Alternative conflict resolution procedures in the framework of the experience of the US tax code.

AutorPedro José Carrasco Parrilla - Luis María Romero Flor
CargoProfessors of Tax Law in the University of Castilla-La Mancha (Spain)
Páginas3-14

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1. Introduction2

The sketch we outline in the presentation contained in this section is designed to contemplate the application of the techniques through which taxpayers may reach an agreement with the Internal Revenue Service (hereafter IRS), an administrative agency that forms part of the Department of Treasury, the mission of which is to "provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all"3.

2. Interview with the taxpayer

With the aim of fulfilling the mission we mentioned above, the IRS begins the examination procedure4by means of a prior selection of tax declarations that may contain incorrect quantities.

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This process of selection or identification of declarations may be carried out either through computer programmes, called Discriminant Inventory Function System (or designated by the acronym DIF), by virtue of which taxpayers are catalogued and graded in accordance with the information contained in declarations, studies of examinations performed in the past or in certain areas identified in taxation fulfilment projects; or the selection may be made using information extracted from external sources such as newspapers, individual or public registers, etc., wherein if it is ascertained that the information contained in these media is true and reliable, it may be used to select a declaration for examination.

After making the selection, and when the IRS has verified that the tax declaration contains incorrect quantities, the service will proceed either to send the taxpayer a letter in which, as well as indicating the reasons why the IRS considers the declaration should be altered, the taxpayer will be asked for additional information enabling them to collate or complete the information shown in the declaration; or, by contrast, the taxpayer will be informed that an examination of the declaration will be performed by means of a personal interview.

In reply to the request received by post, the taxpayer may choose to ask for a personal interview with the official in charge of the examination, or may answer it by post providing the IRS with the information required or giving an explanation. On the basis of this second option, the IRS may or may not agree with the taxpayer, and if it disagrees, must explain the reasons why the alteration should be made to the declaration.

If, by contrast, the taxpayer is informed that an examination is to be carried out by means of a personal interview, or if as we saw in the previous paragraph, it is the taxpayer who requests said interview, he or she will have the right to ask that the interview be held in a place and at a time convenient for both parties, and as a result examinations not carried out by post may take place in the home or the workplace of the taxpayer, in the office of the latter’s attorney, accountant or agent, or in an IRS office.

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During the examination, taxpayers may represent themselves, or may have the right to a representative5or any other person(s) to support their position, as long as these persons are qualified to practice before the IRS, such as for example an attorney, a certified public accountant, or a person enrolled to practice before the IRS. Moreover, taxpayers may "make sound recordings of any meetings with our examination, appeal or collection personnel"6, but in order to implement this, will have to notify the IRS in writing at least ten days before the date of the meeting.

If, after carrying out the examination, the inspector proposes alterations to the taxpayer’s tax declaration, in justified fashion, the latter may agree with said alterations, in which case he or she will sign the agreement and proceed to pay the additional tax that may be owed, plus the interest for delay.

However, in the event that the taxpayer does not agree with some or all of the determinations proposed by the IRS, he or she may explain his or her position to the supervisor of the person who issued the determination, requesting either a meeting, if the examination was performed in an IRS office; or a telephone conference, if the examination did not take place in an IRS office, but in the home or workplace of the taxpayer, or in the office of his or her attorney, accountant or agent.

If, during this meeting held with the supervisor, both parties reach an agreement, the case will be closed. But if the taxpayer still disagrees with the determinations proposed by the IRS after the meeting or talk with the supervisor, the case will be written up explaining the taxpayer’s position and the IRS’ position.

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A few weeks after the interview with the examiner from the reviews area or the meeting with said examiner’s supervisor, a letter known as a 30-day letter7will be delivered to the taxpayer’s home containing the notification of his or her right to appeal the changes proposed by the IRS within the thirty days after receipt of this letter, along with a copy of the examination report explaining the examiner’s proposed changes, an agreement or waiver form and a copy of Publication 5 which, under the title of "Your Appeal Rights and How to Prepare a Protest If You Don’t Agree"8, sums up the multiple rights to appeal taxpayers have, and the different opportunities they have for resolving their differences when they do not agree with an action of the IRS.

After receiving the 30-day letter, in general a triple channel is opened up to taxpayers, enabling them to choose one of the following options:

Firstly, within the period of thirty days from receipt of the letter, taxpayers may inform the IRS that they agree with the changes proposed by returning the agreement form signed by the taxpayer, and proceeding to pay the amount owed plus interest for delay. We should mention, albeit summarily, that in the event that taxpayers are unable to pay the total amount owed, they may request payment by monthly instalments from the IRS. This request must be approved by the IRS. However, the IRS recommends taxpayers consider "less costly alternatives, such as a bank loan"9.

The second procedure taxpayers may choose is to notify the IRS within the period of thirty days from receipt of the letter that they are going to exert their right to appeal the case before the IRS’ Appeal Office.

And finally, taxpayers can simply do nothing, so that if they fail to reply to the 30-day letter with one of the solutions expounded, or fail to reach an agreement with the Appeal Office later on, the IRS will send another letter to them, known as a notice of deficiency, or 90-day letter, by virtue of which taxpayers are granted a period of ninety

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days from the date of receipt, or 150 days if the notice is addressed to them outside the United States, to file a petition for review by the United States Tax Court.

3. Mediation phase

If an agreement is not reached during the administrative negotiations phase, the taxpayer may submit the matter to a third party who will act as mediator and who, through independent and impartial intervention, will help find a solution for the large number of conflicts that arise, or may arise, as a consequence of an inspection or audit, an offer in compromise, trust fund recovery penalties, or other collection actions, as long as the latter are not issues for which there is no legal precedent, where courts have rendered opposing or different decisions in different jurisdictions, Industrial Specialization Program issues or constitutional issues.

This is what is known as Fast Track Mediation (hereafter FTM) in the US tax code, regulated in Publication 360510with...

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