Mediating with the IRS.

• Author: Beehler, John M.

EXECUTIVE SUMMARY

Under a one-year test program that will end in October, certain taxpayers can elect to mediate a dispute with the IRS instead of risking the hazards of litigation. The mediation test program, which was proposed in Ann. 95-2 and detailed in Ann. 95-86, is open to cases already in the IRS Appeals administrative process and not yet docketed in court. This article explains the new program, the types of cases eligible, the issues to consider in drafting various mediation documents and the advantages and disadvantages of mediation and of serving as a mediator. The mediation procedure for docketed Tax Court cases is also discussed.

With the court system overburdened by excessive litigation, alternate dispute resolution (ADR) has become very popular. Many recognize that instituting a lawsuit is a losing proposition to both parties when the time commitment, stress and legal costs are considered; as a result, disputes are usually sent to mediation or another ADR procedure before being litigated. Until recently, ADR was not used frequently for disputes between taxpayers and the IRS. Although the Service has employed various ADR procedures over the past few years,(1) until now it has not attempted mediation for disputes with taxpayers. This article will address the use of mediation under the new IRS procedures for the Appeals administrative process, and discuss the proposed use of mediation in docketed Tax Court cases.

Of the many different forms of ADR, the best known are arbitration and mediation. In general, arbitration differs from mediation in that the process is binding on all parties; the arbitrator solicits arguments from both sides to gather information useful to his decision making.

Mediation, on the other hand, is a nonbinding process that involves a mediator or neutral third party who acts as a facilitator to guide the parties to a negotiated agreement. The mediator does not render a judgment; he meets with the parties, focuses on the key issues and the parties' interests, identifies potential options and helps the parties find a mutually advantageous solution. The mediator tries to remove emotion from the process and to get the parties to work together to resolve the dispute. It is estimated that over 80% of all mediated disputes are resolved.(2)

Background

The IRS issued a proposed mediation procedure in Ann. 95-2(3) that was discussed at a public hearing on Feb. 23, 1995. Based on the comments received, Ann. 95-86(4) was issued, addressing mediation procedures for issues in the Appeals administrative process and not docketed in any court, during a one-year test period beginning Oct. 30, 1995. The IRS also issued a memorandum to field administrative officers on mediation procedures to resolve docketed, pretrial Tax Court cases,(5) stemming in part from public comments that mediation is appropriate for such cases. In Ann. 95-86, the IRS asserts that mediation as set forth therein is only appropriate for cases involving factual issues (e.g., transfer pricing, valuation and reasonable compensation).

Scope of Appeals Mediation Procedures

The one-year test of mediation under Ann. 95-86 is limited to cases in the Appeals administrative process after initial Appeals settlement discussions are unsuccessful. The IRS Appeals settlement process is, in essence, an ADR procedure similar to mediation; the skilled Appeals Officer seeks a compromise of the controversy with the taxpayer based on the perceived hazards of litigation. This differs from arbitration and litigation, in which the arbitrator or judge alone determines the final outcome.

During the test period, mediation is limited to issues in Coordinated Examination Program (CEP) cases assigned to Appeals Team Chiefs. CEP cases involve very large, complex, affiliated corporations audited by an IRS team; these are high-profile, large-dollar cases.(6) The IRS should consider expanding the scope of cases eligible for mediation during the test period to include other cases (e.g., estate tax cases and cases involving smaller entities); this would provide a more meaningful test of the potential of mediation in resolving tax disputes.

Mediation is not available for certain issues during the test period, such as Industry Specialization Program issues, Appeals Coordinated...