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IRS Updates Procedures for Designating Taxpayer Disputes for Litigation

The IRS has issued a memorandum that provides interim guidance to the agency’s compliance staff on requests to designate issues for litigation.

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The IRS has issued a memorandum that provides interim guidance to the agency’s compliance staff on requests to designate issues for litigation.

Designation of issues for litigation, a decision that is made with the Office of Chief Counsel, limits a taxpayer’s opportunity to administratively resolve their case with the IRS Independent Office of Appeals. Disputes between the IRS and taxpayers over designated issues must be resolved through litigation. The IRS took this step to update and clarify its designation procedures as part of its implementation of the Taxpayer First Act (TFA) enacted in July 2019.

The IRS’s approach of judiciously designating issues for litigation balances the need to soundly administer the tax law while recognizing the important role of Appeals in resolving tax controversies without litigation. The designation of issues for litigation has been and remains infrequent. The IRS recently submitted its first TFA annual report indicating that no issues have been designated for litigation.  For perspective, the Office of Chief Counsel annually litigates between 25,000 and 30,000 cases in the United States Tax Court, many of them involving small dollar amounts and pro se litigants.

The process of designating an issue is exhaustive. It involves several written notices and opportunities for the taxpayer to avoid designation and is subject to the highest level of oversight within the IRS and Chief Counsel. It also includes the opportunity to personally meet with the Chief Counsel to make a case against designation. The TFA codifies this framework and high level of oversight. It also sets forth the specific elements for the written notice required to be provided to the taxpayer and grants taxpayers the right to administratively appeal designation determinations.

The designation procedures set out in the memorandum will be incorporated into the Internal Revenue Manual, and corresponding changes will be made to the Chief Counsel Directive Manual.  This ensures that IRS and Chief Counsel employees adhere to the designation procedures and comply with the TFA provisions.