Part III – “The Appeals Process” is the third of a 3-Part Series on “Federal Tax Procedure- Audit, Dispute, Resolution for the Cannabis Industry for years 2021 and Onward.” Please subscribe to our newsletter to be notified of future publications in this series, live webinars, and other relevant tax topics for the cannabis industry written by cannabis accountants and tax professionals at www.420cpa.com.
Part 3 – The Appeals Process
In the best of all possible worlds, we wouldn’t have to write articles like this, and you could go about your business providing your customers with the tastiest cannabis possible. But this isn’t that kind of world – we share this planet with the IRS. And in our third article scenario, you’ve done your best to avoid an audit and then to reason with the IRS minion who’s been sent to plague, ah, audit, you, but to no avail. The IRS examining agent has stuck to their guns, and now you’re headed to an appeal.
Has the final curtain rung down, is all hope lost? Not by a long shot. You’ve just begun to fight!
First Things First – Don’t Miss Any Deadlines
The IRS provides a next-step opportunity for you (and them) to avoid litigation, and that opportunity is conducted at the regional Appeals Office. But be careful of timing – you could lose your rights before you even walk through the Appeals Office door. You’ve been sent a Form 870 offering you their deal, along with a transmittal letter known as the 30-Day Letter. You now have thirty days from the date of issuance of the letter to request a conference with the local IRS Appeals Office.
The Appeals phase is like a chess game, with every move carefully planned. So, remember that Timing Is Critical and that the time-constraint on your 30-Day Letter must be adhered to.
If the amount under dispute is below $25,000, for each year or taxable period, you may make a Small Case Request. The small case request is done in writing and contains a brief statement of the disputed issues. Anything larger, as well as all partnership and S-Corp cases, must be made as a Formal Protest with strict requirements. If you aren’t already accompanied by a CPA or tax attorney, now might be the time to bring in those “hired guns”.
What Happens At Appeals
The appeals process is an informal one — the IRS is still trying to maintain its image of not being the Big Bad Wolf. Testimony is not taken under oath, although the IRS may require your statements of fact to be presented in the form of affidavits or declarations under penalties of perjury. You or your CPA or attorney meet with an appeals officer and informally discuss the pros and cons of your tax position versus the one taken by the examining officer you met with previously.
Although the Appeals Office has a veneer of impartiality, the truth is that the appeals officer assigned to your case will be acting to protect the rights of the IRS and will be an advocate on its behalf. You may find the officer raising a new theory in support of the examining agent’s suggested adjustment. However, new issues should not be raised by them. You or your representative may raise new issues, however, if you choose.
One of the rules governing the appeals process is that there are not supposed to be any Ex Parte Communications between your appeals officer and the examining agent. These are any communications taken between the appeals officer and examining agent without the presence of the tax payer. The intent of this rule is to ensure the independence of the entire Appeals organization. This can be very helpful if you and the examining agent had an “oil-and-water” situation and didn’t get along too well!
The Goal of Appeals – Settlement Agreements
The IRS’s main mission is to avoid litigation “on a basis which is fair and impartial to both the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the IRS.” While this mission may appear overly optimistic to many, there is no doubt that your appearance at Appeals will increase your leverage to obtain a more favorable tax settlement. The appeals officer will be judging the uncertainties surrounding your case should it go to trial, including various disputed facts and the possible testimony of proposed witnesses. Your officer may choose to split or trade issues – “do a deal” – so you and they can arrive at a Mutual Concession Settlement (their term for a settlement arrangement).
If you and your Appeals officer arrive at a “mutual concession”, you’ll be presented with a Form 870-AD which states your mutual understanding. This specialty form contains pledges against reopening the disputed issues which a normal Form 870 does not. The dispute is put behind you and the Internal Revenue Service unless there is “fraud, malfeasance, concealment, or misrepresentation of material fact”, and no claim for refund or credit is allowed to be filed.
The Last BIG Step
Should you and your representative go through the Appeals procedure and not reach an agreement, there is one last step: The Big Fight – United States Tax Court. While US Tax Court is beyond the scope of this article, suffice it to say it is a last resort, but a choice in which justice may be done and tax law interpretations may possibly be changed in favor of cannabis companies.
But remember, if you do choose tax court, respect your deadlines! If you don’t reach an agreement with the Appeals office, you will be issued a Notice of Deficiency, also known as a 90-Day Letter. You will have to file your petition in Tax Court within ninety days of the issuance date of the Notice, or you will lose your right to be heard. Then you’ll end up like Organic Cannabis, which missed its filing deadline by only one day and is now currently appealing to the Supreme Court of the United States, hoping to recapture the right to dispute $1.1 million in taxes and $225,855 in penalties.
Easier to stay on top of those deadlines, we think!