On January 14, 2025, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued final regulations concerning the operation of the Independent Office of Appeals (Appeals). See Treas. Reg. § 301.7803-2. These new regulations implement section 7803(e), enacted as part of the Taxpayer First Act of 2019, and codify the IRS Independent Office of Appeals . Generally, section 7803(e) states that the function of Appeals is to "resolve Federal tax controversies without litigation," and notably, that Appeals "shall be generally available to all taxpayers," with limited exceptions, such as claims that the IRS deems frivolous. See I.R.C. § 7803(e)(3)-(5). The final regulations largely track the proposed regulations issued on September 14, 2022. For a more detailed discussion of the proposed regulations, see our prior coverage here.

Of particular note, the final regulations provide definitions for certain terms, including "federal tax controversy," and identify six categories of IRS determinations that would otherwise fall outside of the definition of "federal tax controversy," but would be deemed to meet the definition for purposes of section 7803, including a catchall provision. See Treas Reg. § 301.7803-2(b)(2)-(3). In addition, the final regulations outline 24 categories of disputes that are excluded from Appeals consideration, beyond the statutory exclusions Congress enacted in section 7803(e)(5). See Treas. Reg. § 301.7803-2(c). Notably, these exclusions include disputes over the constitutionality of a statute, the validity of a Notice or Revenue Procedure, and/or whether a regulation was valid. These exclusions are based on the assertion that Appeals officers should not "unilaterally contradict the decisions made through the regulatory or subregulatory process," and that because validity arguments do not involve "taxpayer-specific facts," and would apply to all taxpayers, a "final unreviewable decision" would be necessary for Appeals to make a determination as to hazards of litigation. In response to comments received during the notice and comment period, the final regulations clarified the definition of "final unreviewable decision" to include a decision by "any Federal court regardless of where the taxpayer resides. See Treas. Reg. § 301.7083-2(c)(18). However, this exclusion does not prevent Appeals from considering whether or not a regulation, Notice, or Revenue Procedure applies to a taxpayer's facts. These exclusions are already effectively in place, because Appeals issued an interim internal memorandum contemporaneously with the proposed regulations indicating that Appeals would not hear validity challenges, and such exceptions were also implemented in the Internal Revenue Manual (IRM) § 8.1.1.3.1(5). 

The proposed regulations also requested comments on whether the final regulations should also exclude from Appeals consideration denials of requests for consent to change an accounting method (CAM) and for section 9100 relief. The final regulations added each of these to exclusion #17 for "a decision by an Office of Associate Chief Counsel regarding whether to issue a letter ruling or the content of a letter ruling" by adding the following sentence: "This includes decisions regarding requests for relief under §§ 301.9100-1 through 301.9100-22 and requests for a change in method of accounting." The preamble, however, clarified that this exclusion only bars immediate consideration by Appeals of any denial. The preamble goes on to say that "[i]f the taxpayer later files a return taking a position that is contrary to the [adverse] letter ruling and that position is examined by the IRS, Appeals can consider that Federal tax controversy if all other requirements in § 301.7803-2 are met."
    
These final regulations are effective as to requests for consideration by Appeals on or after February 14, 2025. 

For more information, please contact:

George A. Hani, ghani@milchev.com, 202-626-5953

Robert J. Kovacev, rkovacev@milchev.com, 202-626-5857

Omar M. Hussein, ohussein@milchev.com, 202-626-1578

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