David Stewart 0:01

Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: zooming to settlement. The IRS has turned to settlement days as a way to quickly resolve a higher volume of tax cases. But the coronavirus pandemic has presented significant challenges for all parties involved. Here to discuss this topic in depth is Tax Notes legal reporter Nathan Richman. Nate, welcome back to the podcast.

Nathan Richman 0:30

Hi, Dave.

David Stewart 0:31

First off, could you give us some background on the concept of settlement days and how they came about?

Nathan Richman 0:36

Settlement days are a relatively recent outgrowth of calendar call programs. Both are ways to get unrepresented Tax Court petitioners help with their cases, either with volunteer attorneys or low-income taxpayer clinics. But while calendar call programs take place in the courthouse at a Tax Court trial session , settlement days happen usually weeks ahead of time, giving the petitioners, representatives, and the IRS participants a more flexible and comfortable situation for addressing the tax controversy. First settlement day events were organized a little over five years ago after some ground-level discussions between the IRS area council and local tax communities.

David Stewart 1:18

Now, you recently talked to someone from the IRS about this. Who did you talk to? And what did they have to say ?

Nathan Richman 1:23

I spoke with IRS Chief Counsel Michael Desmond, who oversees a staff of roughly 2,000, including 1,500 attorneys. He's been chief counsel for about 18 months. And before that, he had been practicing at a boutique law firm he started in 2012 in California. Mike talked about the challenges and benefits of hosting settlement days in person versus virtually. And the lessons he's learned so far. He also shared how those events will influence IRS attorneys going forward, both with remote Tax Court trials and after the pandemic.

David Stewart 1:55

All right. Let's go to that interview.

Nathan Richman 1:58

Thank you so much for joining us.

Michael Desmond 2:01

Thanks, Nate. Thanks for having me here today.

Nathan Richman 2:03

So, settlement days sound like a really good idea and a really good deal. Even before the pandemic, what sorts of difficulties did the initial efforts encounter in getting off the ground? What sorts of situations caused people to not be as interested in various versions?

Michael Desmond 2:19

There are probably a number of elements, but two that come to mind. One is just getting a response from the taxpayers and the petitioners. As I said, one of the challenges, and you'll see this in many, many of the docketed cases and tax disputes generally, is just the tax law is complicated. People's personal and financial circumstances are complicated. And when you put the two together, that can lead to obvious communication breakdowns that are a challenge. And I think a lot of times once people just get all the paperwork and the issues in front of them, and have somebody there to explain them, a resolution can be reached. But the challenge of getting people to the table in settlement days , in trial, even long before a stat notice is issued, getting taxpayers to kind of focus on what the issue is. And frankly, on the IRS's side as well, there are challenges in us providing communication channels to taxpayers. The communication breakdown is a two-way street. It's on our end and it's on the taxpayers' end. But that can continue through even to settlement days. Low takeup rates, low response rates , a sense of skepticism by taxpayers as to whether this is going to be useful for them, or if it's just going to be more of this incommunication challenge. So I think that's one big issue for taxpayers and for the status of settlement days before the COVID pandemic threw a wrench into even what we were doing on that front, so. And another challenge, and this is just more practical for the sort of pre-COVID settlement days, was just finding the right time and place to make the resources available. We have had the two sessions I was able to participate in in person. One was on a Saturday here in D.C. And I think that has proven successful in some cities and not necessarily in others. The one in San Francisco we attended was in the evening. And I think that can prove tough on some places and not in others. And I've think just the geographic and practical challenges of getting people to in-person settlement days are the same challenges we face in getting people to calendar calls and to IRS offices, and just part of the communication challenge there and getting people to the table. So, that's something that's a bit of trial and error. Some cities work differently, and we just learned from what works best in different cities as to what is the right time and place and logistics. Is it an IRS office? Is it a clinic office? Is it a law firm office? What's the right hosting environment? What are the right time and place? Those kinds of things were challenges before and I think they're ones that have evolved, particularly with the COVID pandemic. And a bit of a silver lining with what we're doing with the virtual settlement days to try to find ways to resolve those. I think accelerating our thinking about how we can resolve those logistical challenges.

Nathan Richman 5:00

Let's move on to the virtual settlement days and what sorts of different challenges they present compared to the in-person.

Michael Desmond 5:08

Well, the obvious one is technology. And we have even within counsel then evolving in how we handle technology and contact even with each other in cousel and obviously with taxpayers . So, that's probably the greatest challenge and that has evolved. We've all seen what the Tax Court has done with its Zoomgov sessions that its planning for the fall calendar session. They've had one hearing already that was done in a CBP case with the Tax Court. So, I think that the Zoomgov platform that the Tax Court has adopted, we have obviously adopted that as well. We did not have access to Zoom or Zoomgov prior to COVID due to concerns about cybersecurity and others. But we've been able to work through those. And I think the COVID pandemic has accelerated our thinking on that front. So, in addition, that's probably the primary platform just because that's what the Tax Court uses. And we can use that independently to facilitate settlement days and even just general discussions with taxpayers. And we've got other technologies that we are looking to as well. A WebEx platform that we've used within counsel and IRS for some time. Virtual secure delivery is another mechanism we've had for us. But all of those are obviously dependent upon taxpayers having access to those resources. And we know a lot of lower income and pro se taxpayers don't necessarily have the high-speed internet access that it takes to get a Zoomgov communication line open. WebEx is the same thing. So, we do have some challenges on that front with technology. I think there's some effort at flexibility. So, old-fashioned telephone also still works fairly well. So, keeping that as an option. And sometimes if you've got a number of different players at the table, having telephone available for a petitioner that doesn't have web access , while others can be available through the virtual platforms that are volunteers and clinics is one approach we're looking at. But then probably related to that, and perhaps given a more significant challenge, a lot of our cases involve substantiation, documentation, trying to understand that the history of the correspondence with the IRS. So, it can be a document-intensive exercise to get these matters resolved. And Zoom does allow for some sharing of screens, and that kind of thing, so that you can have some access to documents, but that's a challenge. And again, if the taxpayer doesn't have access or the ability to scan documents in and upload them and email them and do those kinds of things, that can present a bit of a challenge just in those document-intensive cases and even ones that aren't so document-intensive. So that's certainly one aspect of the challenge. And in person, that's much easier to have the documents in front of you as you're working to resolve a case.

Nathan Richman 7:44

They can show up with their shoe boxes.

Michael Desmond 7:46

Right. Although in the experience I've had, you know, oftentimes it's the documents are there, but they aren't all the documents. So there's always an effort involved to try to get the right documents together. And we all have lost files and missing records and needed a bunch of different sources to get them. And that's both on the taxpayer's side and the IRS side . So, a virtual platform does have a little bit more flexibility in that you're can have an initial conversation or discussion, some sharing of documents, identification of what's missing, and then come back a day or two later, fairly seamlessly, for a second session, with more documents in front of you. For in-person sessions that's a little bit more difficult. If you are there on a Thursday evening and one or two records are missing, y ou've got to regroup and come back and get the people together again. So, a virtual platform does facilitate more regular contact and following up on those kinds of missing record issues that can be a sticking point.

Nathan Richman 8:40

Well, speaking of that flexibility from the virtual platforms, are these really settlement days when they're virtual or settlement weeks?

Michael Desmond 8:50

They are. They do go on. And I think one of our virtual summit days was in Detroit and started on May 7, then took place over the course of about eight days. Yeah, those will be more protracted. And I think in part, because of the back and forth, but there will be more sessions involved in these virtual settlement days, plural, than we had when we had just an in-person session in the pre-COVID days.

Nathan Richman 9:15

What sorts of post-COVID plans and lessons are you taking from these virtual days? Stuff like, are you considering these as followups, ways to reach more people who are geographically limited, that sort of thing?

Michael Desmond 9:27

I don't think there's any question that we will take a lot of positives out of the virtual settlement days. I don't think these are going to go away. I hope they don't. Because just looking at these statistics, the take-up rate, as I said, 50 percent or so sometimes of the invitations that the petitioners are coming in, which has a higher response rate than we've had in prior in-person sessions . So, that's a positive. The accessibility you mentioned, Nate, I think is critically important. Some of our calendar sessions, and just speaking from my experience in Los Angeles, the Tax Court has sessions once or twice a month in Los Angeles during the fall and the spring session. But the Los Angeles geographic footprint for taxpayers is extensive. And many taxpayers , even without LA traffic, can be a couple of hours away from the courthouse. And the same is true for in-person virtual settlement days. So I think the virtual platform that we've been embracing here for virtual settlement days will work very well, particularly in those spread out locations, to provide for a lot more regular contact. And at the end of the day, I think will go a long way to providing greater access to justice for taxpayers . One of the statistics that I'm always — is unfortunate — is the number of cases that get dismissed for lack of prosecution. And not that there is a resolution there, but I think just the challenges and difficulty. You know, these taxpayers have gone all the way to filing a petition in Tax Court, and then their case ends up getting dismissed for lack of prosecution. Ideally, those get resolved before you even get to a stat notice, but if you've gotten that far, then you would hope that the taxpayer wants to keep pushing that forward. And, you know, the resolution may be a deficiency with some collection options. But I think there is an issue with access to justice. If you don't take that case to some sort of resolution the taxpayer can understand and agree to. So, facilitating that long-term through things like virtual settlement days, I think will be a very big positive in terms of broader access to justice. And I say that in particular with respect to virtual settlement days, but I think the same will hold true for the long- term consequences of the Tax Court holding its calendar sessions and perhaps even trials and hearings virtually in the fall session. It'll be interesting to see how the court evolves with its thinking. But I know I share Chief Judge Foley's comments about the long-term benefits in providing greater access to justice and to the courthouse protects payers that otherwise would have geographic, practical, work, childcare, all sorts of other limitations that prevent them from getting there and getting their day in court. So, both on the settlement front and on the trial front, I think we'll take some good lessons out of all of this work.

Nathan Richman 12:06

So, you mentioned earlier this move to more routine settlement day sessions from the purely link to trial session version.

Michael Desmond 12:15

Right.

Nathan Richman 12:15

How early in the process are you considering extending that to? Is there some idea for some sort of tax resolution fair for perhaps even pre-docketed cases? Or cases in appeals or something like that?

Michael Desmond 12:31

Yeah. And I don't want to speak for the IRS on that front. I know that's something that has been tried in the past, and I think it's to be determined whether the IRS can pick up on some of the benefits and lessons that we're seeing from the docketed case settlement days. I think there are some challenges extending that beyond docketed cases. One advantage, you have a docketed case is that there's a very defined set of issues. You've got a stat notice as here's the deficiency determination. Here are the years that are at issue. And so it helps to really kind of cabin the issues and allows for perhaps better focus on exactly what that issue is in the case. We'll have to see kind of what lessons can be learned outside the context of docketed cases. But in docketed cases, in particular, as I mentioned a moment ago, we are looking to establish these instead of, as I said, the traditional model was to do this 60 days or so before the calendar session. And that led to some issues, obviously, if the case is already moved along for a year, it's been to appeals. It's maybe still in appeals. Just logistical issues there. I think what we're moving toward now is just thinking about in Los Angeles, for example, or in Chicago or in Atlanta, y ou k now, having a periodic d ate s et f or settlement days. I t isn't necessarily k ey to an upcoming calendar call, but then there may be a number of cases that can lend themselves to coming in to that settlement day, as soon as when the case is answered. So, that can be very early in the process before it's referred over to appeals in post-docketed appeals resolution p rocedures. And then even in that scenario, you can have potentially multiple opportunities for a taxpayer to come into the settlement day. So, perhaps putting a notice out right after the case is answered, we've got a settlement day, it's going to be on September 15, you're welcome to come. And then as a case moves along, after it's been answered, periodic quarterly settlement days and multiple notices going to that taxpayer with multiple opportunities to participate in the settlement day. All the way up to just before the calendar call, once it does get out , if it hasn't been resolved before then. So , kind of logistical issues there, just in terms of getting the cases. We do want to be sure appeals does it all in the post-docketed procedures, a significant percentage of our docketed cases. So, we want to be sure that process continues to work. I think a lot of taxpayers do like to take advantage of that. And that's a very successful procedure. So this is independent of that and really handled by counsel directly. So there's an opportunity kind of up front before the case is sent to appeals, an opportunity at the backend after it comes back from appeals, if it has been set for calendar, set for trial. And then there are some number of cases that also are not eligible for post- docketed appeals because the stat just came out of appeals. And those can lend themselves to sort of periodic touches on perhaps resolution through settlement days. So again, really kind of a periodic on the day schedule that may also have some benefits in terms of planning for the clinics and planning for pro bono attorneys. That knowing there'll be a more regular session for settlement rather than just the ones right before the calendar calls. So, still some evolutions of thinking there, but that seems to be the direction we're heading in.

Nathan Richman 15:42

Let's move on to numbers. You've already mentioned the 50 percent uptake rate for the virtual settlement days. But just what sorts of fun numbers do you have about anything settlement days — number of cases settled, participants, all sorts of fun stuff?

Michael Desmond 15:56

Sure. We've got about 25,000 cases pending in Tax Court at any one time. That number goes up and down over the years, but it's roughly around 25,000 cases in Tax Court. Of those, I think it's about 500 that go to trial and decision each year in Tax Court. The vast majority get resolved short of trial and decision. And I think those two numbers are probably good for context because the number I'm looking at in terms of the settlement days, both virtual and in-person — and this is just over probably less than a year. So the fall of 2019 up through just about this month, we've had almost 250, about 243 cases, are resolved through settlement days. Again, from fall u p through August o f this year a nd just this month. So, that number may look relatively small compared to 25,000 pending cases. But if you compare that to the 500 cases that actually go to trial and decision each year, it's a very sizable number and a very important channel for getting cases resolved just by trial decision. So, a very meaningful number of cases have been settled. This is just in the past , less than a year. Again, 243 cases settled through the in-person and the virtual settlement days that we've had. I think that's an impressive number. You go back a couple of years ago when we didn't even have settlement days, much less virtual settlement days, and it was much closer to zero. That's a very positive number in terms of the number of cases that are getting resolved through the settlement days.

Nathan Richman 17:27

Is the number of participants even higher?

Michael Desmond 17:29

The number of participants is higher. We have had a little over 400 — 417 — taxpayers take us up on our solicitation and have made appointments to come in. Back when we had in-person settlement days, you'd sometimes have people that show up that didn't have appointments, which is not discouraged. So, you know, 417 folks have taken us up on the invitation to come in. Not all of them show up for the appointment , but I think that the attrition rate has been relatively low. So, of the 417 that we've scheduled over the fall 2019 to August 2020 time period, we've had 356 actual in-person meeting or virtual meetings with those 417 appointments. So again, not too high an attrition rates that folks, once they do schedule the appointments, have been pretty good about showing up for them. And then all of that 356, 243 have actually been resolved. Again, a very high take-up, probably a fair number still in flight too, in terms of ultimate resolution. Even if the case doesn't get settled through the settlement days, I think they always make progress in refining the issues and can go a long way toward ultimate resolution of those cases, even if they aren't resolved to the settlement date per se. One other statistic for you as well. And I think this portends well for the future of the settlement days. We've got, depending on how you count it, about 45 counsel offices around the country. And of those, 23 have actually hosted settlement days. Twenty-three unique cities. So, this has not been rolled out to all of our counsel offices. Many of those are brand new to the program, and we expect to be adding more in the coming weeks and months. Those numbers that I'm giving you in terms of the number of appointments meetings, settlements , we do expect those to grow as the settlement days get rolled out to a larger number of our 45 or so counsel offices around the country.

Nathan Richman 19:14

So, would it be safe to predict that settlement days could before too long resolve about as many cases as actual trial?

Michael Desmond 19:20

Probably would not be too far-fetched of an idea . So, we'll see. But certainly, another avenue toward getting cases resolved. And the other point to note on that is that the feedback from taxpayers, in particular, for the settlement days has been overwhelmingly positive. And I think there are some downstream effects for that. I'm not sure you get the same reaction for Tax Court trials. I think the trial is a much more obviously adversarial process. So, I think that the impression that a taxpayer gets coming out of the successful settlement day can have very positive downstream effects for tax administration generally. Feedback has been very positive. People come out of this , I think for the first time, sometimes in a yearslong dispute with the IRS, understanding the issues, understanding their situation. And anything we can do to kind of advance taxpayers' understanding and while perhaps never happy with the deficiency determination, if they have an understanding for why they have a deficiency and an opportunity to have that explained to them in an informal setting like a settlement day, there's some really positive downstream effects for tax administration that we're seeing coming out of it.

Nathan Richman 20:27

One other notable overlap between the court's moves is the expansion to calendar cases rather than actually at the calendar of its limited appearance rule. Have the counsel attorneys had any interaction with that rule, seeing it play out? Particularly now that you can have somebody in the settlement day who has a limited appearance or were planning to enter limited appearance type situation?

Michael Desmond 20:51

I think as a general matter, it's always good to have a clinic or a pro bono representation with the taxpayer. It addresses those communication challenges that I mentioned earlier, and just sort of bringing some resources to the taxpayer that they wouldn't otherwise have. And I think in a more neutral or even advocate capacity that the counsel orders obviously can't serve, so certainly some benefits by having those pro bono and clinic volunteers there earlier in the process. I think on a more mechanical and technical level, there are also some challenges for us. We have obviously got to be very careful about inadvertent disclosures and improper disclosures. And so, if somebody hasn't made an appearance in the case, there are always issues around ensuring that they're authorized to receive return information from us and that we can discuss with somebody that taxpayer situation themselves. In the past, that's been somebody hasn't made an appearance. You can use a 2848 to try to get authority for disclosure of the information. But I think it's preferable to have a formal appearance having been made in the case. We all know that the volunteer or clinic representative is there perhaps on a limited basis to represent that taxpayer. And it does take care again on a more technical level of some of the disclosure concerns that we've always got in dealing with taxpayers and people who are suing.

Nathan Richman 22:09

Perhaps the last question I've got here. I recently heard Judge Toro talk about as flexible as many of these web-based tools are, and you've alluded to some of the gaps still in the flexibility, there are some people who cannot really get an effective remote trial. Do you see that happening somewhat as well with the virtual settlement days?

Michael Desmond 22:30

Yeah , probably to a lesser extent than the virtual trial concerns because virtual settlement days, even in-person settlement days, are purely voluntary for the taxpayer and the petitioner. And also frankly, for counsel. They're going to be some cases that just don't lend themselves to resolution. Cases where the taxpayer or a witness's credibility is at stake; penalty cases; fraud cases; some other cases that just don't lend themselves very well to assessing credibility in those kinds of issues through a remote platform. So, but I think we do have a little bit more leeway on the settlement days. That, first of all, I think those kinds of taxpayers are probably less likely to accept any sort of offer to come to the table on settlement. That's why they're in court. And the same on our side, counsel may not necessarily be thinking that those are cases that are going to get resolved. So those kinds of cases, I think present challenges for virtual trials, certainly where you do have witness credibility and similar issues at play. And I think for the most part, those can be avoided through settlement days just because those cases are never going to get to the table for settlement in their context anyway. And there are obviously channels for resolving those cases, but they tend to be more kind of targeted or tailored settlement discussions that we've had. And those more complicated types of cases.

Nathan Richman 23:50

Any closing thoughts you have on settlement days, and virtual settlement days in particular?

Michael Desmond 23:52

No, other than again, to thank the SB/SE counsel folks, w ho've really taken the lead in cities around the country — Atlanta, Chicago, Los Angeles — 23 total cities that we've had. And really a great team of people that have really embraced not only settlement days, but I think I 've d oubled down on that with their embrace of the virtual settlement days. And taking this up, I think, to reflect my comments about seeing real long-term benefits in terms of access to justice for taxpayers, downstream benefits if we can get agreed upon resolutions in these kinds of environments that are much more amenable to a favorable resolution a nd a favorable experience with the Tax Court and interactions with the IRS. So, not many silver linings coming out of the COVID-19 pandemic, but I do see a lot of positives coming out of the works that the group from SB/SE has been doing to make these settlement days a success.

Nathan Richman 24:47

Well, thank you very much.

Michael Desmond 24:48

Great. And thanks for having

Coming Attractions with Faye McCray

Michael Desmond 24:49

me.

David Stewart 24:50

And now coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Faye McCray. Faye, what'll you have for us?

Faye McCray 25:01

Thank you, Dave. In Tax Notes Federal, Michael Karlin and Stanley Ruchelman consider the tax issues that nonresident aliens face when acquiring, owning, and disposing of U.S. residential real property. Mattia Landoni and Abraham Sutherland argue against taxing cryptocurrency reward tokens annually. In Tax Notes State, Jennifer Karpchuk discusses Synthes v. Commonwealth of Pennsylvania. Sujata Yalamanchili discusses the impact that COVID-19 has had on tax incentive programs and industrial development agencies in New York. In Tax Notes International, Jens Wittendorff examines the OECD’s new transfer pricing guidelines on financial transactions. Brian Abbey and Inés Blanco discuss recent changes to U.S. foreign tax credit rules and their impact on foreign tax redeterminations. And on the Opinions page, Benjamin Willis and Monte Jackel discuss carried interests. Nana Ama Sarfo looks at how the OECD became an international tax leader.

David Stewart 26:04

You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts .org . And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast, we'll be back next week with another episode of Tax Notes Talk.