New Policy Statement That Appeals Is Not to Raise New Issues (7/23/13)

The IRS released a Memorandum for Appeals Employees, here, on the subject of Implementation of the Appeals Judicial Approach and Culture (AJAC) Project.  "The AJAC Project is returning Appeals to a quasi-judicial approach in the way it handles cases, with the goal of enhancing internal and external customer perceptions of a fair, impartial and independent Office of Appeals."  For purposes of this blog entry, the approach should limit Appeals to deciding the controversies that the parties put before it, rather than raise new issues not previously spotted by Exam or re-visit issues settled or dropped by Exam.  In furtherance of that objective, the Memorandum advises of a new IRS Policy Statement as follows:

Policy Statement 8-2 (Formerly P-8-49) 

(1) New issues not to be raised by Appeals. 

(2) Appeals will not raise new issues. Appeals also will not reopen an issue on which the taxpayer and the Service are in agreement.

The memorandum implements this policy with new IRM provisions in various contexts -- Collection Due Process, Offers in Compromise, Collection Appeals Program, and Examination Cases.  I focus here on Examination Cases.  The effect of the new approach on Examination cases is set forth in Attachment 5 to the Memorandum.  Key points in attachment 5 are:

• The prohibition on raising new issues also applies in Appeals consideration of docketed cases.  (IRM 8.4.1.15.3).
• Guidance is given when the taxpayer raises new issues.  Id.
• Guidance is given when an issue not before Appeals is identified; although the Appeals  Officer cannot raise it on appeal, if it is a systemic issue, a process for the issue to be reported is provided.  "A systemic issue is an issue that requires a change or modification to an established procedure, process or operation (e.g., training issues, computer program, campus procedure for processing claims). These are issues that potentially impact more than one taxpayer."  IRM 8.6.1.6(1).
• "Reopening a previously agreed issue or raising a new issue has the same implications, and is, for all practical purposes, one and the same. Therefore, for purposes of this section, treat reopening an agreed issue the same as raising a new issue."
• "A new issue is a matter not raised during Compliance's consideration. (3) A new theory or alternative argument is not a new issue."
• "(1) Appeals will not raise new issues and will focus dispute resolution efforts on resolving the points of disagreement identified by the parties. The Appeals process is not a continuation or an extension of the examination process."  IRM 8.6.1.6.2(1).  "In resolving disputes, Appeals may consider new theories and/or alternative legal arguments that support the parties' positions when evaluating the hazards of litigation in a case. However, the Appeals hearing officer will not develop evidence that is not in the case file to support the new theory or argument."
• "In docketed cases, the Appeals hearing officer will consider a new issue affirmatively raised by the government in pleadings and may consider any new evidence developed by Compliance or Counsel to support the government's position on the new issue. The Appeals hearing officer's consideration of a new issue in a docketed case will take into account that the government has the burden of proof."

 The old version (currently on the web as of 7/23/13), here, is:

1.2.17.1.2  (Approved 01-05-2007)
Policy Statement 8-2 (Formerly P–8–49) 

1. New issues not to be raised unless material 

2. An issue, on which the taxpayer and the Service are in agreement, should neither be reopened by Appeals nor should a new issue be raised, unless the ground for such action is a substantial one and the potential effect upon the tax liability is material. The existence of unreported income, deductions, credits, gains, losses, etc. stemming from a tax shelter which is a listed transaction constitutes such a substantial ground with a material effect upon the tax liability.

Appeals raising of new issues was extremely rare under this old rule.  I have been practicing for over 35 years and have never had a new issue raised on Appeal.  But it was a possibility and a risk.

At least in some cases, the old policy gave incentives to avoid an appeal at the conclusion of which is probably the most efficient timing from an administrative perspective.  Some taxpayers would get to appeals after filing the petition in the Tax Court, with the thought that the press of the expected docket call would limit the time Appeals would be substantively involved and likely to spot new issues.  Other taxpayers pursued their refund remedies with careful attention to timing so that, if new issues were raised, the statute of limitations would foreclose any adjustment other than by offset.

This is a welcome clarification of Appeals' role.

Of course, the fact that Appeals will not raise new issues does not mean that, should litigation ensue in the Tax Court or a refund forum, the Government will not be permitted to raise new issues.  Then, the ability of the Government to raise and pursue new issues will be governed by the respective court's control of its docket.