IRS Fast-Track Settlement for Small Business/Self-Employed Taxpayers

By 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, 2002, www.investmentnews.com).

Fast-track 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.

The Large 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 taxpayers.

The benefits 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 appeal process.

The initial 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.

SB/SE program 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.

Comparison with LMSB Fast-Track Settlement

The procedure 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.

Four key differences between the LMSB and SB/SE programs are as follows:

• An SB/SE group manager performs the duties of the LMSB team manager.
• SB/SE group managers and Appeals team managers select and manage eligible cases.
• 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 days.
• 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.

Eligibility

Subject to the limitations below, SB/SE FTS is generally available for cases within SB/SE jurisdiction if an issue has been “fully developed.” An 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.

SB/SE FTS is not available for:

• Collection Appeals Program, Collection Due Process, Offer-In-Compromise, and Trust Fund Recovery cases, except as provided in specific IRS guidance;
• Correspondence examination cases worked solely at a campus/service center site;
• Cases 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;
• Issues outside SB/SE jurisdiction, except as provided otherwise;
• Issues designated (or under consideration) for litigation;
• Issues in which the taxpayer has submitted a request for competent authority assistance;
• Issues in which the taxpayer requests the simultaneous appeal/competent authority procedure;
• Frivolous issues, including those set forth in Revenue Procedure 2006-2, 2006-1, IRB 89;
• “Whipsaw” issues, for which resolution with respect to one party might result in inconsistent treatment in the absence of the participation of another party; or
• Issues identified in the Chief Counsel Notice as excluded from the SB/SE FTS process.

Application

The taxpayer, 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.

A complete application package, submitted to the local Appeals team manager, should include the following:

• SB/SE–Appeals FTS application,
• Summary of issues or examination-reengineering lead sheet prepared by the SB/SE compliance team, and
• A written response from the taxpayer.

Within 10 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.

Settlement Process

An Appeals 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.

During the 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.

Post-Settlement

The agreed-upon 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.

Where appropriate, 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.

Confidentiality and Ex Parte Communication

The SB/SE 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.

There is 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 role.

Tips for Tax Advisors

When planning 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):

• Consult 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.
• Consult 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 letters.

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