As previously described in part in Disputing Tax and in a recent Bloomberg article that included remarks from Kat Gregor, Facebook has been involved in a multi-front litigation with the IRS for almost two years. It began when Facebook refused to extend the statute of limitations for a sixth time to allow the IRS to continue to its nearly five-year long audit of Facebook for the tax years 2008 to 2010. The IRS responded by filing suit to enforce a summons and then by issuing a Notice of Deficiency alleging that Facebook owed additional tax as a result of its $7 billion undervaluation of certain intangibles transferred to Facebook Ireland. Facebook appealed the Notice of Deficiency in Tax Court and also filed two separate lawsuits in the U.S. District Court for the Northern District of California.
On May 14, 2018, the U.S. District Court issued an important decision in one of those cases, an Administrative Procedure Act (APA) challenge alleging that the IRS arbitrarily and capriciously denied Facebook the right to challenge the Notice of Deficiency in the IRS Office of Appeals. That tentacle of the dispute centered around Congress’s 2015 mandate in section 7803(a)(3) of the Internal Revenue Code that the Commissioner of Internal Revenue “ensure that employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title, including . . . the right to appeal a decision of the Internal Revenue Service in an independent forum.” Facebook argued that this provision set forth a right for taxpayers to challenge all IRS decisions in IRS Appeals, which has been independent from the examination function of IRS since the passing of IRS reform legislation in 1998.
The U.S. District Court disagreed. Focusing on the legislative history of the statute, the Court held that taxpayers did not have any general right to take cases to appeals and Congress did not create any new rights under section 7803(a)(3). Rather, it reasoned that the provision was intended to clarify that the IRS Commissioner had responsibility to ensure that all IRS employees were aware of and abided by taxpayer rights already set forth by statute. The court found that the provisions in section 7803(a), commonly referred to as the “Taxpayer Bill of Rights,” including the right to be informed, quality service, to pay the correct amount of tax, finality, to appeal, privacy, confidentiality, retain representation, and to a fair and just tax system, were simply too vague and indefinite to constitute new substantive rights. As a result, the court held that the IRS’s refusal to let Facebook proceed to IRS Appeals was not reviewable because it was not a final agency action under the APA, and there was also no jurisdiction to compel the IRS to refer the matter to IRS Appeals.
This decision will likely embolden IRS to refuse to refer cases to IRS Appeals. Currently, hearings before IRS Appeals are only statutorily mandated in certain limited circumstances, such as to contest liens and levies under sections 6320 and 6330 of the Internal Revenue Code. Current IRS guidance under Rev. Proc. 2016-22 § 3.03 allows IRS to refuse to refer a case to Appeals where it has been designated for litigation by IRS Counsel, or where IRS determines that “referral is not in the interest of sound tax administration.”
It’s unclear yet whether Facebook will challenge this recent decision. The central dispute—Facebook’s appeal of the IRS’s audit findings—is still proceeding in the Tax Court and unlikely to be resolved for some time. Under the current schedule set by the Tax Court, the case will not be ready for trial until fall 2019 at the earliest.