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IRS expands “Fast Track Settlement” for small businesses

AuditThe risk of a tax audit for a small-business client may be small, but that’s little comfort for the client who gets the call from the IRS.

A business client facing an audit may find some comfort, however, in the agency’s expansion of a Fast Track Settlement program designed to help small businesses under audit.

FTS for small businesses, defined by the Internal Revenue Service as corporations with assets under $10 million, is modeled on an established program for large and mid-size businesses. The program uses alternative dispute resolution techniques to help taxpayers save time and avoid a formal administrative appeal or lengthy litigation. Audit issues typically can be resolved within 60 days, instead of months or years, according to the agency.

The program calls for taxpayers under examination to work directly with IRS representatives from the IRS Small Business/Self Employed Division and the IRS Appeals Office, with the Appeals Office personnel typically acting as mediators.

Either side, the taxpayer or the agency, may initiate Fast Track for eligible cases.

The FTS program has existed for large and mid-size businesses since 2003, and began as a pilot project for small businesses in 2011 in eight locations around the country. Last November, the IRS announced that it is making the FTS program available nationwide for the SB/SE Division.

“Fast Track is one of the tools to resolve cases administratively,” said Richmond tax lawyer Timothy L. Jacobs. The expanded FTS program is “relatively new, and I don’t think a lot of people know about the availability of FTS to small businesses,” he said.

Jacobs has handled a number of Fast Track cases in the program for large and mid-size businesses and expects the expanded program for small businesses to offer another good option for taxpayers.

FTS is used to resolve factual and legal issues and may be initiated at any time after an issue has been fully developed, preferably before issuance of a 30-day letter, according to IRS Announcement 2011-5. SB/SE FTS is generally available for cases under the Division’s jurisdiction if the issues are fully developed and the taxpayer has stated a position in writing.

Fast-Track can be a good option to streamline a complicated case, “if we see discrete issues where there may not be clear law on either side,” said Richmond tax lawyer Bradley A. Ridlehoover, who also has used the large-business FTS program. Resolving issues at a lower administrative level saves money for the client.

FTS is not available for certain kinds of cases, including cases involving issues designated for litigation, issues under consideration for designation for litigation and issues for which the taxpayer has submitted a request for competent authority assistance.

A business that opts for FTS does not forfeit an appeal right if the issue is not resolved to the client’s satisfaction, an important selling point for the program.

But going through both FTS and a standard appeal may be a waste of time and money, and for many cases, it’s better to “pick one and stick with it. I would not bank on getting two bites at the apple,”  Jacobs said.

There are some administrative differences between the large-business and small-business programs, such as which agency officials select and manage cases eligible for SB/SE FTS. The FTS process is designed to be completed within 60 days of acceptance of the FTS application.

The speed of the process can be a real draw. As a general matter, the small-business side doesn’t have a lot of Appeals Officers available and it can take years to deal with their matters under the standard appeals process, according to Jacobs. Appeals Officers also are overloaded with individual cases. With the clock running and possible interest and penalties growing, the FTS program lets business taxpayers “get it resolved on an accelerated basis,” he said.

If the case is not accepted for inclusion in the SB/SE FTS, the SB/SE or Appeals representative will inform the taxpayer of the basis for this decision and discuss other dispute resolution opportunities with the taxpayer, including a standard appeal procedure.

For cases accepted for mediation, an Appeals Officer trained in mediation will serve as a neutral party to facilitate settlement.

During FTS, the taxpayer and SB/SE representatives hold a conference with the FTS Appeals Officer. Each side should have an authorized and informed decision-maker present, so the parties can get down to business.

The taxpayer is not required to have a representative to participate in the SB/SE FTS. If the taxpayer is represented by a person who practices before the IRS, the representative must have a power of attorney from the taxpayer, in addition to the FTS Agreement. The FTS session may include conferences attended by all of the parties, separate meetings with each party, or both as decided by the FTS Appeals Officer.

With FTS, there’s “more interaction and more give and take,” compared to the standard appeals process, Jacobs said. “The open communication is very positive,” and there’s not the “closed door mentality of the regular appeals process.”

A FTS Session Report prepared by the Appeals Officer guides the process, and includes a list of all issues approved for FTS, a description of the issues, the amounts in dispute, conference dates and a plan of action for the FTS Session.

Either side may propose settlement terms, and if settlement cannot be reached, the issue will be closed out as “unagreed.”

When issues are resolved, the parties may sign the Session Report acknowledging acceptance of the settlement terms, in order to prepare computations, but the signed Session Report is not a final settlement and does not waive restrictions on assessment, terminate consents to extend periods of limitation, start the running of any periods of limitation, or constitute agreement to close the case.

Some clients may prefer the regular appeal route because there’s “more certainty” and greater predictability in dealing with a local Appeals Officer, with whom they have an established relationship in the normal course of things, Jacobs said. In fact, the FTS track can be more formal, if it puts resolution of the matter in unfamiliar hands.

Ridlehoover agreed that clients may prefer that some local, specific issues, such as valuation, be handled by a local Appeals Officer, even if it takes more time. With expansion of the FTS program, cases may be handled by an AO who has the mediation training but is an unknown quantity.

FTS probably isn’t the way to go when the client and the IRS are poles apart, according to Jacobs. Mediation is intended to bridge a smaller gap, with each side giving up a little to “mediate to the middle.” If you have a strong case and you’re looking for an 80-percent win, it may be better to go straight to litigation.

FTS is not for parties “at opposite ends of the hazard spectrum,” he said.

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