On September 13, the Treasury proposed new regulations concerning taxpayers’ rights to access the Independent Appeals Office of the IRS (“Appeals”). The appeals are designed to resolve disputes with the IRS fairly and impartially. Taxpayers secured the right to bring certain disputes to appeal following the Taxpayer First Act 2019. However, the proposed regulations aim to limit when taxpayers can appeal and the types of issues that can be raised.
The proposed regulations identify 24 types of issues that will not trigger appeal rights. Major issues include regulatory validity challenges, challenges to IRS notices or tax procedures, and some tax treaty issues. In addition to issuing proposed regulations, the IRS has also already updated the Internal Revenue Manual to reflect the limited jurisdiction of appeals to determine issues based solely on validity challenges to IRS regulations or notices or tax procedures.
Challenges to Treasury regulations. The proposed regulations exclude most appeals to Treasury regulations from appellate jurisdiction. Over the past few years, the IRS and the courts have seen dozens of regulations challenged, both under the Administrative Defects of Procedure Act and under “Chevrons” for substantive matters. Some of the contested regulations have been in place for decades, but the increase is largely attributable to recent regulations that were enacted following the Tax Cuts & Jobs Act of 2017.
The proposed new rules stipulate that appeals will not accept contestations of regulatory validity unless there has been an “unverifiable decision” by a federal court invalidating the regulation in question. An “unverifiable decision” is a final and no longer appealable decision. This means that the appeals would not be allowed to consider a recent Colorado federal court decision, which rules that section 245A of the interim regulations relating to the deduction of dividends received is invalid, because other matters in that case remain outstanding.(1)
Objections to IRS Notices and Rev. Procs. Similarly, the proposed regulations would prohibit appeals from considering challenges to IRS notices and tax proceedings. Taxpayers have recently taken aim at “listing notices,” which are notices requiring taxpayers to report their participation in certain transactions. These notices create potential criminal exposure under sections 6707A and 6662A, among others. In March, a federal appeals court overturned one of these listing notices.(2) Other notices will be the subject of upcoming TCJA validity challenges. However, appeals will not have the authority to examine similar matters, including challenges to the same listing notice, until the decision is final and final. This could unnecessarily prolong disputes that could otherwise be resolved quickly.
Some issues of the treaty. The proposed regulations provide that appeals will lack the authority to examine issues that have been delegated to other units of the IRS. For example, appeals will not consider cases of competent authorities under tax treaties that fall under the jurisdiction of the Large Business & International Division’s Advance Settlements and Reciprocal Settlements program.
Take away. While most taxpayers will continue to be eligible to bring cases to appeal, the proposed regulations limit the jurisdiction of appeals on certain issues. Basically, it’s just a matter of formalizing what we’ve been experimenting with Appeals on Validity Challenges in particular for quite some time. If a taxpayer intends to appeal a tax regulation, notice or procedure on appeal, the taxpayer should consider whether a federal court has already heard the matter and whether the court’s decision is final and beyond review. If a taxpayer has further arguments as to why the proposed adjustment is not appropriate, Appeals still has jurisdiction to address those other arguments.
(1) Liberty Global, Inc. v. United StatesNo. 1:20-cv-03501-RBJ (D. Colo. April 4, 2022).
(2) Mann Construction, Inc. v. United States27 F.4° 1138 (6° Cir. 2022).