Requesting an IRS Early Referral to Appeals

Speak with an Experienced Tax Lawyer About Requesting an Early Referral to the IRS Independent Office of Appeals

Taxpayers that need to challenge unfavorable determinations during IRS audits can request participation in the IRS Independent Office of Appeals’ Early Referral Program. This program allows taxpayers to settle disputes without waiting until the end of the audit process, and without waiving their appeal rights with respect to other issues that may arise.

**Attorney Alina Veneziano**
Tax Attorney & CPA Team Lead

**Alice Campbell**
Tax Team
Former Special Agent (IRS)

If the Internal Revenue Service (IRS) disagrees with a taxpayer’s position taken during an audit, it can require payment of the amount in dispute plus interest and penalties. In this scenario, the standard course of action is for the taxpayer to file an appeal once the audit is over, and to take their case to the US Tax Court if necessary.

But, this isn’t necessarily the only option available. In cases involving complex audits, taxpayers may have the option of requesting an early referral to the IRS Independent Office of Appeals.

What Audited Taxpayers Need to Know About the Early Referral to Appeals Process

If a taxpayer disagrees with the IRS’s conclusions with respect to a particular issue while the IRS is continuing to examine compliance in other areas, the taxpayer may be eligible to request intervention by the IRS’s appeals office. As the IRS explains:

“If your tax matters are being worked by an IRS examiner or collection officer, you may request the transfer of a developed but unagreed issue to the IRS Independent Office of Appeals (Appeals), while the IRS continues to develop other issues in the case. . . . Regular appeals procedures apply, including opportunities for taxpayer conferences.”

An early appeals protest can be used to contest proposed adjustments to taxpayers’ liability as well as other issues raised with respect to the tax period under review. If the Independent Office of Appeals accepts an early referral, both the government and the taxpayer are expected to participate in good faith and attempt to work out an agreed resolution regarding the issue submitted for Appeals’ consideration.

Here are some additional insights for taxpayers that are considering submitting requests for early referrals to Appeals:

Potential Early Referral Issues

Taxpayers that are under audit can submit various types of tax controversies for early referrals to Appeals. The vast majority of tax issues are potentially eligible—though more complex issues are more likely to be deemed worthy of review through the IRS’s appeals function. Depending on the facts presented, some examples of “fully developed” issues that may be ripe for early referrals include:

Complex Income Tax and Payroll Tax Issues

Specific complex issues related to a taxpayer’s income tax or payroll tax return may be eligible for early referral even if the entire case has not been fully resolved. While it is standard IRS practice to close a case before Appeals takes jurisdiction, taxpayers can seek to leverage Appeals’ settlement authority and request mediation with respect to specific issues when the audit process is far from a final determination.

Involuntary Change in Accounting Method

Involuntary changes in accounting methods are among the specific issues designated as potentially eligible for early referrals in the Internal Revenue Manual (IRM).

Employee Plans and Employment Tax

Tax controversies related to employee plans and employment tax liability may also be ripe for early referrals—and employers may be able to obtain a much quicker resolution through a written request for an early referral than through a traditional post-audit appeal.

Tax-Exempt Status

Exempt organizations can also request early referrals to seek quick resolutions to complex issues and avoid the need for a comprehensive appeal and/or litigation in federal court.

Collection Issues

Collection issues can also warrant requests for early referrals—particularly when a substantial change in a taxpayer’s liability has resulted in an inability to pay.

Potential Outcomes of Early Referrals

Broadly, early referrals to the IRS Independent Office of Appeals have two potential outcomes. An early referral can result in either:

Agreement Reached on Early Referral Issues

The taxpayer and the IRS can reach an agreement with respect to the issue(s) for which the taxpayer filed for early review. In this scenario, the taxpayer and the IRS will enter into a partial closing agreement (more on this below).

Agreement Not Reached on Early Referral Issues

If the taxpayer and the IRS do not reach an agreement, the taxpayer will retain the right to pursue all other means of resolution.

Entering into a Partial Closing Agreement

If both the taxpayer and the IRS agree to settle the issue that triggered the taxpayer’s formal written protest, the next step is to enter into a closing agreement. The Internal Revenue Manual provides guidance on closing agreements, and makes clear that an agreement entered into through the early referral process is to be limited to the specific issues accepted for review. Issues not covered in the taxpayer’s formal protest are not eligible for inclusion—and the taxpayer retains the right to challenge the IRS’s position on all remaining issues during (and after) the remainder of the audit process.

Managing the Rest of the Audit Process

When a taxpayer requests an early referral for a key issue that has been “fully developed,” the remainder of the issues in the taxpayer’s case remain subject to resolution through the audit process. As a result, the taxpayer will need to continue to proactively address both substantive and procedural issues during the remainder of the IRS’s audit—and will need to continue to preserve all available options to file further appeals as necessary.

Potential Alternatives to Requesting an Early Referral to an IRS Appeals Officer

While requesting an early referral to Appeals is one option for taxpayers that are facing additional liability as the result of an IRS audit, taxpayers may have various other options in this scenario as well. A few examples include:

Fast-Track Settlement (FTS)

Fast-track settlement (FTS) is another option for taxpayers that want to resolve issues during the audit process. Facilitating fast-track settlements fall within Appeals’ mission to ensure consistent application of the law and promote voluntary compliance, and pursuing FTS can be a viable option in various circumstances.

Rapid Appeals Process (RAP)

The Rapid Appeals Process (RAP) is an alternative to a traditional post-audit appeal. When taxpayers and the IRS agree to pursue a rapid appeal, the goal is generally to reach an agreed resolution over the course of a single day.

Other Means of Alternative Dispute Resolution (ADR) with the IRS

From requests for Competent Authority assistance to post-appeals mediation (PAM), various other means of alternative dispute resolution (ADR) are also available in varying circumstances.

Taxpayers that are facing collection may also have various options. Our attorneys handle these cases as well—including collection due process hearings and collection appeals program cases—and we can work to prevent the IRS from executing levies, liens, and other means of enforcement provided that we have sufficient time to do so.

The Taxpayer First Act Codifies IRS Appeals’ Authority to Help Resolve Disputes Between Taxpayers and the IRS

The role of the IRS Independent Office of Appeals is to facilitate settlements between taxpayers and the IRS in appropriate cases. The Taxpayer First Act codifies Appeals’ authority to help resolve disputes via ADR. As a result, while requesting an early referral can be a viable option in many cases, taxpayers should work with their counsel to assess the likelihood that an early referral to Appeals will lead to a favorable resolution.

FAQs: Early Referrals to the IRS Independent Office of Appeals

How does the IRS decide whether to grant a request for an early referral to Appeals?

The IRS evaluates early referral requests based on the criteria defined in Revenue Procedure 99-28. If you think that pursuing an early referral to Appeals may be a desirable option in your case, our attorneys can assess whether a request is likely to be approved.

What types of issues are not eligible for early referrals to Appeals?

Various issues fall outside of the oversight of the Independent Office of Appeals. For example, issues included in a “30-day letter” are excluded from early referral (ER)—and the IRS will reject early referral requests for issues covered in a 30-day letter once it has been issued.

Additionally, Appeals will not consider challenges to the validity of IRS regulations. Challenges involving issues designated for litigation by the IRS Office of Chief Counsel are also excluded from ER. These challenges will generally need to be litigated in either the US Tax Court, the US Court of Federal Claims, or a federal district court depending on the specific issues and circumstances involved.

If I seek Competent Authority assistance, and I also request an early referral (ER)?

No, IRS rules prohibit taxpayers who are seeking Competent Authority assistance from submitting requests for early referrals to Appeals.

Speak with a Senior Federal Tax Attorney at Oberheiden PC

If you have questions about requesting an early referral to Appeals, we invite you to get in touch. Call 888-680-1745 or contact us confidentially online to arrange a free initial consultation with a senior federal tax attorney at Oberheiden PC.

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