Fast-Track Settlement for Small Business/Self-Employed Taxpayers
Alyssa Forslund and Noelle Geiger
NOVEMBER 2007 - The
IRS has extended fast-track settlement to include small business
and self-employed taxpayers. “A primary focus in the IRS reorganization
has been to develop systems and processes that improve service to
the taxpayer. Fast-track mediation is geared to meet taxpayer needs
by resolving controversy at the earliest resolution point within
the IRS,” says Joseph Kehoe, IRS commissioner for the Small
Business/Self-Employed (SB/SE) Division (Mark Battersby, “Tax
Watch: IRS Starting Fast-Track Dispute Resolution,” InvestmentNews,
settlement (FTS) is meant to improve business practices by reducing
the burden on both the IRS and taxpayers through mediation. In
August 2006, the IRS extended its existing FTS procedure to SB/SE
taxpayers. The SB/SE implementation of FTS allows qualifying taxpayers
to expedite case resolution where the taxpayer has disputed issues
in at least one open year under examination. The SB/SE Division
and the IRS Office of Appeals jointly administer the SB/SE FTS.
and Mid-Sized Business (LMSB) FTS program, initiated in 2002,
has been called a success by the IRS. As a result, the IRS decided
it would be prudent to extend the opportunity to mediate to smaller
of FTS include a significantly shorter IRS process and an assurance
that IRS section 6621 “hot” interest will not be charged.
If a resolution is reached, FTS requires the taxpayer and the
IRS to sign a consent form acknowledging acceptance. A key aspect
of this program is that taxpayers do not give up any of their
rights and can withdraw from the mediation process at any time.
Issues not resolved through mediation can follow the normal IRS
six-month focus period ran from September 5, 2006, through March
5, 2007. Qualifying taxpayers in Chicago, Houston, and St. Paul,
Minn., were eligible to apply for SB/SE FTS.
analyst Thomas S. Ryan says: “The IRS is committed to continuing
the program in those cities and eventually expanding it nationwide
on a staggered rollout basis” (Announcement 2006-61). When
the two-year test period ends on September 5, 2008, the SB/SE
FTS program will be evaluated to determine whether the program
will be made permanent, and adjusted if necessary.
with LMSB Fast-Track Settlement
for using FTS for SB/SE taxpayers depends on the procedure set
forth in Revenue Procedure 2003-40 for the LMSB FTS Dispute Resolution
Program, although the programs are run separately.
differences between the LMSB and SB/SE programs are as follows:
- An SB/SE
group manager performs the duties of the LMSB team manager.
group managers and Appeals team managers select and manage eligible
- The SB/SE
FTS process is designed to be completed within 60 days of acceptance
of the SB/SE–Appeals FTS application. The LMSB FTS requires
an answer within 120 days, although the process averages 70
- If any
issue is determined to be ineligible for the SB/SE FTS program,
all issues in the case will not be eligible. The LMSB program
has the ability to segregate the resolution of some, but not
all, of the issues in dispute.
the limitations below, SB/SE FTS is generally available for cases
within SB/SE jurisdiction if an issue has been “fully developed.”
issue is deemed fully developed upon: 1) the issuance of a “notice
of proposed adjustment” setting out the government’s
position; and 2) a written response from the taxpayer clearly
defining his position and the basis for disagreement.
is not available for:
Appeals Program, Collection Due Process, Offer-In-Compromise,
and Trust Fund Recovery cases, except as provided in specific
examination cases worked solely at a campus/service center site;
where the taxpayer has failed to respond to IRS communications
and no documentation has been previously submitted for consideration
by compliance officers;
- Tax Equity
and Fiscal Responsibility Act (TEFRA) partnership cases;
outside SB/SE jurisdiction, except as provided otherwise;
designated (or under consideration) for litigation;
in which the taxpayer has submitted a request for competent
in which the taxpayer requests the simultaneous appeal/competent
issues, including those set forth in Revenue Procedure 2006-2,
2006-1, IRB 89;
issues, for which resolution with respect to one party might
result in inconsistent treatment in the absence of the participation
of another party; or
identified in the Chief Counsel Notice as excluded from the
SB/SE FTS process.
examining agent, or SB/SE group manager can initiate the process
to participate in the SB/SE FTS program at any time after an issue
has been fully developed, preferably before a 30-day letter is
issued. The IRS generally wants to resolve issues at the lowest
level possible; after the 30-day letter is issued, the case goes
to Appeals. The hope is to work out a prompt resolution in the
least complicated manner possible.
application package, submitted to the local Appeals team manager,
should include the following:
of issues or examination-reengineering lead sheet prepared by
the SB/SE compliance team, and
- A written
response from the taxpayer.
days of the receipt of the application, the taxpayer will be notified
if the case has been accepted to the SB/SE FTS program. If a case
is not accepted, the SB/SE or Appeals representative will inform
the taxpayer and discuss other dispute resolution opportunities.
There is no appeal or judicial review process for cases not accepted
to the SB/SE FTS program.
official governed by mediation ethics serves as the neutral party
in the FTS session, using dispute resolution techniques to assist
settlement. During the FTS session, the taxpayer and SB/SE representatives
will hold a conference with the FTS Appeals official. Though not
required, a taxpayer may have a representative participate in
the FTS session. For the mediation to succeed, all decision-making
parties must be present.
The FTS Appeals
official will use an FTS session report to assist in planning
the FTS session. The session report will include: 1) lists of
all issues approved for settlement; 2) a description of the issues
to be settled; 3) the amounts disputed; 4) the conference dates;
5) a plan of action for the FTS session; and 6) any other information
useful to the process, as determined by the parties and the FTS
Appeals official. An agenda may also be prepared by the FTS Appeals
official to guide communication, set the order of issues for discussion,
pose questions for clarification, and guide meetings.
FTS session, the FTS Appeals official may propose settlement terms
for any or all issues and may consider settlement terms proposed
by either party. If the taxpayer accepts the FTS Appeals official’s
settlement proposal, but the SB/SE group manager rejects it, the
SB/SE territory manager must review the decision and either concur
in writing or accept the settlement proposal on behalf of the
SB/SE. If the SB/SE territory manager agrees with the group manager’s
rejection, and an alternative settlement cannot be reached, the
case will be closed out of the FTS program.
If any issues
are resolved at the FTS session, the parties and the FTS Appeals
official must sign the FTS session report acknowledging acceptance
of the terms for the purposes of preparing computations. The signatures
of the parties on the FTS session report, however, do not constitute
a final settlement.
settlement is memorialized using IRS Form 906, “Closing
Agreement on Final Determination Covering Specific Matters.”
This settlement agreement is binding, and generally may not be
reopened once Form 906 is executed.
the IRS will report the proposed resolution reached by SB/SE FTS
to the Joint Committee on Taxation. The IRS may reconsider the
proposed settlement after receiving comments from the committee.
Again, if a resolution cannot be reached between the parties after
reconsideration, the taxpayer retains the usual rights to request
consideration from Appeals.
and Ex Parte Communication
process is confidential. By signing the FTS agreement, the taxpayer
consents to the disclosure of the taxpayer’s return and
return information related to the issues being considered for
settlement. IRS employees are subject to the nondisclosure provisions
of IRC section 6103 covering information regarding any communications
made during the SB/SE FTS session. The confidentiality of the
process can be a great benefit when compared to the nonconfidential
alternative of litigation.
no prohibition against ex parte communications between the Appeals
officers and the other IRS employees in the FTS process, because
the Appeals officers are not acting in their traditional settlement
for Tax Advisors
to use mediation or the FTS process, a tax advisor should take
the following actions before engaging in alternative dispute resolution
methods (Phillip Zimmerman, “A Practical Guide to Mediation,”
The CPA Journal, January 2003):
with a professional liability insurance carrier to determine
whether representing clients in mediation or FTS is covered
by the liability policy and whether the carrier has special
requirements to ensure coverage.
an attorney to develop language to include in engagement letters
describing and authorizing an advisor to engage in these alternative
dispute resolution methods. Some professional liability insurance
carriers will provide suggested language to use in engagement
Forslund, JD, is a senior tax associate, and Noelle
Geiger, JD, is a senior tax manager, both for Marks Paneth
& Shron LLP’s tax controversy practice.