Pevita Pearce
When a disagreement arises between a taxpayer and the Internal Revenue Service (IRS), a crucial, yet often overlooked, avenue for resolution is the agency’s Independent Office of Appeals. This independent body, designed to provide a neutral review of tax disputes, is currently facing significant operational challenges that tax professionals and taxpayers alike fear could undermine its vital role in ensuring fairness and upholding taxpayer rights within the U.S. tax system.
The Crucial Role of the Independent Office of Appeals
For many individuals and businesses, the Independent Office of Appeals remains an enigma, a distant bureaucratic entity lost in the complexities of tax administration. However, within the intricate framework of the nation’s tax system, Appeals occupies a unique and indispensable position. It operates distinctly and separately from the IRS’s compliance functions, which are responsible for conducting audits and examinations. When taxpayers or their representatives contest the findings of these examinations, the Appeals process is intended to provide a critical second look.
Appeals Officers are tasked with meticulously reviewing cases based on the existing administrative record. While situated within the IRS, the office is legally mandated and structurally designed to function independently. This independence means that Appeals does not align itself with the IRS compliance divisions that initiated the audit, nor does it automatically favor the taxpayer bringing the case. Instead, its core purpose is to objectively evaluate the evidence gathered during the examination phase. This impartial review is a cornerstone of taxpayer rights, ensuring that disputes are resolved equitably and that the tax laws are applied fairly.
Tax practitioners, in particular, understand the profound significance of the Appeals office. They recognize its critical role in safeguarding both the rights of taxpayers and the integrity of the nation’s tax laws. The ability of taxpayers to present their case to an independent body, free from the direct influence of the examining agents, is a fundamental tenet of due process in tax matters.
Emerging Concerns and Fundamental Changes
Despite its critical importance, there are growing concerns within the tax community regarding fundamental changes in how the Independent Office of Appeals is operating. These shifts are perceived by many as threatening a vital component of the tax system, potentially eroding the very independence that defines the office.
One of the most significant contributing factors to these concerns is the issue of staffing. The IRS, as a whole, experienced substantial workforce reductions in recent years, but the Independent Office of Appeals was disproportionately affected. Reports indicate that a significant percentage of its workforce departed in the preceding year, leading to a severe shortage of Appeals Officers. This depletion of personnel has created a backlog of tens of thousands of cases, placing immense pressure on the remaining staff, who are often overworked and stretched thin.
Beyond staffing shortages, other operational changes are raising alarm bells among tax practitioners. These changes revolve around the evolving methods and procedures within the Appeals office, particularly in how certain complex cases are being handled.
The Employee Retention Credit (ERC) Case Conundrum
A prime example illustrating these concerns can be found in the handling of Employee Retention Credit (ERC) cases stemming from the pandemic era. Tens of thousands of these claims were systematically rejected by the IRS compliance functions. Many businesses argue that the fundamental facts of their situations were overlooked during the initial review, facts that would have rendered them eligible for the ERC. Consequently, these businesses have turned to the Appeals office for recourse, further exacerbating the already overwhelming caseload.
The situation is further complicated by the nature of the cases being forwarded to Appeals. In many instances, the ERC cases arriving at Appeals are described as "underdeveloped." This means that the cases are being sent from IRS compliance functions, such as the Small Business and Self-Employed (SBSE) division, without the thorough substantiation and initial review that is traditionally performed by IRS Revenue Agents. As a result, Appeals Officers are finding themselves conducting the foundational work of basic substantiation and review, tasks that fall outside their purview and are typically handled by IRS compliance personnel. This deviates from established practices and the long-standing division of labor within the IRS.
Erosion of Independence and Mission Drift
This development is deeply troubling for stakeholders across the tax community. When Appeals Officers are compelled to undertake basic investigative and substantiation work on cases received from IRS compliance units, it directly undermines the independence of the Appeals office. Such practices run counter to the established policies and procedures outlined in the Internal Revenue Manual and other agency documents, including the principles of the Appeals Judicial Approach and Culture (AJAC) Project.
The AJAC Project, initiated in 2013, established a critical framework for the Appeals office, emphasizing a quasi-judicial approach to dispute resolution. However, there are indications that this framework is being abandoned in tens of thousands of cases, including those involving complex issues like the ERC. Critically, this is not solely a failure originating within the Office of Appeals itself. Rather, it appears to be a consequence of an administrative posture imposed by the agency, characterized by the forwarding of underdeveloped cases from IRS compliance functions.
The repercussions of this trend are significant for both taxpayers and the broader tax administration. Hard-working taxpayers are being denied the independent review to which they are entitled, potentially leading to unjust outcomes. Simultaneously, the effectiveness and integrity of tax administration are being hampered by the erosion of the Appeals office’s independence. This situation can be characterized as "mission drift," a departure from the core principles that have historically been championed by Congress.
Congressional Intent and Taxpayer Rights
The importance of an independent Appeals process has been recognized at the highest levels of government. In a testament to its significance, bipartisan members of Congress took the proactive step of formally adding the word "Independent" to the Appeals office’s name through the Taxpayer First Act of 2019. This legislative action underscored the congressional commitment to ensuring that taxpayers have access to a neutral and impartial forum for resolving tax disputes. The current challenges facing the office therefore represent a departure from this clear legislative intent.
Signs of Hope Amidst Challenges
Despite the mounting concerns, there are emerging signs of optimism that suggest a potential path toward addressing these critical issues. IRS Commissioner Frank Bisignano has publicly acknowledged the existence of the problem and has indicated a commitment to resolving the Appeals backlog. Furthermore, the IRS has initiated efforts to hire additional Appeals Officers, signaling a move to reverse the concerning staffing trends of the previous year.
Commissioner Bisignano and the IRS leadership deserve commendation for their focus on making progress in this area. However, it is imperative that these efforts are undertaken in a manner that aligns with the agency’s own established standards, respects the expectations of Congress, and, most importantly, safeguards the fundamental rights of taxpayers.
Recommendations for Restoration and Protection
To effectively address the current challenges and restore the integrity of the Independent Office of Appeals, several concrete steps are recommended.
Firstly, the IRS should take immediate action to revive the core principles of the AJAC Project. This would involve reinforcing the traditional, quasi-judicial approach that is essential for maintaining an independent Appeals forum. This includes ensuring that cases are properly developed and substantiated by compliance functions before being forwarded to Appeals, allowing Appeals Officers to focus on their role as independent adjudicators of fact and law.
Secondly, the National Taxpayer Advocate should consider designating the systemic administration of ERC refund claim disallowances, and its detrimental impact on the Appeals office, as a "Most Serious Problem" in her upcoming 2026 Annual Report to Congress. Such a designation would bring significant attention to the issue and formally recommend immediate corrective action, thereby providing a powerful mechanism for protecting taxpayer rights.
The firm Frost Law, recognizing the gravity of these developments, has already taken proactive steps. Their colleagues highlighted these concerns in a formal letter to IRS leadership and National Taxpayer Advocate Erin Collins. This letter, dated July 17, 2023, and available for review, details the specific issues and advocates for the restoration of established procedures.
Implementing these recommendations would yield substantial benefits for all parties involved. It would help streamline the work of the Appeals office, making its operations more efficient and effective. Moreover, a return to historically proven processes would unequivocally protect taxpayer rights and ensure that the IRS upholds its commitment to fairness and due process.
This renewed focus on procedural integrity and independence will be crucial in restoring the critical balance and fairness that the Independent Office of Appeals is designed to provide, ultimately strengthening the entire U.S. tax system. The ongoing challenges, while significant, present an opportunity for the IRS to reaffirm its commitment to its foundational principles and to the taxpayers it serves.
Peter Haukebo is a partner at Frost Law, specializing in tax controversy. He has extensive experience with IRS Appeals, including matters related to the Employee Retention Credit. Mr. Haukebo has also served as an adjunct professor of law at the University of Maryland Francis King Carey School of Law, where he taught in the Low Income Taxpayer Clinic.
Terry Lemons is the public relations director at Frost Law. He previously spent 26 years at the IRS, including 13 years as Chief of Communications & Liaison, overseeing the agency’s communications operations and outreach to the tax professional community.
