appeals process, you should consult with a knowledgeable IRS tax attorney.
The Tax Lawyer - William D Hartsock Tax Attorney Inc. has been successfully helping clients with appeals since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.
Tax Law References:
- IRS Policy Statement P-8-47 (Consideration to Be Given to Offers of Settlement) (approved Apr. 6, 1987).
- Dorchester Industries, Inc. v. Comm’r, 108 TC 320 (1997) (parties had entered into a binding contract to settle the docketed cases via the exchange of letters, which provided an offer and acceptance and manifested mutual assent).