Resolution of Federal Tax Controversies by the Independent Office of Appeals

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 301</CFR> <DEPDOC>[TD 10030]</DEPDOC> <RIN>RIN 1545-BP72</RIN> <SUBJECT>Resolution of Federal Tax Controversies by the Independent Office of Appeals</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final regulation. <SUM> <HD SOURCE="HED">SUMMARY:</HD> 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. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on January 15, 2025. <E T="03">Applicability date:</E> The regulations in §§ 301.7803-2 and 301.7803-3 apply to <E T="03">all requests for consideration by Appeals that are received on or after February 14, 2025.</E> </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Joshua P. Hershman at (202) 317-4311 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> 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.” <HD SOURCE="HD1">Background</HD> 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 <E T="04">Federal Register</E> (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 § 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 § 301.7803-2(c), such as proposed § 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 §§ 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 <E T="03">Summary of Comments and Explanation of Revisions</E> 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 <E T="03">Summary of Comments and Explanation of Revisions.</E> The final regulations also include minor typographical and editorial edits, including non-substantive clarifications, to the proposed regulations. <HD SOURCE="HD1">Summary of Comments and Explanation of Revisions</HD> <HD SOURCE="HD2">I. Proposed § 301.7803-2</HD> <HD SOURCE="HD3">A. Intent of the TFA To Grant Authority To Make Exceptions</HD> Numerous comments addressed the scope of the proposed exceptions to Appeals consideration in proposed § 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 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 <E T="03">Summary of Comments and Explanation of Revisions.</E> 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 ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 150k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━