The US Department of the Treasury and the Internal Revenue Service (IRS) have released Final Regulations related to the resolution of federal tax controversies by the Independent Office of Appeals (Appeals), largely rejecting taxpayer recommendations for change. The IRS retained the 24 exceptions to Appeals consideration, including restrictions on challenging the validity of Treasury regulations and certain other subregulatory guidance. Taxpayers protesting IRS Exam 30-day letters or otherwise heading into Appeals jurisdiction should carefully review the Final Regulations to understand which issues may be excluded from Appeals jurisdiction and how their case may be affected.
Domestic corporate taxpayers may be familiar with Appeals after getting a 30-day letter from IRS Exam with proposed income adjustments at the end of an audit. Protesting the 30-day letter’s proposed adjustments generally shunts the taxpayer to Appeals, who generally considers whether to resolve Federal tax controversies without litigation based on the likelihood of the taxpayer’s or the IRS’s position prevailing if the controversy went to court.
The 2019 Taxpayer First Act (TFA)[1] added to the Code § 7803(e), codifying this Appeals function that has existed for more than 100 years. Subsection 7803(e) mandated
Treasury and the IRS in 2022 issued Proposed Regulations that included 24 exceptions that limited Appeals consideration on an issue or outright denied a taxpayer a chance at Appeals review.[2] Despite comment letters requesting that the regulations be modified to provide greater access to Appeals, Treasury and the IRS last month finalized the Proposed Regulations and maintained the 24 exceptions with mainly minor, nonsubstantive revisions.[3]
Exceptions to Consideration by Appeals
Paragraph 301.7803-2(b)(1) provides that “[t]he Appeals resolution process is generally available to all taxpayers to resolve Federal tax controversies” (emphasis added)—faithfully paraphrasing § 7803(e)(4). But the bulk of § 301.7803-2 describes 24 exceptions to the general-availability rule. The 2019 Tax Reform Act (TRA) House Committee Report explained that the resolution of tax controversies, as outlined in § 7803(e)(3), “is generally available to all taxpayers, subject to reasonable exceptions that the Secretary may provide. Thus, cases of a type that are referred to Appeals under present law remain eligible for referral to Independent Appeals”[4] (emphasis added).
Treasury and the IRS seem to think differently. They’ve interpreted the language of § 7803(e)(3) and the “reasonable exceptions” language from the House TFA Report to support their assertion that the regulations can exclude certain taxpayers from the § 7803(e)(3) Appeals resolution process and certain issues from all taxpayers, availing themselves of such process, including cases and issues that were eligible for referral to Appeals when the TRA was passed. Thus, it is unclear whether—in so interpreting “generally available” in § 7803(e)(4) and “reasonable exceptions” in the House TFA Report—Treasury and the IRS engaged in reasoned decision-making.[5] Under the right circumstances, these exceptions may be subject to challenge.
Exceptions 19 and 20 are examples of “new” post-TRA exceptions imposed on Appeals by Treasury and the IRS. Appeals won’t consider any issue based on a taxpayer’s argument that a Treasury regulation is invalid[6] or any issue based on a taxpayer’s argument that a notice or a rev. proc. is procedurally invalid,[7] unless there’s an unreviewable decision from a federal court holding as much.
The decision in Loper Bright Enterprises v. Raimondo, 144 S.Ct. 2244 (2024)—overruling Chevron deference accorded to agency regulations, and requiring courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority[8]—increases taxpayers’ chances of invalidating Treasury regulations. More regulation validity challenges can be expected. Exception 19 will, however, preempt Appeals settlement of such challenges and send more taxpayer regulation validity challenges to court, at least, until there is an unreviewable federal court decision invalidating the relevant regulation.
Exceptions 19 and 20 thus creates an exception to Appeals’ purpose to “resolve[] Federal tax controversies without litigation on a basis that is fair and impartial to both the Government and the taxpayer.”[9] Until there is a relevant nonreviewable federal court decision, Exception 19 may direct invalidity challenges to litigation on a basis that is not fair or impartial to taxpayers.
Requests for Referral to Appeals Following Issuance of a Deficiency Notice
Subparagraph 7803(e)(5)(A) says that if any taxpayer who got a § 6212 statutory notice of deficiency asks for referral to Appeals, and the taxpayer’s request is denied, then the IRS has to give the taxpayer, in writing, (1) a detailed description of the facts involved, the basis for the decision to deny the request,[10] and a detailed explanation of how the basis of such decision applies to such facts and (2) a description of the procedures under § 7803(e)(5)(A)(C) for protesting the IRS’s decision to deny the request.
Subsection 301.7803-3(a) essentially embodies § 7803(e)(5)(A), but adds three requirements, not in the Code, that must be met before the taxpayer can get a written description. The three added requirements are, first, the taxpayer can’t have previously asked for Appeals consideration, under § 7805(e)(3), of the same matter or issue in a taxable year or period;[11] second, Appeals cannot have previously considered the matter or issue in a taxable year that is the subject of the request and determined that the matter/issue could not be settled, or a settlement offer was rejected;[12] and third if the notice of deficiency for which the taxpayer requests Appeals consideration includes more than one issue/matter in a taxable year, the taxpayer must request referral for Appeals consideration and submit all such issues/matters at the same time.[13] These three added regulatory requirements should be noncontroversial.
Because the Treasury and IRS retained the 24 exceptions in the final regulations, corporate taxpayers under IRS audit must carefully plan their defenses if any of the exceptions may be implicated. If so, taxpayer protests to 30-day letters (RARs) should, if possible, be drafted to frame issues so as to skirt the exceptions. To save time and money, a taxpayer should—in interacting directly with Appeals—try to determine early the extent of discretion Appeals officers may be willing to exercise with the taxpayer’s issues. If a taxpayer’s case involves international issues with a related party in a treaty jurisdiction, invoking US competent authority procedures before[14] going to Appeals may be warranted.
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[1] Public Law 116-25, 133 Stat. 981, § 1001.
[2] REG–125693–19, 87 Fed. Reg. 55934 (Sept. 13, 2022) (the Proposed Regs).
[3] T.D. 10030, 90 Fed. Reg. 3645 (Jan. 15, 2025) (the Final Regs); these Final Regs are applicable to requests for Appeals consideration (e.g., in a Protest filed in response to an IRS 30-day letter (RAR)) made on or after Valentines Day, 2025. §§ 301.7803-2(h) and -3(b).
[4] House TFA Report at 30–31.
[5] For example, the Proposed Regs cite language from the House TFA Report clearly referring to certain taxpayers that will be excluded from Appeals consideration, and then quote the House TFA Report’s footnote in support of that language: “Rev. Proc. 2016-22, [§ 601.106]. Exceptions to the general rule in favor of requiring Appeals consideration include cases that are withheld in the interests of sound tax administration, among other reasons.” House TFA Report at 29, n. 8 (quoted in part in Proposed Regs, 87 Fed. Reg. at 55937). Rev. Proc. 2016-22 deals with the Office of Chief Counsel referring Tax-Court-docketed cases to Appeals—i.e., excluding certain taxpayers from Appeals. To be sure, § 602.206(f)(2) (Rule II) states that “Appeals may defer action on or decline to settle some . . . issues (for example, issues on which action has been suspended nationwide) in order to achieve greater uniformity and enhance overall voluntary compliance with the tax laws.” It’s unclear, however, that the House TFA Report, in citing § 601.106 in support of excluding certain taxpayers from Appeals, intended to bless Rule II’s signaling Appeals’ ability to decide issues it will exclude for all taxpayers. Even if the US Congress intended to give Appeals a blank check to exclude issues from its consideration, if Congress intended Appeals to be independent from Treasury and the IRS, wouldn’t Congress have intended Appeals itself—not Treasury and the remainder of the IRS—to determine which issues to exclude?
[6] A regulation is “invalid” if it’s either substantively invalid or procedurally invalid.
[7] A Notice or Rev. Proc. is procedurally invalid if it failed to comply with administrative law requirements, such as the notice-and-comment requirements under 5 U.S.C. § 553. Exception 20 doesn’t prevent Appeals from considering the likelihood that a court would agree or disagree with the interpretation of the tax law asserted by the taxpayer, even if it differs from the interpretation described in a Notice or Rev. Proc. Proposed Regs, 87 Fed. Reg. at 55943.
[8] 144 S.Ct. at 2273.
[9] § 301.7803-2(a).
[10] The Preamble to the Final Regs explains that if one or more of the 24 exceptions in § 301.7803-2(c) applies to a taxpayer, that “may be a reason why the request for referral to Appeals was denied.” Final Regs, 90 Fed. Reg. at 3661. Exception 21 in § 301.7803-2(c)(3) applies if a case or issue is designated for litigation—i.e., the federal tax controversy, comprising an issue or issues in a case, won’t be resolved without either a full concession by the taxpayer or a decision of the court.
[11] § 301.7803-3(a)(3).
[12] § 301.7803-3(a)(4).
[13] § 301.7701-3(a)(5).
[14] Rev. Proc. 2015-40, I.R.B. 2015-35 236, § 6.04 (Coordination with IRS Appeals). Taxpayers should also think carefully about the advisability of requesting the simultaneous appeals procedure, which is an optional aspect of the competent authority process in which Appeals works jointly with the US competent authority and the taxpayer toward developing the US competent authority’s position on an underlying US-initiated adjustment before the US competent authority’s consultations with the foreign competent authority. Rev. Proc. 2015-40, § 6.04(2).