or several years, the IRS has been making an effort to resolve taxpayer disputes at the lowest possible level and as early in the process as possible. Even though the service has a high success rate with cases that ultimately go to court, such cases are costly in time and resources. To lower the number of cases that reach the trial stage, the IRS has implemented various alternative dispute resolution (ADR) procedures to improve the process and resolve disputes earlier.
The procedure types can be categorized by when they apply and are available. Some, such as those discussed below, apply before a return is filed; others, such as the classification settlement program for worker classification disputes, are available after a return has been filed and while it is subject to audit (and the IRS Appeals Division); still others, such as mediation and arbitration, can be used during litigation.
The following IRS ADR procedures apply before a return is filed:
APAs. The most well-known ADR process is the advance pricing agreement (APA) program. This allows multinational corporations to negotiate an agreement with the IRS on appropriate pricing for international intercompany transactions. An APA assures a corporation that the service will approve its treatment before a return is filed.
Under the APA process, a taxpayer proposes a pricing method, providing data to show the suggested method best reflects arm’s-length pricing. The taxpayer must file an APA request before the deadline (including extensions) for filing the return for the first year to be covered; it must also pay the appropriate user fee (generally, $25,000).
While generally available only for large multinational corporations, small business taxpayers now may obtain APAs with a streamlined process, reduced documentation requirements and a lower application cost.
Prefiling determinations. Some taxpayers wish to know the tax implications of transactions already completed before they file returns. Prefiling determinations allow the IRS and a taxpayer to voluntarily agree on the treatment of such transactions; these determinations typically are requested for noncontroversial issues such as the qualification of a pension plan or the tax-exempt status of an organization.
The availability of these determinations is limited. Taxpayers must make a written request of the IRS district director on a completed transaction that affects a return over which the district has jurisdiction. One will not be issued for a return question if the same question is involved in a return already filed. And it cannot be issued if the taxpayer has directed a similar inquiry to the IRS National Office or the same issue (involving the same or a related taxpayer) is pending in litigation.
A taxpayer requesting a prefiling determination letter is taking a risk. If the taxpayer does not agree with the IRS’s determination, the service is fully aware of the taxpayer’s situation and is likely to challenge any contrary position.
Advance valuation of art. The IRS allows the taxpayer to obtain a statement of value for certain works of art contributed to charity or includable for income, gift or estate tax purposes. These statements assure taxpayers of the transferred items’ value before filing returns.
This method is available for all taxpayers; the types of art that may be valued include paintings, sculpture, watercolors, prints, drawings, ceramics, antique furniture, decorative arts, textiles, carpets, silver, rare manuscripts, historic memorabilia and similar objects. The user fee for obtaining a statement of value is $2,500; in general, to be eligible for advance valuation, an item must have a fair market value of at least $50,000.
For a detailed discussion of these procedures, as well as others that may be available, see “IRS Alternative Dispute Resolution Initiatives,” by John Beehler, in the February 2000 issue of The Tax Adviser.
—Nicholas Fiore, editor
The Tax Adviser