How Does the IRS Tax Arbitration Process Work?

The IRS Independent Office of Appeals provides several methods for alternative dispute resolution (ADR) to resolve disagreements without litigation. While the formal arbitration program once offered by Appeals was discontinued, other options, such as mediation, remain available. Additionally, binding arbitration may be an option in certain cases docketed with the U.S. Tax Court. These processes are designed to be more efficient and less formal than a court trial, involving a neutral third party to help resolve disagreements.

The Discontinuation of Appeals Arbitration

For several years, the IRS Office of Appeals offered a formal arbitration program for specific factual disputes. However, this program was officially eliminated in 2015 due to very low usage. As a result, taxpayers can no longer request this specific form of binding arbitration directly through the Appeals office as a standard ADR option.

Mediation: A Non-Binding Alternative

Mediation, a primary ADR tool available through the IRS Appeals office, is a non-binding process where a neutral mediator assists the taxpayer and the IRS in reaching a voluntary agreement. The mediator facilitates negotiations but does not impose a decision. This process is available for factual issues, such as determining the fair market value of an asset or a reasonable salary. To initiate mediation, both parties must document the terms in an Agreement to Mediate using Form 13369. If the parties cannot agree, they can still pursue the matter in court.

Arbitration Through the U.S. Tax Court

For cases that have already been filed and are under the jurisdiction of the U.S. Tax Court, both the taxpayer and the IRS can jointly request to use binding arbitration to resolve a factual issue. This process is governed by the court’s rules and provides a final, binding decision from an arbitrator on the specific matter in dispute.

Finalizing a Resolution

When a dispute is successfully resolved through an ADR process, the final step is to formalize the outcome. If mediation leads to a settlement, the taxpayer and the IRS will execute a closing agreement, often using Form 906, “Closing Agreement On Final Determination Covering Specific Matters.” This document details the resolved issue and its tax treatment, providing legal finality. This closing agreement is binding on both parties and can only be set aside in rare circumstances, such as a showing of fraud.