Press Room: Tax Release

February 20, 2014

IRS Appeals Division Revises Policy on Raising New Issues

IRS has recently updated its policy, Policy Statement 8-2, to provide that Appeals Officers will not raise any new issue and will not reopen an issue that the taxpayer and IRS resolved during the examination phase. Previously Appeals Officers could raise a new issue if the grounds were substantial and the potential impact upon the tax liability was material. This new policy will eliminate the taxpayer’s concern that the Appeals Officer will identify and raise a new, large issue not previously raised during the examination process.

In the past, taxpayers under examination with large, unidentified issues would choose one of two strategies to limit IRS’ opportunity for raising the unidentified issue. One was to quickly resolve or concede all proposed adjustments, even ones that had merit. Then, they would file a refund claim for those having merit shortly before the deficiency statute was about to close. The second option was to file a petition in Tax Court with regard to disagreed issues because it was unlikely the unidentified issue would be raised in Tax Court. The new policy creates an entirely different strategy— close the case out in the examination phase as quickly as possible and protest the disagreed issues to Appeals.

However, the new policy also requires that all new facts or evidence presented for the first time in Appeals must be returned to the examining agent for review and comment. As a result, taxpayers should not wait until in Appeals to present important facts or evidence because that would simply delay the resolution of issues and give Examination another opportunity to identify other issues.

While Appeals may not raise new issues, it is allowed to consider alternative or new legal arguments that support the parties’ positions for purposes of hazards of litigation analysis. The new guidance also provides that the discussion of new or additional cases or other authorities that support a previously raised theory or argument does not constitute a new issue. However, Appeals may only utilize evidence within the case file to evaluate such theories.

For cases that are not fully developed by Examination and where the taxpayer has not presented new evidence or information, Appeals is now required to attempt to settle the case based upon the actual hazards. This is contrary to its prior policy where Appeals could return the entire case to Examination for further development. Depending on the significance of the underdevelopment of an issue, this policy might result in more favorable settlements for taxpayers.

Recommended Action:

Taxpayers should take all actions necessary to close the case out in the examination phase as quickly as possible. After receipt of the 30-day letter and the revenue agent’s report, taxpayers should protest any disputed issues to Appeals. Taxpayers should not refrain from going to Appeals because the revenue agent has failed to identify potentially large issues. In addition, taxpayers should submit all relevant information and evidence during the examination phase to avoid the return of the entire case to Examination.