Advisors and clients have a newly codified appeals process at the IRS

Financial advisors and tax professionals whose clients dispute an IRS calculation of their liability could get an outside ruling through the newly renamed Independent Office of Appeals.

In the last week of President Joe Biden's administration, the IRS issued the final rules under a 2019 law adopted during President Donald Trump's first term that added "independent" to the name of the administrative review body and codified that the process is available to most taxpayers. Because the law "originated in his first term," it's not clear whether President Trump's team intends to change anything about this aspect of taxpayer services at the IRS amid their larger plans for budget cuts at the agency, said Brett Cotler, a partner in the Taxation Group of law firm Seward & Kissel.

"Sometimes you are dealing with a tax examiner that sees a case one way, and no matter how hard you try, you can't convince them that they're wrong and you're right," he said. "The ability to move the case up a level can just provide options and benefits to your clients when dealing with controversial matters."

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With only 14 public comments on the proposed version of the regulation from September 2022, the rule will likely fall below many other bigger-ticket items on newly confirmed Treasury Secretary Scott Bessent's agenda, such as the extension of the Tax Cuts and Jobs Act and efforts by the new administration to roll back the previous one's enforcement efforts. 

The new appeals process, and exceptions to the rule

The Taxpayer First Act put the appeals process under the responsibilities of a "chief of appeals" whose office exists "to resolve federal tax controversies without litigation on a basis that is fair and impartial, promote consistent application of federal tax laws, and enhance public confidence in the IRS," the law's text said. The law required that any taxpayer whose request for an administrative appeal is denied get a detailed written explanation, and it dictated that any individuals with gross income of $400,000 or less be able to obtain every nonprivileged part of their case files, according to a guide to the law from "The Tax Adviser" journal. Those with wealth above that level could receive case files through a Freedom of Information Act request.

"The Office of Appeals is the settlement arm of the IRS, with a mission to review administrative determinations from the IRS's collection and examination activities and, when possible, to resolve them without litigation," Timothy McCormally, a former chair of the IRS Advisory Council, wrote in the guide to the legislation. "Before the TFA's enactment, there was no statutory right to contest administrative decisions in Appeals, even though a review of administrative actions before payment of any tax underlying a controversy was generally available. (There are exceptions to the taxpayer's access to Appeals — for example, when inadequate time remains on the limitation period for assessment or collection, the taxpayer's arguments are frivolous, or a case has reached the point at which litigation is initiated.)"

Other exceptions include whistleblower awards, agency determinations from outside the IRS, cases with criminal prosecutions involved in the underlying taxes, disputes that are already docketed for the U.S. Tax Court or filings questioning the constitutionality of provisions of the Tax Code or other laws.

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In general, clients who believe an IRS agent, auditor or a "foreign bank and financial accounts" (FBAR) examiner added up their tax bill erroneously can go to Appeals for "a fresh look at the merits of the case, and it will determine whether it thinks the IRS got it right or wrong," Cotler said.

"Even though there are 24 broad exceptions, they're actually kind of narrow," he added. "The vast majority of income-tax controversies, as well as FBAR examinations, which the IRS will do, those all have basically the option to go to appeals."