United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Oversight, Committee on Ways and

Means, House of Representatives

May 1997 INTERNAL REVENUE

SERVICE

IRS Initiatives to

Resolve Disputes Over

Tax Liabilities

GAO/GGD-97-71

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-260164 

May 9, 1997

The Honorable Nancy L. Johnson

Chairman, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

Dear Chairman Johnson:

Each year, thousands of disputes arise between taxpayers and the Internal

Revenue Service (IRS) over billions of dollars in additional taxes

recommended by auditors in IRS’ Examination Division (Examination). IRS

eventually resolves most of these disputes over tax liability without

litigation through negotiations with taxpayers in its Office of Appeals, but

the resolution process can take years and hundreds of staff hours for

disputes over large tax amounts because of the complex issues involved.

Since 1990, IRS has made available to certain groups of taxpayers several

initiatives to provide alternative ways for resolving certain tax disputes

without litigation. We are addressing this report to you at your request

because of your ongoing interest in IRS’ enforcement programs and IRS’ use

of performance measures in striving to achieve its mission and program

goals. Our objectives were to (1) analyze IRS’ design of these initiatives and

taxpayers’ use of them to resolve disputes between IRS and taxpayers over

tax liability, and (2) analyze IRS’ plans for evaluating the impacts of its new

initiatives on the stated goals.

Background The federal government and the private sector have long recognized that

litigation is costly, time consuming, and destructive of cooperative

relationships. Congress intended that federal agencies avoid these

problems by offering prompt and inexpensive administrative processes for

resolving disputes; yet, over the last 30 years, agency processes have

grown more formal, costly, and time consuming.

Seeking to counter this trend, the Administrative Conference of the United

States (ACUS) began in 1982 to encourage federal agencies to use

alternative dispute resolution (ADR) processes.1

 Because use of ADR grew

slowly among federal agencies, Congress passed the Administrative

Dispute Resolution Act in 1990 to explicitly authorize and encourage

1

ACUS was an independent federal agency established in 1964 to promote efficient, adequate, and fair

procedures in federal agencies. It was not funded in fiscal year 1995 and passed out of existence.

Page 1 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
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agencies to use neutral third party ADR techniques (app. I describes these

types of ADR techniques).2

Well before the 1990 act, IRS offered an administrative dispute resolution

process through its Office of Appeals (Appeals) as an alternative to

litigation. Otherwise, a taxpayer dissatisfied with the tax adjustments

recommended by an IRS auditor can either take the dispute to Tax Court,

where IRS’ District Counsel initially transfers the dispute to Appeals, or pay

the additional taxes and claim a refund in the U.S. Court of Federal Claims

or a federal district court.

Organizationally located in the Office of the Commissioner, Appeals

operates independently from IRS functions such as the Examination

Division, which performs audits to determine the correct tax liability, and

the Office of Chief Counsel, which litigates Tax Court cases for IRS. Its

mission since 1927 has been to resolve tax controversies without litigation

on a basis that is fair and impartial to both the government and the

taxpayer and that will enhance voluntary compliance and public

confidence in IRS’ integrity and efficiency. With a staff of about 2,150

employees, Appeals is one of the oldest and largest dispute resolution

organizations in the United States.

Appeals’ process consists of an administrative review by an Appeals

officer and negotiations with the taxpayer, usually after an IRS audit, over

the tax treatment of one or more issues on the tax return. An Appeals

officer must first review the relevant facts, law, regulations, and court

cases. Then, through written submissions from the taxpayer and one or

more informal conferences, the Appeals officer must assess the relative

merits of the opposing views and determine an acceptable settlement

position for IRS. Unlike Examination, which is limited to applying the tax

code, Appeals is authorized to consider the hazards of litigation. Thus, the

Appeals officer can negotiate with the taxpayer and make concessions to

arrive at a settlement that attempts to approximate the probable results if

the case were to be tried in court.

2

In recent years, Congress has encouraged federal agencies, including IRS, to use ADR techniques

instead of litigation or adversarial administrative procedures. The 1990 act serves as an example of this

encouragement. This act terminated in October 1995, but Congress reauthorized use of these

techniques in an October 1996 act. IRS’ initiatives, for the most part, do not involve neutral third

parties, and thus do not include the full range of ADR techniques encouraged by the act.

Page 2 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
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This appeals process handles an average inventory of about 53,500 dispute

cases.3

 Appeals’ processing time for small cases (those with less than

$10 million in dispute) that are not docketed in the courts averages about 8

months.4

 Larger, more complex cases average about 2.4 years to process.

While the larger cases comprise about 1 percent of all Appeals cases, they

account for about 88 percent of the tax dollars in dispute. Most large cases

come from IRS’ Coordinated Examination Program (CEP), under which IRS

audits the largest corporations. Overall, Appeals has been resolving about

85 percent of its large cases.

In addition to Appeals, which has the major role in dispute resolution, two

other IRS functions also have roles in dispute resolution. The Examination

Division attempts to resolve disagreements over additional tax

recommendations with taxpayers before they go to Appeals. The Office of

Chief Counsel also has a role, particularly when Appeals’ negotiations do

not resolve the disputes. All three functions have developed initiatives to

improve the resolution of disputes over tax liability.

Results in Brief Since 1990, IRS Appeals, Chief Counsel, and Examination5

 have

implemented at least eight initiatives to improve dispute resolution

between IRS and taxpayers over certain tax issues (app. II describes IRS’

initiatives). Each of the initiatives applies to specific groups of taxpayers,

generally large corporations. Two of these initiatives seek to prevent

disputes, three seek to resolve disputes before they reach Appeals, and

two seek to resolve disputes in Appeals more quickly. Only one initiative

uses a neutral third person as a mediator to help resolve disputes in

Appeals. Generally, the goals of these initiatives are to reduce the overall

time, costs, and taxpayer burden of dispute resolution.

In June 1996, IRS identified 276 taxpayers that had used or were using 1 of

IRS’ 8 initiatives to resolve tax disputes since 1990. As of November 30,

1996, IRS data showed that these taxpayers had used IRS’ initiatives to

3

The average inventory for Appeals cases is based on the fiscal year-end inventory for the 5-year period

ending September 30, 1995.

4

Appeals divides its case workload into two basic categories: nondocketed and docketed.

Nondocketed cases are those protested directly to Appeals by the taxpayer; docketed cases are those

entered on the calendar, called the docket, of the Tax Court and referred to Appeals by the District

Counsel.

5

Other IRS functions, such as Collection, have undertaken initiatives for resolving disputes other than

those involving the amount of income tax to be assessed.

Page 3 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
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resolve 209 disputes over tax issues.6 This is a small fraction of the

relevant disputed tax issues since 1990. Various reasons exist for the

limited use of the initiatives to date. For example, the initiatives were

relatively new and generally target disputes with very large corporations

for certain types of issues, such as employment taxes. Also, IRS officials

said use of the initiatives ultimately depends on the willingness of eligible

taxpayers.

IRS has established some performance measures intended to evaluate the

impacts of its initiatives on reducing the time, costs, and taxpayer burden

in dispute resolution. Our analysis indicated that many of these measures

will not allow IRS to directly gauge the initiatives’ impacts on these goals.

For example, Chief Counsel and Examination both have as a measure the

number of times the initiatives were used. Officials from these functions

believe that frequency of use means a reduction in time, costs, and burden.

But knowing how often initiatives were used does not answer the question

of how effectively they reduced time, costs, and burden. Appeals has

established some measures, such as the level of taxpayer satisfaction, that

are more directly related to its initiatives’ goals of reducing the time, costs,

and burden of dispute resolution.

IRS officials said they thought it was too early to assess the impacts of all

of their initiatives and it was difficult to obtain data that would isolate the

impacts, particularly when the issues being resolved are highly technical

and can carry over to future tax years. IRS officials described ongoing

efforts to develop other measures, in conjunction with a special IRS task

force, by the spring of 1998. We recognize the challenges of developing

measures and evaluating the initiatives as well as the importance of proper

timing of the evaluations. Even so, measures that more directly gauge the

impacts of the initiatives on their goals would help IRS determine, after

sufficient data are available over a period of time, whether and the extent

to which the initiatives had the intended effects of reducing the time,

costs, and burden of resolving tax disputes.

Objectives, Scope,

and Methodology

Focusing on tax disputes between IRS and taxpayers, our objectives were

to (1) analyze IRS’ design of its initiatives and taxpayers’ use of them since

1990 in resolving disputes over tax liability, and (2) analyze IRS’ plans for

evaluating the impacts of its new initiatives on their goals. To gain

perspective in doing work on both objectives, we first reviewed the 1990

6

This figure does not reflect the unknown number of disputes over transfer pricing issues that were

avoided by using one of the initiatives that focuses on those issues.

Page 4 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
B-260164 

and 1996 acts, the Congressional Record, and various ACUS publications

including its 1995 report to Congress.

To address both objectives, we first asked IRS officials to identify

initiatives begun since 1990 to help resolve tax disputes between IRS and

taxpayers. They identified 11 initiatives, of which our review included 8.

Tax Court Rule 124 was excluded because it is under the jurisdiction of

the United States Tax Court. IRS’ Ombudsman was excluded because it has

existed since 1988 and its scope of disputes goes beyond issues of tax

liability. Simultaneous referral to Appeals/Competent Authority was

excluded because its stated purpose was to enhance the competent

authority process. According to the Assistant Commissioner

(International), the competent authority process addresses disputes

between the United States and treaty nations rather than disputes between

the IRS and taxpayers. Appendix II briefly describes these additional IRS

initiatives.

To analyze IRS’ design of its dispute resolution initiatives since 1990, we

first learned about IRS’ traditional dispute resolution method—the appeals

process—and the roles that the Examination and Chief Counsel had in the

dispute process. To do so, we reviewed published procedures and reports,

and interviewed officials in these functions at IRS’ National Office. To learn

about IRS’ new initiatives, we reviewed related authorizations and

procedures as well as written comments on proposed initiatives from

inside and outside of IRS. We interviewed IRS National Office officials in the

Examination Division, Office of Appeals, Office of Associate Chief Counsel

(International), and the Office of the Assistant Commissioner

(International).

To analyze taxpayer use of IRS’ initiatives, we asked IRS to identify

taxpayers that have used an initiative since 1990 by name and

identification number so we could develop profiles of those taxpayers. In

June 1996, IRS provided that information on 276 taxpayers, usually very

large corporations, that had used or were using 1 of the 8 initiatives. Using

this information, we queried IRS’ Statistics of Income (SOI) database on

corporate filers for 1993—the most recent data available. Being a sample

of all taxpayers, this database had profile information on 209 of the 276

taxpayers. We then identified the number of disputed tax issues that were

resolved under an initiative for the taxpayers through November 30, 1996.

Finally, we interviewed officials at the Tax Executives Institute (TEI) and

collected documentation on TEI’s views of IRS’ initiatives. Because TEI

Page 5 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
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represents very large corporations—the major users of IRS’

initiatives—TEI’s views provided insights on the issue of taxpayer usage.

To analyze IRS’ strategy for evaluating the impacts of its new initiatives, we

reviewed ACUS guidance for evaluating ADR programs and IRS functions’

evaluation plans, questionnaires, and reports such as the 1995 Appeals’

Measurements and Standards Task Force report. We did not attempt to

evaluate the impacts of IRS’ initiatives because they generally were too new

and IRS data were not readily available.

We requested comments from IRS and TEI on a draft of this report. On

March 17, 1997, we obtained comments from representatives of the IRS

Commissioner. We received written comments from TEI on April 4, 1997.

As appropriate, we made changes in the report based on these comments.

The comments and our evaluation of them are discussed starting on page

27. We conducted our review from March through December 1996 at

Washington, D. C. and our Kansas City Office in Mission, KS, in

accordance with generally accepted government auditing standards.

IRS’ Initiatives Target

Specific Taxpayers

and Issues

IRS has implemented eight initiatives since 1990 to improve resolution of

its disputes with taxpayers over certain tax issues. These initiatives

attempt to meet goals related to reducing the time, costs, and burden of

dispute resolution. IRS’ design and timing of these initiatives have, to date,

limited taxpayers’ use of the initiatives.

IRS’ Initiatives to Improve

the Resolution of Disputed

Income Tax Liability Issues

Since 1927, IRS’ Appeals function has offered taxpayers an administrative

process to resolve disputes over tax liability. This traditional process,

while resolving most tax disputes without litigation, can be

time-consuming, costly, and adversarial. In the process, the Appeals

officer acts more as an independent reviewer and negotiator on behalf of

IRS than as a neutral third party chosen by the disputants to help design

their own resolution. As such, Appeals’ process is best characterized as

settlement negotiations with the taxpayer.7

To improve the resolution of tax disputes between IRS and taxpayers, IRS’

Appeals, Chief Counsel, and Examination functions have implemented at

least eight initiatives since 1990. One of these initiatives—Appeals’

7

Unlike the 1990 act, the 1996 act did not include a reference to “settlement negotiations” in the list of

ADR techniques. The deletion was made to clarify Congress’ intent to encourage use of neutral

third-party methods. According to ACUS, settlement negotiations do not use a neutral third party, and

do not constitute an “alternative” resolution method because agencies already had been using them.

Page 6 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
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mediation initiative—uses neutral parties to help resolve disputes. Two

initiatives seek to prevent disputes, three seek to resolve disputes before

they reach Appeals, and two seek to resolve Appeals cases more quickly.

Generally, the goals of these initiatives are to reduce the overall time,

costs, and taxpayer burden of resolving disputes without litigation. The

following summarizes the initiatives across the three functions (see app. II

for a fuller description).

• Using Neutral Third Parties: In fiscal year 1996, Appeals completed a

1-year test of mediation procedures for nondocketed CEP cases.8

 Mediation

has been designed to be an additional attempt to avoid litigation and to be

available only after negotiations in Appeals are unsuccessful. Once IRS

approves a request for mediation, Appeals and the taxpayer are to select a

neutral third party from inside or outside IRS as mediator and to enter into

a written agreement on the issues to be discussed and the location and

dates of the mediation.

• Preventing Disputes: In 1991, the Office of Chief Counsel (International)

implemented its Advance Pricing Agreements (APA) Program to avoid

disputes over intercompany transfer pricing issues. Transfer pricing refers

to the amounts that affiliated members of a multinational corporation

charge one another for goods and services. IRS developed the APA program

to avoid transfer pricing disputes and the prolonged, expensive litigation

that had been used to resolve the disputes. Under an APA, IRS avoids such

disputes by reaching a prospective agreement with the taxpayer on an

appropriate transfer pricing methodology, the factual nature of the

transactions involved, and the expected results of the methodology.

In 1996, Appeals began to offer taxpayers the option of receiving IRS

valuations of art works for such purposes as estate and gift taxes and the

charitable contribution deduction on an income tax return. These

procedures permit a taxpayer to have an art valuation for tax purposes

approved prior to filing the tax return, thus avoiding any dispute during an

audit.9

• Resolving Disputes Prior to Appeals: In 1994, Examination implemented

the use of closing agreements between IRS and the taxpayer that were

designed to extend the current resolution of a particular issue during a CEP

audit to future audits of tax years ending prior to the date of the

8

IRS has extended the test period for another year beginning on January 13, 1997.

9

IRS has used a panel of outside experts since 1968 to evaluate appraisals submitted by taxpayers to

support the fair market value claimed on federal income, estate, and gift tax returns for works of art.

Disputes over the value of the art can affect tax liability.

Page 7 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
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agreement. IRS called this Accelerated Issue Resolution (AIR). It avoids

raising the same issue when those tax years are audited. IRS audits nearly

all tax returns filed by CEP taxpayers.

In 1990, IRS gave limited authority to CEP case managers to accept

settlement offers on issues that “recur” or “rollover” across the tax years

being audited by applying a previous Appeals settlement with the same

taxpayer and issue.10 In 1996, IRS gave limited settlement authority to CEP

case managers for particular issues in designated industries. These issues

involve those for which (1) IRS’ position needs to be coordinated across

its functions to promote consistent, nationwide treatment, and (2) Appeals

has published issue papers containing settlement guidelines.

• Resolving Disputes in Appeals: In 1994, Appeals started accepting the early

referral of key disputed issues before the end of a CEP audit in the hopes

that concurrent processing would reduce total processing times and that

early resolution of a key issue would help resolve related issues in

Examination. In 1996, Appeals started a similar initiative for employment

tax audit disputes.

To Date, Use of Initiatives

Is Limited

As of November 30, 1996, IRS records showed that CEP and large corporate

taxpayers had used 7 of IRS’ initiatives to resolve at least 209 tax issues in

dispute between IRS and taxpayers since 1990.11 Compared to the tens of

thousands of disputes we estimate are raised annually by the audits of

these taxpayers, the number of resolutions achieved by IRS initiatives is

small.12

Several reasons, including IRS’ design and timing of the initiatives, help

account for the limited use. First, IRS generally limited use of its initiatives

10A “rollover” issue arises from a taxable event that impacts more than one tax period. A “recurring”

issue arises from separate or repeated taxable events for which a taxpayer advances the same legal

position. In 1996, IRS revised this limited authority to include any CEP audit issue for which Appeals

had previously settled the same issue of the same taxpayer or of another taxpayer who was directly

involved in the transaction or taxable event.

11The 209 do not reflect the unknown number of disputes avoided through APAs; as of November 30,

1996, IRS had completed 74 APAs. Appeals and Chief Counsel provided updated figures on the number

of disputed issues resolved using many of their initiatives as of February 28, 1997. They identified 18

more issues resolved by early referral and early referral for employment tax issues and 82 issued

APAs.

12IRS does not yet track the total number of disputed issues raised by its audits. Using IRS’ data, we

conservatively estimate that CEP and other large corporation audits annually generate tens of

thousands of disputes. IRS audits about 10,000 to 12,000 large corporations per year, of which about 70

to 80 percent raise one or more tax issues; in 1996, CEP audits raised an average of 17 issues. And,

large corporations dispute many audit issues, often those involving large tax amounts.

Page 8 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
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to CEP taxpayers to date. Although CEP and other taxpayers with large

disputes account for about 88 percent of the dollars in dispute, they

account for about only 1 percent of Appeals cases. Second, many of the

initiatives began recently; three did not start until 1996. Third, IRS intended

many of these initiatives to initially have limited applications, as illustrated

below.

• Mediation may be requested only when the case is not designated by IRS

for litigation, is not docketed before the United States Tax Court, or does

not involve certain tax issues, and only after negotiations in Appeals have

failed to resolve the dispute.13

• Early referral may be used only when the referred issue (1) is not

designated by IRS for litigation; and (2) could be expected, if resolved

early, to help resolve related issues in Examination.

• Certain initiatives covered unique tax issues; for instance, the APA program

dealt only with transfer pricing issues, art valuation dealt only with art,

and one early referral initiative dealt only with employment tax issues.

• Limited settlement authority targeted issues that recur in CEP audits.

In acknowledging the limitation on eligibility, IRS officials also pointed out

that the eligible population usually disputes very large tax adjustments

that take a lot of time to resolve. If the initiatives work, they could reduce

the time to resolve disputes, as well as related costs and burdens. We

agree that the potential for such reductions exists. Even if IRS finds that the

initiatives produce such reductions for some large dollar disputes, other

taxpayers, disputing thousands of issues annually, would be unlikely to

benefit from these reductions if they continue to not use the initiatives or

to be ineligible. IRS officials said they plan to expand the pool of eligible

taxpayers and encourage more usage by changing criteria such as user

fees for an APA.

IRS officials also noted that eligible taxpayers have the final say on whether

to use the initiatives. Some taxpayers may be reluctant to use them

because they are comfortable with the traditional Appeals process. TEI

officials said their members generally are confident of Appeals’

independence and ability to reach fair and practical resolutions; a 1993 TEI

survey indicated that over 80 percent of the respondents were satisfied

with the Appeals process. As discussed in our 1994 CEP report, IRS litigated

relatively few CEP tax disputes and only assessed 22 percent of the taxes

13About 69 percent of Appeals cases are nondocketed. The certain issues include those that involve

(1) specialized industries, (2) coordination across IRS to ensure consistent treatment in the audit or

appeals process, and (3) tax treaties with other nations.

Page 9 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
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recommended in CEP audits after Appeals’ settlement process.14 TEI

officials also said CEP corporations may not yet be comfortable using

mediation because it is relatively new and IRS has rejected five of nine

requests that did not meet IRS’ eligibility guidelines for mediation.15 TEI

suggested that IRS mediation guidelines, while necessary, should not be too

restrictive and that IRS should better promote the use of its initiatives.

As for those that have used or were using the initiatives, we analyzed the

most recent IRS information about the types of users. As of June 1996, we

found information on 209 corporations that had elected to use an IRS

dispute resolution initiative since 1990.16 Appendix III contains tables that

profile users by type of initiative and the category of industry as well as

the average amounts that the users reported on their corporate income tax

return for total assets, total income, taxable income, and income tax.

For example, 50 percent of the 209 corporations were manufacturers.

Another 23 percent were involved in the financial, insurance, or real estate

industries, with banks being the most common users in this category.

Further, the average amounts of total assets, total and taxable incomes,

and net tax liability by type of dispute resolution initiative varied widely

but were relatively large because nearly all users were CEP taxpayers. To

illustrate, average total assets ranged from about $7 billion to about $57

billion, and average taxable income ranged from about $207 million to

about $1 billion by type of initiative.

IRS’ Selected

Performance

Indicators Will Not

Measure the Impacts

of Initiatives on All

Goals

IRS’ goals for its initiatives include reducing the time and costs consumed

by dispute resolutions and improving taxpayers’ satisfaction with the

process. The goals also address improvements to the outcomes of the

resolution process, including voluntary compliance with the tax laws. IRS

officials also told us that an overarching goal of the initiatives is to resolve

more disputes without litigation.17 However, IRS’ current performance

indicators (or measures) are not designed to directly gauge the impacts of

the initiatives on all of these stated goals, particularly the time and costs.

14Tax Administration: Compliance Measures and Audits of Large Corporations Need Improvement

(GAO/GGD-94-70, Sept. 1994).

15Two requests did not involve CEP cases, two were premature, and one involved docketed years not

under Appeals’ jurisdiction. Of the four approved requests, two have been completed as of

November 1996.

16Taxpayers involved in the 209 resolved disputes were not the same 209 taxpayers that IRS identified

as having used 1 of the 8 initiatives, including APAs, and that we found in IRS’ SOI sample; it is

coincidence that both populations total 209.

17IRS officials also told us that litigation is necessary at times to ultimately resolve disputes over

selected tax issues.

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ACUS has provided guidance on possible ADR program goals and

performance measures (app. IV summarizes ACUS’ guidance on evaluating

ADR). The goals include (1) reducing the time and costs consumed by

dispute resolutions; (2) improving the outcomes of the resolution process,

such as reducing the dispute inventory or improving the rate at which

disputes are resolved; and (3) improving participants’ satisfaction with the

process and outcomes. To determine whether an ADR program is meeting

its goals, ACUS guidance advises ADR managers to collect and compare data

for performance measures under conditions with and without ADR.

In addition, the 1993 Government Performance and Results Act provides

guidance on the need to have program performance measures that allow

an agency to demonstrate a program’s effectiveness in achieving its goals.

Performance measures that effectively identify whether a program is

achieving its stated goals either (1) directly measure change (e.g., amount

of time required to resolve disputes with and without the initiative),

(2) use a reasonable proxy for the goal (e.g., taxpayer satisfaction with the

initiative as an indicator of reduced burden), or (3) provide the data

needed to evaluate specific research questions about the program and its

effectiveness.

Table 1 presents the goals and performance measures identified for the

various IRS initiatives.

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Table 1: IRS’ Evaluation Measures for the Goals of the Initiatives by IRS Function

Function Initiative(s) Goal(s) Measure(s)

Associate Chief Counsel (Intl),

Office of Chief Counsel

Advance pricing agreements

program

Improve voluntary compliance

with international tax laws and

treaty provisions

Number of advance pricing

agreements

Reduce the (1) time and costs

used to develop and resolve

transfer pricing issues, and (2)

rate of increase in resources

used on transfer pricing issues

A comparison of average

lapse time and staff days to

complete an advanced pricing

agreement and to complete an

audit involving transfer pricing

issuesa

Examination Limited settlement authority;

accelerated issue resolution

closing agreements

Improve rate at which CEP

taxpayers fully or partially

agree with audit issues in

Examination

Number of times initiatives are

used

Reduce average calendar

days for CEP audits

Improve currency of CEP audits

Improve voluntary complianceb

Reduce taxpayer burden

Appeals Early referrals Reduce processing time in

Examination and Appeals

Whether Examination case

managers and taxpayers

perceive that early referral

reduced audit hours and

calendar days in Examinationc

Improve the CEP agreement

rate in Examination

Whether Appeals resolved the

referred issues and

Examination resolved related

issues

Improve taxpayer satisfaction Level of taxpayer satisfaction

Mediation Improve Appeals’ rate for

settling CEP disputes; resolve

nondocketed issues

Rate at which CEP disputes

are settled by Team Chiefs in

Appeals

Reduce the costs of litigations No measure selectedd

Improve voluntary complianceb No measure selected

Improve taxpayer satisfaction Level of taxpayer satisfaction

General Reduce taxpayer burden Number of taxpayers using

APAs /Appeals’ initiatives

(Table notes on next page)

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aThis is an interim measure. In addition, Appeals, which is a participant in Counsel’s negotiation of

an advance pricing agreement, will ask Appeals participants whether the agreement reduced the

time needed to resolve issues from open tax years prior to the agreement.

bAccording to the Director, Office of Dispute Resolution and Specialty Programs, improved

voluntary compliance is an indirect goal of Examination’s and Appeals’ initiatives. He said that the

initiatives have a relationship to voluntary compliance in that the taxpayers can choose to use an

initiative to help resolve disputes. However, IRS has not identified a measure for voluntary

compliance.

cAlthough not a selected measure of whether early referral reduced Appeals’ case/lapse time,

Appeals is also asking appeals officers for the number of hours used to resolve the early referral

issue.

dAlthough Appeals has not selected a measure, Appeals officials believe that a successful

mediation avoids the costs of litigation.

Source: IRS data.

As table 1 indicates, some of the measures selected by the three functions

do not directly gauge the impacts of the initiatives on their stated goals.

For example, both Chief Counsel and Examination plan to measure how

often a taxpayer uses an initiative. While this is useful information, in

isolation it does not demonstrate or measure the effectiveness of the

initiatives in reducing dispute resolution time, costs, or taxpayer burden.

Also, initiatives in all three functions include voluntary tax compliance as

a goal but have not included a related direct measure. A prior director of

the APA program acknowledged that voluntary compliance is difficult to

measure; current IRS officials agreed and characterized taxpayers’ use of

an initiative as an indicator of their desire to voluntarily comply. Although

this may be true, signing any agreement does not necessarily mean full

voluntary compliance in the future. Under the APA program, IRS’ Revenue

Procedure 91-22 requires taxpayers to submit annual reports that IRS can

use in monitoring compliance.

Further, one goal of early referral is to reduce total processing time

(Examination and Appeals). However, Appeals’ evaluation planning

documents show that the primary performance measure addresses only

Examination’s processing time, and only the impact on Examination

processing time is reported to the National Director of Appeals. Appeals

plans to collect data about the impact on processing time by asking

Examination case managers and taxpayers (i.e., qualitative data) rather

than collecting and comparing quantitative data. In March 1997, Appeals

officials said that they also will be tracking the number of hours that

Appeals officers spend on early referral issues and that their evaluations of

early referral will consider the effect on Appeals processing time.

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Table 1 also shows that Appeals’ planned measures go beyond counting

the number of disputes resolved and link more directly with the stated

goals of its initiatives. For instance, to assess the impact on the goal of

improving CEP taxpayers’ satisfaction with the examination and appeals

processes, Appeals plans to query taxpayers who use early referral or

mediation about their satisfaction with these initiatives.

Officials from Chief Counsel and Examination indicated that they have not

completed their evaluation design efforts to directly measure the impacts

of their initiatives on all their goals for various reasons. For instance, they

said (1) data on the time that field personnel spend working on an APA are

not always reliable because IRS has not yet devised a method for

distinguishing time spent by field personnel on APA negotiations from time

spent on pending examinations of the same taxpayer, and (2) Examination

tracks the time spent on the entire audit and tracks certain large dollar

issues but does not track all issues nor the time spent by issue.

Further, they pointed to the difficulty in evaluating the impacts, partly

because issues associated with initiatives such as APAs and AIRs are often

highly complex and extend years into the future. As a result, measuring

the impacts of an initiative may have to wait years. They also pointed to

the difficulty in isolating the impacts of an initiative when goals such as

those involving the number of days to complete a CEP audit or the currency

of the tax years being audited can be affected by many other factors (e.g.,

availability of information on an issue).

Even with these concerns about current data and indicators, it remains

important for IRS to measure the effectiveness of the initiatives in

achieving their goals. Without this information, IRS cannot know whether

the initiatives worked as intended (and if so, to what extent they worked),

need improvements, or merit being extended to other issues or groups of

taxpayers.

In addition, concerns about the time and costs consumed by dispute

resolution in IRS make evaluation of each initiative important. For

example, an article reporting a 1996 survey of CEP taxpayers, although

showing increased satisfaction with aspects of CEP audits, showed

continued dissatisfaction with Examination’s ability to resolve issues. In

the article, the Assistant Commissioner for Examination said the

satisfaction level was not as high as IRS had hoped, particularly given the

number of efforts to make CEP audits more efficient and less time

Page 14 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
B-260164 

consuming. These efforts include Examination’s dispute resolution

initiatives.

At the time of our work, the three IRS functions had not yet evaluated the

impacts of their initiatives using the measures and goals. In general,

officials in these functions said the initiatives were too new or used too

infrequently to have sufficient data for evaluation. These officials told us in

March 1997 that they have made progress in developing more measures

and tools to evaluate the impacts of the initiatives on the goals. They said

they are working with a special task force that is developing measures

across IRS. These officials said they hope to have sufficient measures by

the spring of 1998 in order to more fully evaluate the initiatives. Even so,

they believe that the initiatives have been helping to resolve issues without

litigation and at reduced time, costs, and burden.

For example, Chief Counsel officials discussed interim and planned

measures such as (1) the average lapse time and staff days for completing

an APA, (2) the impact of the APA on audit cases opened prior to it, (3) the

quality of taxpayer information received while developing the APA, (4) the

dollars and number of issues agreed/unagreed for cases with transfer

pricing issues developed in Examination, (5) taxpayer satisfaction, and

(6) the dollars spent on expert witnesses for litigations involving transfer

pricing. Examination officials said they plan to develop a survey to collect

feedback from their staff and taxpayers and to measure time spent on an

initiative.

Conclusions For almost 70 years, IRS has relied on its Office of Appeals to resolve most

disputes over tax liability that arise after audits in Examination without

involving Chief Counsel in litigation with the taxpayer. Even so, Appeals’

resolution of tax disputes with large corporations can take years and

hundreds of staff hours. Because these three IRS functions have a role in

the disputes and their resolutions, each function has started initiatives to

avoid disputes over tax liability or improve the resolution process. Since

1990, the three functions have started at least eight initiatives, and

Congress has encouraged federal agencies, including IRS, to use neutral

third parties in resolving disputes to help reduce the time and costs. One

of the eight dispute resolution initiatives that IRS has implemented since

then uses a neutral third party to aid dispute resolution.

IRS’ initiatives generally attempt to reduce the time, costs, and taxpayer

burden of the dispute resolution process by avoiding disputes or

Page 15 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
B-260164 

improving the existing process. IRS officials believe that their initiatives

have partially met these goals. However, IRS functions are not yet able to

show whether their initiatives are achieving these goals, partly because

many of the performance measures selected by the functions do not

directly gauge the impacts of the initiatives on these goals. Some IRS

officials have pointed to the difficulties in evaluating whether the

initiatives meet their stated goals. They cited problems in collecting

reliable data and isolating the impacts for highly complex tax issues that

may involve future tax years. These difficulties, while real, do not prevent

IRS from developing indicators that more directly measure the impacts of

the initiatives on the time, costs, and burden of dispute resolution.

IRS officials stated that a special IRS-wide task force is helping the IRS

functions to develop measures and an evaluation program for their

initiatives and that they believe that they are making progress. They said

they hope to have sufficient measures during the spring of 1998 to more

fully evaluate the initiatives’ impacts on the stated goals. Such efforts, if

successful, would help IRS to determine whether the initiatives worked as

intended and how they might be improved or expanded to other tax issues

or groups of taxpayers.

Recommendations We recommend that the IRS Commissioner hold the IRS functions

accountable, in conjunction with the special measures task force, for

(1) completing the development of performance measures that directly

gauge the impacts of the dispute resolution initiatives on their stated goals

and (2) setting milestones to measure these impacts. Using these

measures, the functions should, after sufficient data are available over a

period of time, analyze whether each initiative reduces the time, cost, and

taxpayer burden of dispute resolution.

Agency Comments

and Our Evaluation

We obtained comments on a draft of this report in a meeting on March 17,

1997, with IRS officials that represented the IRS Commissioner. These

officials included the Assistant Commissioner of Examination and the

Director of CEP, the National Deputy Director of Appeals and the Director

of the Office of Dispute Resolution and Specialty Programs in Appeals, the

Director and Deputy Director of the APA Program in the Office of Associate

Chief Counsel (International), and representatives from the Office of

Associate Chief Counsel (Domestic) and the Office of Legislative Affairs.

Page 16 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
B-260164 

We discussed their comments on our findings, conclusions, and

recommendations as well as comments on technical aspects of the draft

report. We summarize these comments in this section and made technical

changes, where appropriate, in the related parts of the report.

First, in discussing the type of IRS initiatives, IRS officials asked us to

describe other initiatives that fall outside the scope of our work or that

have recently begun. We expanded our objectives, scope, and

methodology section to clarify the rationale for focusing on eight

initiatives and excluding three others—Tax Court Rule 124, Simultaneous

Referral to Appeals and Competent Authority, and IRS Ombudsman. We

describe these and other initiatives that have begun recently in appendix

II.

Second, in discussing the limited usage of the eight initiatives, IRS officials

said IRS plans to expand the pool of eligible taxpayers. These officials also

noted that taxpayers ultimately choose whether to use an initiative. If this

is true, any efforts to increase usage by expanding the eligibility pool

would not address those who are eligible but choose to bypass the

initiatives. We added these comments to the text of the report.

Third, IRS officials stated that they have been working to develop more

measures to evaluate the impacts of the initiatives on the stated goals.

They pointed to the difficulty in developing comprehensive measures and

evaluations, given disputed issues that are highly complex, technical, and

may need to be tracked for a number of years before sufficient data are

available for analysis, particularly for the APA and AIR initiatives. They

believe that they have made progress. They pointed to examples of interim

measures they have been developing and measures they plan to develop

through a special IRS-wide measurement and evaluation task force. They

hoped to have sufficient measures by the spring of 1998 to more fully

evaluate the initiatives’ impacts on the stated goals. They also offered

clarification about some existing goals and measures for mediation and

early referral. We have incorporated these comments and clarifications in

the section of this report dealing with measures and evaluations.

In discussing our conclusions and recommendations, the IRS officials

asked us to more specifically account for the difficulty in developing

measures and evaluations for the initiatives. They said, for example, these

initiatives address very complex issues that often have to be tracked years

into the future before enough data becomes available for an evaluation.

They also asked us to account for their efforts to further develop the

Page 17 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
B-260164 

measures. Accordingly, we have reworded our recommendations to

recognize the work of the measurement task force and the time frame

needed to develop sufficient measures. We also have revised our

conclusions to further recognize the difficulty in developing measures for

evaluation.

TEI officials generally agreed with our description of the IRS efforts to

resolve disputes over tax liability, the appeals mission and process, and

the time to complete this process. TEI noted that its members are satisfied

with the appeals process and the independence of appeals staff,

recognizing that such staff are IRS employees and not neutral third parties.

While TEI favors initiatives to resolve disputes without litigation at reduced

time and costs, TEI did not want any initiative to detract from the historical

role Appeals has played in providing an alternative to costly,

time-consuming litigation. Given these views, TEI agreed with our

recommendation on performance measures, believing that revising the

measures would reflect the importance of dispute resolution techniques

and encourage their use.

In addition, TEI stated that it believed the report could provide a stronger

endorsement of IRS Appeals and IRS’ efforts to develop the initiatives. TEI

also believed that IRS should do more to promote use of the initiatives.

Given the scope and objectives of our work, we did not take positions on

these issues. Although Appeals generally plays a valuable role, we did not

design our study to evaluate Appeals; nor did we evaluate how well IRS

developed the initiatives and whether the initiatives worked well enough

to merit greater usage. TEI also provided technical comments that we have

incorporated in the appropriate sections of the report.

We are sending copies of this report to the Subcommittee’s Ranking

Minority Member, the Chairmen and Ranking Minority Members of the

House Committee on Ways and Means and the Senate Committee on

Finance, various other congressional committees, the Director of the

Page 18 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
B-260164 

Office of Management and Budget, the Secretary of the Treasury, and

other interested parties. We also will make the report available to others

upon request. Major contributors to this report are listed in appendix V. If

you or your staff have any questions on this report, please contact me on

(202) 512-9110.

Sincerely yours,

Lynda D. Willis

Director, Tax Policy and Administration Issues

Page 19 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Contents

Letter 1

Appendix I 

What Is Alternative

Dispute Resolution?

22

Appendix II 

IRS Dispute

Resolution Initiatives

24

Other Initiatives to Resolve Tax Liability Disputes and Other

Issues

26

Appendix III 

Profile Data on

Taxpayers That Have

Used IRS Dispute

Resolution Initiatives

28

Appendix IV 

Summary of ACUS

Guidance on Program

Evaluation

31

Appendix V 

Major Contributors to

This Report

34

General Government Division 34

Kansas City Regional Office 34

Tables Table 1: IRS’ Evaluation Measures for the Goals of the Initiatives

by IRS Function

12

Table II.1: IRS Dispute Resolution Initiatives as of March 1996 to

Resolve IRS and Taxpayer Disputes Over Income Tax Liability

24

Table III.1: Percent of 209 Corporations Using IRS Dispute

Resolution Initiatives by Type of Initiative and Category of

Industry

28

Table III.2: Assets, Income, and Tax Reported by 209

Corporations Using IRS Dispute Resolution Initiatives

29

Page 20 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Contents

Table III.3: Tax Credits and Net Operating Loss Deduction

Claimed by 209 Corporations Using IRS Dispute Resolution

Initiatives

29

Table III.4: Tax Credits and Net Operating Loss Deduction

Claimed by 30 Corporations Using Limited Settlement Authority

29

Table III.5: Tax Credits and Net Operating Loss Deduction

Claimed by 47 Corporations Using Accelerated Agreements

30

Table III.6: Tax Credits and Net Operating Loss Deduction

Claimed by 22 Corporations Using Early Referrals and Mediation

30

Table III.7: Tax Credits and Net Operating Loss Deduction

Claimed by 110 Corporations Having or Seeking APA Agreements

30

Abbreviations

ACUS Administrative Conference of the United States

ADR alternative dispute resolution

AIR Accelerated Issue Resolution

APA Advance Pricing Agreement

CSP Classification Settlement Program

CEP Coordinated Examination Program

IRS Internal Revenue Service

SOI Statistics of Income

TEI Tax Executives Institute

Page 21 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix I 

What Is Alternative Dispute Resolution?1

Alternative dispute resolution, or ADR, is a name for a group of

problem-solving methods designed to resolve disputes consensually.

These methods usually involve a neutral individual who works with the

disputing parties to help them find mutually acceptable solutions. The

various ADR methods can be viewed as points along a continuum, ranging

from processes over which the parties have the most control (e.g.,

conciliation, mediation) to processes over which they have the least

control (e.g., binding arbitration). Here are some ADR methods:

Conciliation is the attempt by a neutral individual to reduce tensions and

improve communications among the parties so they can agree on a

process for resolving their dispute.

Facilitation uses a neutral individual to assist the parties in a meeting

where the established process is used.

Mediation uses a trained neutral individual to help the parties negotiate a

mutually agreeable settlement. The mediator has no independent authority

and does not render a decision or opinion; a decision must be reached by

the parties themselves.

Fact Finding is often used in technical disputes. It uses a neutral party

with subject matter expertise to make findings of fact. This can be useful

where disagreements about the need for or meaning of data are impeding

resolution, or where the disputed facts are highly technical and would be

better resolved by experts. The fact-finder usually prepares a

report/advisory opinion based on an informal presentation by each party

and independent research.

Early Neutral Evaluation uses a neutral individual with substantive

expertise to evaluate the relative merits of each party’s case. This process

usually involves an informal presentation to the neutral of the salient

points of each party’s position. The neutral provides a nonbinding opinion

that can give the parties a more objective assessment of their positions,

thereby increasing the chances that further negotiations will be

productive.

The Settlement Conference uses a neutral individual, generally a judge

other than a presiding judge, to serve as a mediator and neutral evaluator

in a case pending before an agency tribunal. The settlement judge may give

1

 Federal Administrative Procedure Sourcebook, Administrative Conference of the United States, 2nd

ed. (Washington, D. C.: 1992), pp. 227-229.

Page 22 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix I 

What Is Alternative Dispute Resolution?1

an informal advisory opinion. If settlement is not reached, the case

continues before the presiding judge.

The Minitrial is a structured settlement process in which each side

presents a highly abbreviated summary of its case before senior

representatives of each party. Following the presentations, the senior

representatives seek to negotiate a settlement. A neutral advisor

sometimes presides over the proceeding, and can mediate or render an

advisory opinion if asked to do so.

The Summary Jury Trial is a structured settlement process in which

each side has a limited time to present its case before a peer jury. The

jury’s verdict is advisory and is used to facilitate negotiations.

Arbitration uses a neutral individual to decide disputed issues after

hearing evidence and arguments from the parties. The arbitrator’s decision

may be binding on the parties either through agreement or operation of

law, or it may be nonbinding or advisory. Arbitration may be voluntary, or

it may be mandatory and the exclusive means available for handling

certain disputes.

Partnering is a process used in contracting to avoid or simplify disputes.

At the start of a project, participants seek to identify common goals and

interests and establish clear lines of communication. The process may

involve a joint workshop, managed by a neutral facilitator, to develop a

team charter; follow-up meetings; and evaluation processes. A partnering

agreement usually includes a commitment by the parties to use ADR to

resolve disputes that arise during a project.

Page 23 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix II 

IRS Dispute Resolution Initiatives

Table II.1 presents the dispute resolution initiatives begun by IRS since

1990 that were included in our review. The table presents information on

when the initiative was begun, a brief description, the limits inherent in or

placed on the initiative’s use, and the number of times taxpayers have used

the initiative as of November 30, 1996. Immediately following table II.1 are

brief descriptions of additional IRS initiatives not addressed by this report.

Table II.1: IRS Dispute Resolution Initiatives as of March 1996 to Resolve IRS and Taxpayer Disputes Over Income Tax

Liability

Initiating

function Initiative Year Initiated Description Limits

Use as of

November 1996

Appeals Advance valuation

of works of art

1996 Permits taxpayers to obtain

an IRS review of a

taxpayer’s valuation of a

work of art before filing a

return.

Limited to works of art. 2 completed

Mediation October 1995 Permits taxpayers and

Appeals to negotiate a

settlement assisted by

neutral individuals who

have no authority to impose

a decision.

1. CEP cases only after

negotiations in Appeals.

2. Not available for issues

designated for litigation,

docketed cases, or ISP,

ACIP, or Competent

Authority issues.

3. The mediator(s) are

either Appeals employees,

in which case IRS pays the

mediators’ costs, or outside

parties, in which case IRS

and the taxpayer share the

expense.

2 completed

5 requests

denied

2 in process

Early referral March 1994 Allows taxpayers whose

returns are being examined

to request the referral of a

developed, unagreed issue

to Appeals while

Examination continues to

develop other issues.

1. CEP cases.

2. Does not apply to issues

designated for litigation or

for which the taxpayer has

or intends to seek

Competent Authority

assistance.

23a

Early referral of

employment tax

issues

March 1996 Allows taxpayers whose

returns are being examined

to request the referral of

one or more employment

tax issues to Appeals.

Limited to employment tax

issues.

2a

(continued)

Page 24 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix II 

IRS Dispute Resolution Initiatives

Initiating

function Initiative Year Initiated Description Limits

Use as of

November 1996

Counsel Advance pricing

agreements

March 1991 Taxpayers can request an

agreement on the factual

nature of intercompany

transfers, a transfer pricing

methodology, and an

expected range of results

from the methodology.

Agreement may be applied

to prior tax years still in

dispute.

1. Limited to transfer pricing

issues.

2. $5,000 user fee.

74 agreements

in forcea

Examination Limited settlement

authority

November 1990;

Rev. 2, March

1996

Grants discretionary

authority to Examination

case managers to accept

settlement offers where a

prior settlement has been

negotiated by Appeals for

the same issue with the

same taxpayer, or of

another taxpayer who was

directly involved in the

taxable event.

1. Limited to CEP.

2. The facts must be

substantially similar;

Appeals must have settled

the subject issue on the

merits independent of other

issues; and legal authority

must be unchanged.

81

Limited settlement

authority for

coordinated issues

March 1996 Grants authority to

Examination case

managers to accept

settlement offers with

respect to coordinated

issues within the Industry

and International Field

Assistance Specialization

Programs on which Appeals

has coordinated issue

papers containing

settlement guidelines or

positions.

Applies to issues

coordinated under the

Industry and International

Field Assistance

Specialization Programs for

which Appeals has

settlement guidelines.

2

Accelerated issue

resolution

October 1994 Allows district directors, in

coordination with other IRS

functions, to execute

closing agreements with

CEP taxpayers that cover

both the tax year under

audit and unaudited tax

years ending prior to the

date of the agreement.

1. Limited to CEP.

2. Not available for issues

subject to an APA, issues

involving employee plans or

exempt organizations or

partnership items under Tax

Equity & Fiscal

Responsibility Act of 1982,

issues for which resolution

would be contrary to an IRS

position, or issues

designated for litigation.

97

aIRS officials provided updated figures as of February 28, 1997, on the use of some initiatives to

resolve disputed issues. They identified 39 disputed issues resolved by early referral and 4

resolved by early referral of employment tax issues. They also said 82 APAs were in force.

Source: IRS.

Page 25 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix II 

IRS Dispute Resolution Initiatives

Other Initiatives to

Resolve Tax Liability

Disputes and Other

Issues

1. Tax Court Rule 124 — In 1990, the Tax Court promulgated Rule 124

allowing voluntary binding arbitration of factual issues under the direction

of the Tax Court. Arbitration has not been seriously considered to resolve

disputes between taxpayers and the IRS outside of docketed Tax Court

status.

2. Although no specific Tax Court mechanism for the use of mediation has

been developed, mediation can be used by the parties to resolve a Tax

Court case under existing Tax Court authority.

3. IRS Taxpayer Ombudsman/Advocate — The Taxpayer Ombudsman was

authorized by Congress in 1988 to issue Taxpayer Assistance Orders to

stop certain actions to alleviate a hardship faced by a taxpayer. The

Ombudsman was replaced by the Taxpayer Advocate, effective July 30,

1996. The Taxpayer Advocate has broad authority to require action or to

stop an action with respect to a taxpayer.

4. Simultaneous Appeals/Competent Authority Procedures — Taxpayers

may request competent authority assistance when they believe actions of

the United States, a treaty country, or both, will result in taxation that is

contrary to treaty provisions. If the request is accepted, the U.S.

Competent Authority generally will consult with the appropriate foreign

competent authority in an attempt to reach an agreement that is

acceptable to all parties. According to the Assistant Commissioner

(International), the competent authority process addresses

intergovernmental disputes between the United States and treaty nations

rather than disputes between the IRS and taxpayers and does not meet the

definition of ADR.

Revenue Procedure 96-13 established a new competent authority

procedure whereby taxpayers may seek simultaneous competent authority

assistance and Appeals consideration of the competent authority issue.

This procedure coordinates the two processes and is intended to reduce

the time required to resolve disputes by allowing taxpayers more proactive

involvement. Taxpayers may request simultaneous Appeals/competent

authority procedures in four situations: after Examination has proposed

an adjustment, after the taxpayer files a protest against the adjustment,

after the dispute goes to Appeals, and after a competent authority request

has been made.

5. Environmental Cleanup Costs — IRS is developing a revenue procedure

that will provide special procedures for requesting written guidance on the

Page 26 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix II 

IRS Dispute Resolution Initiatives

tax treatment of environmental cleanup costs incurred over several years.

The procedures will attempt to facilitate resolution of issues involving the

capitalization or deduction of such cleanup costs for prior and future years

of a single environmental cleanup transaction.

6. Classification Settlement Program (CSP) — The Commissioner

announced the CSP on March 5, 1996, to help resolve audit disputes over

the classification of workers as either employees or independent

contractors. Under the CSP, IRS auditors will offer pro forma settlements to

taxpayers under audit using a standard closing agreement developed in the

National Office.

Page 27 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix III 

Profile Data on Taxpayers That Have Used

IRS Dispute Resolution Initiatives

Based on identifying information provided by IRS, we located 1993 SOI data

for 209 corporations that have used 1 of 6 IRS dispute resolution initiatives

as of June 24, 1996.1

 Table III.1 indicates that the largest number of users

by industry are manufacturers. Within IRS’ industry codes, the heaviest

users were banks (15 percent) and chemical companies (12 percent).

Table III.1: Percent of 209 Corporations Using IRS Dispute Resolution Initiatives by Type of Initiative and Category of

Industry

IRS dispute resolution initiative

Industry category

Limited

settlement

authority

Accelerated

issue resolution

Early referrals

and mediation APA All initiatives

Construction 0% 0% 5% 1% 1%

Manufacturing 50 53 55 48 50

Transportation and public

utilities

13 15 4 1 6

Wholesale trade 10 2 9 19 13

Retail trade 13 6 4 2 5

Finance, insurance, and real

estate

13 21 23 26 23

Services 0 2 0 3 2

Total 100% 100% 100% 100% 100%

Source: GAO analysis using IRS data.

As shown below, income varied substantially by industry for the 209

corporations. The average income for all corporations was over $3 billion.

This is not surprising because mostly very large corporations are given the

opportunity to use IRS’ dispute resolution initiatives. The table also shows

that the average taxable income was $443 million and average income tax

paid was $76 million. However, 64 of the corporations (31 percent) had no

taxable income and paid no taxes. Another 52 corporations (25 percent)

paid no taxes on their net income.

1

Does not include taxpayers that requested advance valuation of works of art and limited settlement

authority for coordinated issues. As of the date of our request, only one or two taxpayers had used

these methods.

Page 28 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix III 

Profile Data on Taxpayers That Have Used

IRS Dispute Resolution Initiatives

Table III.2: Assets, Income, and Tax

Reported by 209 Corporations Using

IRS Dispute Resolution Initiatives

Dollars in millions

IRS initiative

Average

total

assets

Average

total

income

Average

taxable

income

Average

income

tax

Average

net tax

Limited settlement authority $9,700 $2,100 $247 $86 $77

AIRs 23,200 4,700 704 246 112

Early referrals and mediation 56,700 10,200 1,200 435 186

APAs 6,900 1,700 207 72 38

All corporations 16,200 3,300 443 151 76

Source: GAO analysis using IRS data.

The use of tax credits and net operating losses of corporations using IRS

initiatives may explain why many of the corporations paid few taxes. Many

of the corporations claimed tax credits. For instance, 116 of 209 (56

percent) of the corporations claimed credits totaling about $17 billion.

Most of these corporations either had or were seeking APA agreements.

Table III.3: Tax Credits and Net

Operating Loss Deduction Claimed by

209 Corporations Using IRS Dispute

Resolution Initiatives

In millions

Type of credit

No. of

corporations

Total amount

claimed

Average

amount

claimed

Foreign tax credit 84 $14,700 $175

General business credit 85 914 11

Alternative minimum tax credit 31 779 25

Total credits 116 16,600 144

Net operating loss deduction 57 4,200 74

Source: GAO analysis using IRS data.

Table III.4: Tax Credits and Net

Operating Loss Deduction Claimed by

30 Corporations Using Limited

Settlement Authority

In millions

Type of credit

No. of

corporations

Total amount

claimed

Average

amount

claimed

Foreign tax credit 13 $215 $17

General business credit 9 47 5

Alternative minimum tax credit 8 82 10

Total credits 30 382 17

Net operating loss deduction 10 148 15

Source: GAO analysis using IRS data.

Page 29 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix III 

Profile Data on Taxpayers That Have Used

IRS Dispute Resolution Initiatives

Table III.5: Tax Credits and Net

Operating Loss Deduction Claimed by

47 Corporations Using Accelerated

Agreements

In millions

Type of credit

No. of

corporations

Total amount

claimed

Average

amount

claimed

Foreign tax credit 24 $5,800 $242

General business credit 26 335 12,900

Alternative minimum tax credit 7 302 43

Total credits 35 6,500 186

Net operating loss deduction 16 292 18

Source: GAO analysis using IRS data.

Table III.6: Tax Credits and Net

Operating Loss Deduction Claimed by

22 Corporations Using Early Referrals

and Mediation

In millions

Type of credit

No. of

corporations

Total amount

claimed

Average

amount

claimed

Foreign tax credit 13 $5,200 $400

General business credit 12 406 34

Alternative minimum tax credit 6 280 47

Total credits 14 5,900 421

Net operating loss deduction 11 3,100 282

Source: GAO analysis using IRS data.

Table III.7: Tax Credits and Net

Operating Loss Deduction Claimed by

110 Corporations Having or Seeking

APA Agreements

In millions

Type of credit

No. of

corporations

Total amount

claimed

Average

amount

claimed

Foreign tax credit 38 $3,500 $92

General business credit 28 126 5

Alternative minimum tax credit 10 116 12

Total credits 45 3,700 82

Net operating loss deduction 20 624 31

Source: GAO analysis using IRS data.

Page 30 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix IV 

Summary of ACUS Guidance on Program

Evaluation1

ADR program evaluation is simply a way to determine whether an ADR

program is meeting its goals and objectives. ACUS recommended

systematic planning for program evaluation at the time an ADR program

was set up because this allows agencies to establish data collection

mechanisms early in the program.

ACUS guidance outlined three phases to program evaluation: (1) planning;

(2) design and implementation; and (3) presentation, dissemination, and

use of results. This summary addresses the planning and

design/implementation phases.

For the planning phase, ACUS guidance noted four planning steps:

(1) determining the evaluation’s goals, (2) identifying the audience(s) and

their needs, 3) considering issues of timing and expense, and (4) selecting

an evaluator.

ACUS guidance stated that the evaluation’s goals should be tied closely to

the goals of the program being evaluated. Ideally, the agency will have

established the ADR program’s goals in the program design phase. Although

terminology differs, evaluations are commonly characterized as either

“program effectiveness” or “program design and administration”

evaluations. Program effectiveness evaluations, also known as impact or

outcome evaluations, focus on whether a program is meeting its goals

and/or having the desired impact. Program design and administration

evaluations, also known as process evaluations, examine how well a

program is operating.

Usually, a variety of people have an interest in the results of a program

evaluation. These audiences may be interested in different issues and seek

different types of information. Potential audiences should be identified

early and kept in mind in planning the evaluations so that their questions

will be addressed. For example, program (such as Appeals) officials and

legal staff may be interested in the ADR program’s impact on case inventory

and the nature of settlements, how long it takes to resolve cases, and

whether ADR promotes long-term compliance; budget officers may be

interested in whether ADR has achieved cost savings; and members of

Congress may be interested in how the use of ADR affects budgets.

Evaluation can be undertaken at different times during the life of an ADR

program. Among the factors to consider are whether the program has been

1

 Evaluating ADR Programs: A Handbook for Federal Agencies, Administrative Conference of the

United States, Dispute Systems Design Working Group (Washington, D. C.: 1995).

Page 31 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix IV 

Summary of ACUS Guidance on Program

Evaluation1

in operation long enough to have sufficient cases available for analysis,

and whether the program has resolved early implementation problems.

The agency also needs to (1) identify budget and resource constraints,

organizational opposition, and operational difficulties; and (2) develop

strategies for dealing with them. The agency should also consider the

qualifications of objectivity, experience, technical expertise, and

understanding the context in which the ADR program operates in selecting

the evaluator(s).

For the design and implementation phase, ACUS guidance laid out broad

steps for an effective ADR program evaluation. These included

• understanding ADR program design and operation,

• translating evaluation goals into measurable performance indicators,

• determining data needs and availability,

• selecting an appropriate design strategy,

• deciding how to collect the data,

• collecting the data, and

• analyzing and interpreting the data.

Once the evaluation’s goals have been established, evaluators can select

appropriate performance indicators. Performance indicators represent the

questions being asked in the evaluation and serve as the basis for data

collection and analysis. According to ACUS, measuring all aspects of an ADR

program is neither easy nor necessary. Some types of data are harder to

obtain, and some areas of a program are more important than others to

examine.

ACUS’ evaluation guidance included a list of performance indicators, which

it intended as a “sampling” from which agencies could select as they

formulated ADR program goals and identified measures of program

effectiveness. For program effectiveness evaluations, the list presented

indicators under three categories—efficiency, effectiveness, and customer

satisfaction.

Indicators of efficiency included measures of cost and time.

Indicators of effectiveness included measures of dispute outcomes,

durability of outcomes, and impact on the dispute environment. Suggested

measures of dispute outcomes include (1) the number of settlements

achieved through ADR; (2) the number of cases going beyond ADR to

litigation; (3) the nature of monetary and other outcomes; and (4) the

Page 32 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix IV 

Summary of ACUS Guidance on Program

Evaluation1

relationship between outcomes and other factors, such as complexity,

number of issues, or number of disputants. Suggested measures of

durability included (1) rate of compliance with negotiated agreements,

(2) rate of dispute recurrence, and (3) impact on organizational

environment. Suggested measures of impact on dispute environment

included (1) size of case inventory, (2) types of disputes, (3) timing or level

of dispute resolution, (4) management or public perceptions, and

(5) negative impacts.

Indicators of customer satisfaction included measures of participants’

satisfaction with the process, impact on relationships, and participants’

satisfaction with outcomes. Measures of participants’ satisfaction with the

process included perceptions of fairness, appropriateness, usefulness, and

control.

A variety of research designs are available for use in evaluating ADR

programs. Possible design strategies include case studies, time series

analysis, and group comparisons. Evaluation planners should consult

persons with research methodology expertise when selecting a design

strategy.

Once the evaluators determine what to measure, the next consideration is

what data to collect. In a program effectiveness evaluation, evaluators

need to be able to describe the situation without the ADR program

(sometimes referred to as the baseline) to serve as a basis for comparison.

Comparison information is not always easy to obtain, especially if the

agency does not keep ongoing records reflecting the relevant information.

Ideally, evaluators collect comparison data by using a control group. If a

control group is not available, alternatives must be used, although they

may not provide as good a comparison. For example, comparison data can

be collected by looking at the historical period before the ADR program

began.

Page 33 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
Appendix V 

Major Contributors to This Report

General Government

Division

Tom Short, Assistant Director, Tax Policy and Administration Issues

Kansas City Regional

Office

Royce L. Baker, Tax Issue Area Coordinator

Patricia M. Crown, Evaluator-in-Charge

James Slaterbeck, Evaluator

Thomas N. Bloom, Computer Specialist

(268656) Page 34 GAO/GGD-97-71 IRS Dispute Resolution Initiatives
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