Your client manufactures heavy farm equipment. It has a network of independently owned dealerships that employ sales staff to sell the equipment to customers. From time to time, your client wishes to boost the sales of specific equipment, so it offers incentives directly to the dealerships’ sales staff to sell that equipment. Your client reports the payments to the sales staff and issues them each a Form 1099. During your client’s IRS examination, an employment tax examiner determines that the sales staff are your client’s employees and should be treated as such for employment tax purposes. That is, income tax and FICA should be withheld, and earnings should be reported on Form W-2. Your articulate factual presentation and well-reasoned arguments fall on unsympathetic ears. The IRS issues a 30-day Letter to your client.

This is the first of a five-part series on pointers for powerful Appeals. In this article, we discuss the Protest. The following articles will discuss Preparation, Presentation, Persistence, and Perfection[1]. We will focus on administrative Appeals from a 30-day Letter issued by Compliance; however, many of the lessons apply to other Appeals as well. These articles aren’t meant to be exhaustive but are to share insight gleaned from decades of Appeals – many of which were successful. For some of the lessons, we still have scars. Let’s begin with the Protest.

Let the IRS Help You Write the Protest.  The best way to start writing is with a plan. IRS Publication 5 provides a list of required elements for a protest. Always start with this list to make sure that you cover each element. Your formal protest must include

• A statement that you want to appeal the changes proposed by the IRS
• Your name, address, and a daytime telephone number
• List of all disputed issues, tax periods or years involved, proposed changes, and reasons you disagree with each issue
• Facts supporting your position on each disputed issue
• Law or authority, if any, supporting your position on each disputed issue
• Penalties of perjury statement

Publication 5 provides a standard penalties of perjury statement for taxpayer submissions.[2] If a representative submits the protest, a different statement is required. That raises a good question: Who should sign and submit the protest – the taxpayer or its representative? After discussing our overall strategy with our client, we’ve done it both ways. Generally, we write and sign the protest ourselves. Other times we write it and the client submits it on the client’s letterhead under the client’s signature. In a later article we will discuss effective Presentations, but let us just say for now, a protest may be more effective coming from a client when the client is sympathetic, or the client has deep knowledge of an industry issue at the center of the appeal.

Appeals is Independent – Even When It Isn’t. Appeals prides itself in its independence. Congress apparently does too. With the Taxpayer First Act of 2019, Congress changed its name to the Internal Revenue Service Independent Office of Appeals.[3] A wag has said: “Is Appeals independent? Of course, it is. It’s in its name.” Independence is no small point. One of the worst accusations that can be made to an Appeals Officer is that she is not independent. What does that mean in practical terms? Because they value themselves as independent, most Appeals Officers consider themselves as protectors of the tax system. They are outside the system – dare we say – above the system, attempting to make sure that it functions fairly. In our farm equipment hypothetical, the protest should show why the agent’s proposal is unworkable in a fair tax system: treating the sales staff as employees of both the manufacturer and the dealership is inefficient. Appeals must intervene to stop a ridiculous result.

Argue the Facts and the Law and the Important Stuff Too. A Protest is a chance to demonstrate scholarship and technical tax knowledge, but it should be written to be read. Thus, before launching into the depths, the writer should provide a concise, affirmatively stated summary of the points relied upon is very effective. Like a legal brief filed with a court, a Protest relies upon the code, regulations, and case law as primary authority. However, a Protest should readily draw from the vast body of agency documents issued by the IRS. Other “authorities” like private letter rulings, chief counsel advice, field service advice, audit technique guides, and even, publications and instructions, if favorable, should be considered. In the example above, the taxpayer could include a copy of Publication 3204 which is a very old two-page document to help automobile sales staff understand their obligations under a similar incentive arrangement – which, by the way, the taxpayer and the sales staff were following. These other lesser authorities may be helpful to Appeals Officers because, as mentioned above, they feel an obligation to protect the system and not simply follow the law.

AJAC and “New Issues.” In 2013, Appeals issued internal guidance for its employees to implement the Appeals Judicial Approach and Culture Project (AJAC). AJAC encourages Appeals Officers to act more like judges in that they should only consider the facts and issues that are properly before them (i.e., facts and issues previously raised with examination). Thus, it is important for the taxpayer to ensure that the Protest is complete. Any facts and issues not presented before the 30-day letter should be included in the Protest. Ideally, convincing matters would be presented earlier, but because the Protest is addressed to the examiner’s manager, new facts and positions in the Protest would be timely and not contrary to AJAC. Finally, after reviewing the Protest, examiners typically write a rebuttal, which is generally (but not always) provided to the taxpayer. Thus, the Protest should include a request for a copy of any rebuttal and an opportunity to respond.

A Word About Tone. Most IRS examiners are professional, smart, and conscientious; however, occasionally, you get one who is not so good and may even be a bit belligerent. First, don’t attack the examiner. Appeals Officers are typically former examiners themselves. Naturally, they might identify with the examiner and feel that you are being unfair, and that is not a good posture. Thus, you challenge the position and not the person. “We find the government’s position meritless.” And not: “The examiner doesn’t know what he’s talking about.” On the other hand, sometimes you must say something. If a complete breakdown in trust or an examiner’s demonstrated ill will derailed an examination or caused the escalation of non-issues to Appeals, the tax system did not function fairly. In situations, like this, include one paragraph about the background of the examination, and then, leave it alone. The Protest is not a customer complaint. We’ll talk more about how to handle an examiner’s misconduct in a later article.

In our next article we will share some pointers for how to prepare for a successful Appeals conference.

[1] Perfection as in “Completion.” Southern lawyers use alliteration and quote Scripture.

[2] “Under penalties of perjury, I declare to the best of my knowledge and belief, the information contained in this protest and accompanying documents is true, correct, and complete.”

[3] I.R.C. § 7803(e)(1). The TFA even codified its mission: “to resolve Federal tax controversies without litigation on a basis which is fair and impartial to both the Government and the taxpayer; promotes a consistent application and interpretation of, and voluntary compliance with, the Federal tax laws; and enhances public confidence in the integrity and efficiency of the Internal Revenue Service.” I.R.C. § 7803(e)(3).

Article by Mark Mesler and Ethan Vernon