Settling IRS Tax Debt Through Tax Arbitration or Mediation

Under the Administrative Dispute Resolution Act of 1996, all government administrations were ordered to pursue mediation and arbitration sessions as alternatives to formal court and administrative proceedings. The IRS is no exception to this rule and has created two distinct programs for solving tax disputes outside of the courtroom. In order to qualify for either of these methods, you cannot have already appeared in tax court.

Voluntary IRS Binding Arbitration

Under IRS procedure, a person can opt for binding arbitration for their case for either a single factual issue or the entire decision. According to the IRS, appropriate cases for binding arbitration include valuations, reasonable compensation for taxes owed, and allocation of deduction and credit cases. These cases must first be approved for binding arbitration through the IRS Office of Associate Chief Counsel. Cases involving trade or business expenses, entertainment expenses, or those cases where a settlement is imminent will not be approved for binding arbitration. Once a case is approved, the parties can choose their neutral arbitrator and establish the stipulations by which the arbitrator is bound.

As part of the arbitration process, the parties can decide whether the arbitrator will decide all facts or only certain specific issues. Should either party feel that the arbitration is proving fruitless in resolving the matters, they can file a motion for trial and the case will be sent to the tax court instead. The tax court oversees the entire arbitration process and verifies whether or not the correct procedures are being followed. After the matter goes to the arbitrator, the decision is sent back to the tax court for the final ruling. Once made, binding arbitration decisions cannot be appealed.

IRS Mediation

Mediation was initially used by the IRS in their Large Business and International Fast Track Dispute Resolution Program. Mediation is now used by the IRS to form settlement agreements with all taxpayers. The mediator is a neutral third party that does not render judgement or even offer legal advice. Instead, the goal is to diffuse emotions and aid the parties in reaching a reasonable settlement. The two parties in an IRS mediation are the assigned field agent and the taxpayer. IRS mediations are overseen by the tax court and guidance is offered to the mediator where necessary.

Mediation, like binding arbitration, must be selected by the taxpayer. It must be requested within the parameters of the trial timeline and cannot be used as a means to delay the trial or other settlement procedures. Mediation is also a one-shot deal and cannot be used twice in the same case. Most IRS mediation proceedings happen with parties in separate rooms with the mediator going between the rooms to facilitate.

Both binding arbitration and mediation are options that save the IRS and taxpayers money. The particular parties in the case can save a great deal of time. When used appropriately, these measures result in both parties reaching a settlement that is agreeable and avoiding the tax court and its fees entirely.

Case Studies: Settling IRS Tax Debt Through Tax Arbitration or Mediation

Case Study 1: Resolving Valuation Dispute Through Binding Arbitration

John, a taxpayer, is in disagreement with the IRS over the valuation of certain assets for tax purposes. Instead of going to tax court, John opts for binding arbitration. The IRS Office of Associate Chief Counsel approves the case for arbitration, and John and the IRS choose a neutral arbitrator.

After a thorough review of the evidence and arguments presented by both parties, the arbitrator makes a binding decision on the valuation issue. The tax court confirms the decision, and the matter is settled without the need for a formal court proceeding.

Case Study 2: Reaching a Settlement Through IRS Mediation

Sarah, a taxpayer, is engaged in a dispute with the IRS regarding the allocation of deductions and credits. Instead of pursuing a lengthy court process, Sarah decides to request mediation. The IRS assigns a mediator, who facilitates negotiations between Sarah and the field agent assigned to the case.

The mediator helps them find common ground and reach a reasonable settlement agreement. The tax court oversees the mediation process and provides guidance as needed. Ultimately, Sarah and the IRS resolve their differences, avoiding the need for further legal action.

Case Study 3: Efficient Resolution of a Tax Dispute Through Binding Arbitration

In this case, Mark, a business owner, is contesting the IRS’s determination of reasonable compensation for taxes owed. Mark chooses binding arbitration as an alternative to the tax court. The approved case proceeds to arbitration, where Mark and the IRS present their arguments to the neutral arbitrator.

The arbitrator carefully considers the evidence and makes a final decision on the matter. The tax court reviews the arbitrator’s decision and issues a final ruling based on the arbitration outcome. Mark saves time and money by utilizing binding arbitration to settle the dispute.