Since January, taxpayers under examination by the Internal Revenue Service’s Large Business and International Division have been taking advantage of the rapid appeals process, a new alternative dispute resolution program that allows large companies to resolve their tax controversies in one meeting with an IRS appeals officer.
The RAP applies to audits that are in the IRS appeals phase, and it allows the taxpayer and IRS examination team to sit down before an appeals officer who uses mediation techniques to resolve their conflicts in one conference, shaving significant time from an appeals process that could last nearly two years for large cases.
While the program is efficient, taxpayers should proceed cautiously because the process may not be right for taxpayers with very complicated cases, attorneys say.
Here are some steps to help your client navigate the program:
Ensure Your Examiner Is Settlement-Minded The taxpayer and IRS examination team must both agree to enter the RAP, but lawyers shouldn’t assume that the agency will be fully cooperative in trying to reach a settlement just because it agrees to participate in the program, experts say.
“You don’t want to have a situation where you go into RAP and you have a hostile examination team and team members who are going to torpedo a settlement,” says Jean Pawlow, chair of McDermott Will & Emery LLP’s tax controversy practice.
“Sometimes you have a team that is not necessarily uniform in their thinking — the team manager might think one way while the economist thinks another way. You really do have to know the personalities and the players.”
Jeffry Erney, a BakerHostetler tax controversy and litigation partner, says he would think twice about entering the RAP if his client’s examination team did not seriously consider settlement options during the exam process.
“If the IRS examination team isn’t willing to engage in meaningful settlement conversations at the exam level, what assistance will they provide in settlement discussions during the RAP process?” Erney asks.
IRS examination teams are absent from normal appeals proceedings, and their presence at an RAP meeting can potentially create an unfair dynamic because the examination team can potentially sway the appeals officer, experts say. Hence, it is important for taxpayers to ensure that the law supports their arguments.
“My concern is that the disapproval of a settlement offer by the examination team may unduly influence the appeals officer to reject a settlement offer that he or she might otherwise accept,” Erney says.
In that vein, taxpayers in the RAP program also have to be OK with waiving traditional restrictions on ex parte communications, which are communications between appeals officers and IRS employees that the taxpayer isn’t privy to.
“What can happen is that the parties can go to separate rooms and then the appeals officer can meet with them individually, and that’s why you have to waive,” says Joel Crouch, a tax partner with Meadows Collier Reed Cousins Crouch & Ungerman LLP.
But clients shouldn’t worry about ex parte talks or even seemingly chummy IRS examiners and appeals officers if their legal arguments are airtight.
Weigh Rapid Appeals Over Fast-track Settlement
Fast-track settlement is another alternative dispute resolution tool offered by the IRS, and it allows LB&I taxpayers to resolve their IRS disputes in the examination phase instead of the appeals phase, as the RAP requires. Both programs use mediation techniques, but the RAP makes sense for taxpayers with more complicated matters, while clients with extremely complicated cases should be advised to steer clear of both programs.
“Some practitioners think there’s no reason to try RAP if you have fast-track as an option, because if your exam team is cooperative and willing to engage in negotiations, why not resolve as early as you can, and why move to appeals at all,” Pawlow says. “It’s a good point, and if fast-track is an option, use that. I did RAP when I had multiple issues over several years, and some were at exam, and some were at appeals. So we consolidated and moved to appeals.”
Come Prepared and Organized
The one-shot nature of RAP means it’s incredibly important that taxpayers are fully prepared before they enter their meeting, says Ronson Shamoun, a tax attorney and principal of RJS Law Firm.
“You want to have all of your research done, all of your substantiation with you, and make sure all of your issues are covered,” Shamoun says. “If you don’t have all of your information, it defeats the purpose of going on to that meeting.” Crouch adds that lawyers should approach the RAP meeting like they’re preparing for trial. “How you present your case will be similar to how you will in going to trial,” Crouch says. “In most cases you want your experts available if not present in the room, as I suspect the IRS will pull in their experts.”