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Mediation of Tax Disputes. US Experience

On 30 June 2022, the Conference on the Development of Mediation in Different Countries will be held in Moscow with the support of the HSE Legal Clinic and the Solis Mediation Center. At this conference we will discuss the experience of England, France, USA, Japan, China in the development of mediation in private and public disputes. In particular, we can discuss the experience of introducing mediation in the area of tax relations.

A year ago, on 14 June 2021, Finansovaya Gazeta published an article entitled Project of Non-Resistance of the Parties. Mediation in Tax Legal Relations (1). This publication reported that in St. Petersburg an experiment is underway to introduce a new procedure in tax legal relations - mediation.

Some experts interviewed by Finansovaya Gazeta reacted negatively to the prospect of using mediation in tax disputes, calling this idea a myth or a gamble. Indeed, while mediation in Russia has not yet become the most popular tool for resolving civil disputes, it is difficult to talk about the prospects for its development in public disputes.

However, it is interesting to look at the experience of other countries in this area, and therefore I propose to analyze the US practice of introducing tax dispute mediation.

The US Internal Revenue Service (or “Internal Revenue Service”, IRS) states on its website that mediation, also known as alternative dispute resolution (ADR), can help you if you have an unresolved issue with the IRS or you disagree with an IRS decision or action. This is an informal, confidential and voluntary procedure.

As a pilot project, mediation began to be used in the United States in 1995. This pilot project was launched in response to the passage of the US Administrative Dispute Resolution Act in 1990. The purpose of the law was to introduce alternative dispute resolution procedures and reduce the government's legal costs.

Although the use of mediation was initially very limited, every year the possibilities of mediation for taxpayers gradually expanded. For example, in 1998, the United States reformed the tax service and adopted a corresponding law aimed at making the tax service more client-oriented, and pre-trial settlement procedures were applied on a larger scale.

Tasks of the tax mediator and questions to the parties

Mediation is conducted by a mediator - a special IRS employee trained in mediation techniques, or an independent mediator chosen by the taxpayer and the IRS. The mediator must be an expert in tax matters.
The tasks of the mediator include:
- Facilitate communication between the taxpayer and the IRS,
- Help to identify the main problems or obstacles on the way to a settlement,
- Help identify possible settlement conditions,
- Show the prospect of cooperation and benefits (move from a position of strength to the search for mutual interests),
- Ensure equal conditions and mutual respect during the mediation session.

The mediator helps the taxpayer and the tax officer answer the following questions:
- What is the essence of the question for you?
- How do the facts, circumstances and events that gave rise to the dispute look to the other side? What would you probably do if you were in her place, and what would help you better understand her point of view?
- Are there factors beyond the control of the parties that contributed to the dispute?
What would you do differently if you had the opportunity to start over?
- If the dispute ended, what would it look like (positive scenario)?
- If the case went to trial and ended unfavorably, what would be the consequences (negative scenario)?
- What will be a fair resolution of the dispute for you?

What is the range of cases that can fall into US tax mediation?

Mediation is suitable, according to the IRS, for the following cases:
- if you want to resolve the dispute at the earliest stage of the audit,
- if you do not have a lot of controversial issues,
- if you have provided information to the IRS to support your position and
- if the IRS is still reviewing your case and your problems have not been resolved.

The IRS emphasizes that both legal and factual issues can be resolved in mediation.
I draw special attention to this, since skeptics who objected to mediation in tax disputes in Russia referred to the fact that there is no point in tax mediation. The experts explained their opinion by the fact that in an agreement with the tax authority, one can only clarify the actual circumstances of the case, but in no way remove the tax burden or change obligations.

A similar attitude existed in the United States at the very beginning of tax mediation. The first pilot projects of tax mediation did not allow discussion of legal issues, cases worth more than $1 million were accepted for mediation, in which the actual circumstances and their assessment were in question.

For several decades, the situation has changed, and now in the United States in mediation it is possible to consider both legal issues and cases of small disputes.

Agreement with the tax office can also concern legal issues, as the example of the United States shows. This may work for those cases where the interpretation of a rule of law has several options, and the parties can agree on an interpretation in favor of the taxpayer.

The IRS also describes cases that are not suitable for mediation. This list is established by law, and includes, for example, the following situations: issues for litigation, issues already in court, issues for which there is a precedent of the Supreme Court. Issues in the resolution of which other persons (for example, a spouse) should also participate should be considered with their participation (and without them this is impossible).

In addition, in order to be eligible for mediation, the taxpayer needs to show that he acted in good faith, promptly responded to the requests and proposals of the tax service.

Some states have developed their own approach to the use of mediation. For example, in the state of New York, mediation was immediately opened to all taxpayers on the widest possible range of issues, and in this regard, 90% of tax disputes are resolved out of court.

What are the advantages of mediation in tax disputes described by the US tax authorities?

In the US, these benefits are:
1) Speed ​​- with the help of mediation, a dispute can be resolved quickly (on average, from 60 to 120 days),
2) Savings - costs are reduced (for example, for lawyers and representation in court),
3) Flexibility of procedure,
4) Control of the decision by the parties to the mediation (agreement),
5) Risk reduction.

How to prepare for tax mediation?
The IRS gives the following advice:
- The mediation session should be attended and attended by those who make the decision,
- Participants must have a sincere desire to resolve the dispute, not to defeat the other side,
- It is important for each party to know and understand the concerns of the other party, although it is not necessary to agree with them,
- Participants should be open to new ideas in search of a solution,
- The parties should weigh realistically the prospects for continuing the dispute and the costs of litigation.

Conclusion

In the United States, a serious attempt has been made to introduce mediation into the settlement of tax disputes. Since 1995, the use of mediation has become more active, the criteria for issues that can be resolved through mediation have changed significantly, and the volume of cases submitted for mediation has increased.

The US Taxpayer Advocate Service (TAS) notes that the subject area of ​​tax mediation in the US is not yet broad enough, besides, the IRS can veto mediation at any time, and call on the IRS to cooperate more constructively in the field of mediation (2).

Despite some difficulties, this process does not stand still, and every year an increasing number of disputes are resolved in the United States out of court. Such mediation reduces the cost of litigation to the state and taxpayers, increases the mutual trust of the parties, improves the culture of paying taxes, and strives to ensure that tax obligations are met on time and voluntarily.

On 30 June 2022, a conference on mediation in different countries will be held in Moscow. We invite you to discuss the development of alternative dispute resolution procedures and their implementation in all areas of the economy. Participation in the conference for mediators, lawyers and law students is free.

You can get acquainted with the conference program and register at the link: https://solismediation.timepad.ru/event/2050049/

To support the release of new materials on the topic of negotiations, diplomacy and mediation, participate in mediation events and receive news from the world of negotiators, subscribe to the channel of the Solis Mediation Center in Yandex.Zen or Telegram

Sources:
1) “The project of non-resistance of the parties. Mediation in tax legal relations” / “Financial newspaper”, issue dated June 14, 2021. URL: https://cnfp.ru/ufiles/SMI%20onas/21221213.pdf
2) Melinda Jone (2018), Evaluating the Tax Dispute Resolution System in the United States: A Dispute Systems Design Perspective. URL: https://www.austaxpolicy.com/evaluating-tax-dispute-resolution-system-united-states-dispute-systems-design-perspective/
3) AMY S. WEI (2000), Can Mediation Be the Answer to Taxpayers' Woes?: An Examination of the Internal Revenue Service's Mediation Program. URL: https://core.ac.uk/download/pdf/159566515.pdf
4) Internal Revenue Manuals. Part 35. Tax Court Litigation. Chapter 5. Settlement Procedures. Section 5. Arbitration and Mediation: https://www.irs.gov/irm/part35/irm_35-005-005
5) Photo by Scott K. on January 16, 2014. URL: https://www.yelp.com/biz_photos/kansas-city-tax-mediation-merriam-2?select=abudEFKx6wpvbf_VfX9ykw
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