February 1997
FS-97-9   

                       THE APPEALS PROCESS


THE RELATIONSHIP BETWEEN EXAMINATION AND APPEALS

     The mission of Examination is to determine the correct
amount of tax.  The vast majority of cases are agreed at the Exam
level because the taxpayer agrees with the proposed adjustment or
because the return was correct as filed.

     Most examination adjustments are straightforward and based
on easily discerned facts and clear law and regulations.

     The mission and authority of Appeals are different from
those of Examination.

     Appeals is charged with taking a fresh look at issue/cases
in controversy.  Appeals considers proposed resolutions that are
fair and impartial to both the government and the taxpayer. 
Settlements may be related to the uncertainty of a factual
dispute, or uncertainty as to the interpretation or application
of the law to the facts of a case.  Appeals has the authority to
estimate these "litigation hazards" in negotiating a þreasonableþ
settlement of a case.


CASES GO TO APPEALS BECAUSE:

  -- The IRS examiner and the taxpayer could not agree on the
     interpretation or application of the law to the facts.

  -- The facts in the case are complex, unclear, or in dispute.

  -- The law is unsettled and/or complex.


UNDERSTANDING APPEALS' STATISTICS

     In a recent stratified random sample of cases selected by
GAO, the average percentage assessed by the IRS (combined Exam
and Appeals) from the entire sample was 31.3%.  The sample was
broken out into four strata:

  -- $75k to $299k made up 49% of the audits and had an
     assessment rate of 71.7%.

  -- $300k to $999k made up 26% of the audits and had an
     assessment rate of 62.8%.

  -- $1 million to $2.999 million accounted for 15.3% of the
     audits and had an assessment rate of 47.3%.
  -- $3 million and over accounted for 9% of the audits and had
     an assessment rate of 23.4%.

     The dollars in the largest cases skew the "average" result. 
As can be seen, 91% of taxpayers have assessment rates far above
the statistical "average".

     Accordingly, cases over $10 million in dispute account for
only 1% of the inventory in Appeals, but 88% of the dollars in
dispute.  Cases over $1 million are 4% of the inventory, but 95%
of the dollars.

     Overall assessment rates do not reflect the outcome for most
taxpayers and, in our opinion, should not be extrapolated to have
some meaning for the population of unappealed cases.

     In Appeals' Large Case Quality and Process Review, analysis
of a representative sample of cases with $10 million or more in
dispute revealed a significant impact on assessments from factors
developing after the audit and from computational adjustments. 
These include:
  -- New issues raised by taxpayers
  -- Changes in IRS position
  -- Credit and loss carrybacks/carryovers
  -- Changes in the tax law
          
     Accounting for these factors would increase the assessment
rate from 23% to 41% for these cases.

     For reasons given above, it is an error to take Appealsþ
"average" for docketed cases to represent the average case; or to
assume that unappealed cases would be conceded or settled at
those rates.

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