Not So Independent?: New Proposed Rules Constrain IRS's Independent Office Of Appeals

• Published date: 30 September 2022
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Tax Treaties
• Law Firm: Mayer Brown
• Author: Ms Jenny A. Austin and Jeremy D. Himmelstein

On September 13, Treasury proposed new regulations relating to taxpayers' rights to access the IRS Independent Office of Appeals ("Appeals"). Appeals was designed to resolve disputes with the IRS in a fair and impartial manner. Taxpayers secured the right to take certain disputes to Appeals following the Taxpayer First Act of 2019. However, the proposed regulations seek to limit when taxpayers can go to Appeals, and the types of issues that can be raised.

The proposed regulations identify 24 types of issues that will not trigger Appeals rights. The most notable issues include regulatory validity challenges, challenges to IRS notices or revenue procedures, and certain tax treaty questions. In addition to issuing proposed regulations, the IRS has also already updated the Internal Revenue Manual to reflect the limitation on Appeals' jurisdiction to determine issues based solely on validity challenges to regulations or IRS notices or revenue procedures.

Challenges to Treasury Regulations. The proposed regulations exclude from Appeals' jurisdiction most challenges to Treasury Regulations. In the last few years, the IRS and courts have seen dozens of regulations challenged, either under the Administrative Procedure Act for procedural defects, or under "Chevron" for substantive issues. Some of the challenged regulations have been on the books for decades, but the uptick is largely attributable to recent regulations that were promulgated following the Tax Cuts & Jobs Act of 2017.

The new proposed rules provide that Appeals will not entertain regulatory validity challenges unless there has been an "unreviewable decision" from a federal court invalidating the regulation in question. An "unreviewable decision" is a decision that is final and no longer appealable. This means that Appeals would not be authorized to consider a recent Colorado federal court decision-ruling that the section 245A temporary regulations regarding the dividends-received-deduction is invalid-because other issues in that case remain pending.¹

Challenges to IRS Notices and Rev. Procs. Similarly, the proposed regulations would prohibit Appeals from considering challenges to IRS notices and revenue procedures. Taxpayers have recently been targeting "listing notices," which are notices that require taxpayers to report their participation in certain transactions. These notices create potential penalty exposure under sections 6707A and 6662A, among others. In March, a federal appeals court struck...