Drafting the IRS Appeals Protest: Developing the Facts, Preserving the Law, and Presenting the Hazards of Litigation

I. INTRODUCTION

A formal administrative protest is not simply a request that another IRS employee reconsider an examination. In a substantial controversy, it is the first document in which the taxpayer can present the dispute as a coherent litigation case rather than as a series of responses to information document requests, examination questions, and proposed adjustments. IRS Appeals representation is charged by statute with resolving federal tax controversies without litigation on a basis that is fair and impartial to both the government and the taxpayer.¹

That mission changes the drafting objective. Examination ordinarily asks whether the Service should assert an adjustment. Appeals asks a different question: given the record, the governing law, and the risks of litigation, what result should the government accept to resolve the controversy? The protest should therefore enable the Appeals employee to identify the disputed issue, the material facts, the controlling law, the burden of proof, the evidence likely to be available at trial, and the hazards that affect the probable litigation result.

This Article addresses primarily examination-originated, nondocketed controversies in which a taxpayer receives a 30-day or equivalent letter and seeks Appeals consideration. Collection Due Process, Collection Appeals Program matters, offers in compromise, innocent-spouse proceedings, refund claims, BBA partnership proceedings, exempt-organization determinations, and docketed Tax Court cases have distinct procedural rules. Those variants matter because the same substantive tax issue can require a different document, deadline, or settlement strategy depending on procedural posture.

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II. CONTROL THE PROCEDURE BEFORE DRAFTING THE MERITS

A. Identify the route and the operative deadlines

The practitioner should begin with the IRS letter that grants appeal rights, not with a generic protest template. Publication 5 describes the conventional formal-protest requirements. A formal written protest generally is required when the proposed change to the total amount of tax and penalties for any tax period exceeds $25,000; if any period exceeds that threshold, the formal protest applies to all periods involved. A formal written protest is also required, regardless of the amount in dispute, in employee plan, exempt organization, partnership, and S corporation cases. A Small Case Request may be available when the total amount for each period is $25,000 or less, subject to case-specific exclusions, but the governing notice and case type control.² The file should separately calendar the administrative protest deadline, the assessment-statute expiration date, the Tax Court petition deadline if a statutory notice has issued, and any refund-suit limitations period that may apply.

Those dates are not interchangeable. A protest deadline ordinarily determines whether the case will receive nondocketed administrative review. A statutory petition deadline determines access to the Tax Court and is not extended by continuing discussions with the IRS.³ A notice of claim disallowance can start a separate limitations period for a refund suit.⁴ The safest practice is to maintain a procedural chronology outside the merits draft and require a second-person verification of each jurisdictional or limitations date before filing.

B. Statute control can determine whether Appeals will take the case

For a conventional nondocketed examination case, Appeals generally will not accept the administrative file unless at least 365 days remain on the assessment statute when the case is received. The current IRM provides 270-day exceptions for estate tax cases and I.R.C. § 6206 cases, and a 180-day minimum for a premature-referral case previously returned to Compliance when Compliance returns the case to Appeals.⁵ This is not merely an internal housekeeping detail. It can determine whether the taxpayer will receive meaningful Appeals consideration before issuance of a statutory notice.

The consent decision therefore belongs near the beginning of the Appeals strategy. Counsel should determine what period is actually open, what issues the proposed consent would cover, whether any suspension or special limitations rule applies, and whether the consent should be fixed-date or open-ended. Forms 872 and 872-A can be useful tools, but executing a consent should be a deliberate litigation decision rather than an automatic response to an examiner who says that additional time is needed.⁶ In BBA partnership cases, different statute-control rules and forms apply, and the ordinary Form 872 discussion should not be carried over mechanically.

C. Distinguish nondocketed from docketed Appeals

A protest is principally a nondocketed document. Once the taxpayer files a Tax Court petition, Chief Counsel represents the Commissioner, and Rev. Proc. 2016-22 governs the ordinary referral of qualifying docketed cases to Appeals for settlement consideration. Subject to its exclusions and exceptions, Counsel generally refers docketed cases to Appeals; while a referred case remains with Appeals, Appeals has sole settlement authority. The case nevertheless remains litigation. Counsel continues trial preparation, may participate in settlement conferences in appropriate circumstances, and receives access to documents submitted to Appeals in the docketed case.⁷

The functional documents also change. There may be no reason to reproduce a nondocketed protest after petition. Depending on the case, counsel may instead use a focused settlement submission, legal memorandum, factual stipulation package, expert materials, or other case-specific submission. A Tax Court pretrial memorandum is not a substitute for an Appeals protest. It is a court-directed trial document with a different audience and purpose. The drafting principle remains the same, however: identify what evidence and law would drive the judicial result, then explain how those risks support settlement.

D. Consider ADR before the protest forecloses sequencing options

The January 2025 ADR pilots materially changed the sequencing analysis. Through January 15, 2027, Announcement 2025-6 permits Fast Track Settlement to address one or more issues rather than requiring the entire case to qualify, removes prior FTS participation as a bar to Post Appeals Mediation, requires first-line executive approval before a formal FTS or PAM denial, and requires an explanation when a request is formally denied. It also created the limited Last Chance FTS pilot for selected SB/SE cases after the taxpayer submits a protest in response to a 30-day or equivalent letter. Early Referral remains separately available under Rev. Proc. 99-28 for a developed but unagreed issue while Examination or Collection continues to develop other issues.⁸

The protest strategy should therefore ask, before filing, whether the dispute is better suited to FTS while Examination still has jurisdiction, Early Referral of a discrete developed issue, ordinary Appeals consideration, or a later PAM request if the case remains unresolved. FTS is often most useful when both sides have completed factual development but remain separated by valuation, characterization, or another issue susceptible to facilitated negotiation. Early Referral can be useful when resolution of one fully developed issue may narrow the issues that remain under examination. A protest should not be drafted in a way that assumes ordinary Appeals is the only available administrative path.

E. Understand the transfer and assignment process

Once Appeals receives the transferred administrative file, Appeals Account and Processing Support (APS) verifies the case contents, establishes the appeal in the Appeals Case Management System (ACMS), validates and routes the appeal, and sends it to a queue for management review, grading, and assignment. The Appeals Team Manager then assigns the case to an Appeals Technical Employee. Counsel should treat this processing interval as part of the controversy timeline when evaluating statute control, interest accrual, and the economics of a § 6603 deposit or payment.⁹

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III. BUILD THE RECORD BEFORE ASKING APPEALS TO VALUE IT

Appeals is a settlement function, not a second examination team. A taxpayer who withholds material evidence during Examination and presents it for the first time in Appeals risks delay, referral for Examination assistance, or return of the case for further development. Current Appeals procedures focus on the evidence as if the case were going to trial, including witness credibility, witness availability, authenticity, admissibility, and the probative value of the record.¹⁰

The final Appeals regulations reinforce that sequencing. A taxpayer generally receives one opportunity for Appeals consideration of the same matter or issue. A narrow exception permits another opportunity when the taxpayer provides new factual information and satisfies the requirements for audit reconsideration or reconsideration of issues previously considered by Appeals.¹¹ That exception is a reconsideration mechanism with stated prerequisites, not a general right to reserve evidence for Appeals.

The practical task before drafting is to convert the examination file into an evidence file. For each issue, counsel should identify the legal elements, the facts that satisfy or defeat those elements, the documents or testimony that prove those facts, and the weaknesses in that proof. The objective is not to make the administrative file larger. It is to make the decisive facts provable.

A. Use an evidence matrix

A worked matrix is more useful than a generic grid. The following hypothetical illustrates a capitalization dispute involving expenditures incurred on business property. It is not a conclusion on any actual expenditure.¹²

The matrix should remain counsel work product unless there is a reason to disclose it. Its function is diagnostic. It forces the drafting team to distinguish an unsupported assertion from an adverse fact, an adverse fact from a disputed fact, and a disputed fact from an evidentiary problem. Those distinctions are central to hazards analysis.

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IV. FRAME THE ISSUE THE WAY APPEALS WILL HAVE TO DECIDE IT

The protest should not say merely that Examination is wrong. Each disputed adjustment should be stated as a question that identifies the legal classification or statutory element in dispute. Appeals uses the same discipline internally: current Appeals Case Memorandum procedures instruct Appeals employees to frame the issue, summarize the parties' positions, analyze the evidence and law, and explain the settlement rationale, including hazards where applicable.¹³

A weak issue statement says: "The IRS improperly disallowed the deduction." A useful issue statement says: "Whether the $___ expenditure incurred to [describe transaction] is deductible under I.R.C. § 162 or must be capitalized under I.R.C. § 263 and the applicable regulations." The second statement defines the research question, the relevant facts, and the evidentiary burden. It also prevents the protest from drifting into a generalized narrative about the examination.

For each issue, the protest should identify the amount and period, state the government's position accurately, state the taxpayer's requested disposition, present the material facts with record citations, state the governing authorities, apply those authorities, address the strongest contrary argument, identify material litigation hazards, and state the requested result. Computational consequences should be separated from primary liability issues unless the computation is itself disputed.

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V. STATE FACTS AS TRIAL PROOF, NOT AS ADVOCACY LABELS

The factual discussion should read like the foundation for proposed stipulations. Chronology is often the best organizing device, but not always. A transaction with several independent legal elements may be clearer when organized by element. In either structure, each material proposition should be traceable to a document, witness, stipulation, return, transcript, or other identifiable source.

Avoid substituting adjectives for facts. "The taxpayer reasonably relied on qualified advisers" is a legal conclusion. The useful facts are who was engaged, what the adviser was asked to analyze, what information the taxpayer supplied, what assumptions were made, what advice was delivered, when the advice was delivered relative to the return position, and what the taxpayer did after receiving it. The same discipline applies to intent, business purpose, valuation, reasonable cause, and economic substance.

Material adverse facts should not be concealed. Appeals will have the examination file, and a protest that omits an obvious adverse document loses credibility without eliminating the problem. The better technique is to identify the fact, explain its evidentiary weight, place it in context, and distinguish the inference the government draws from it.

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VI. ANALYZE BURDENS OF PROOF AS PART OF HAZARDS, NOT AS AN AFTERTHOUGHT

Burden allocation affects settlement value because the same incomplete record can produce different expected outcomes depending on who must prove the disputed fact. Tax Court Rule 142(a)(1) generally places the burden on the petitioner, subject to statutory and other exceptions. I.R.C. § 7491(a) can shift the burden on a factual issue when its prerequisites are satisfied, including substantiation, record maintenance, and cooperation.¹⁴ The protest should not merely cite § 7491. It should explain whether the prerequisites can actually be shown.

Penalty cases require a separate burden analysis. In a proceeding involving an individual, I.R.C. § 7491(c) places the burden of production on the Commissioner with respect to penalties, additions to tax, and additional amounts. In Graev III, the Tax Court held that this burden includes producing evidence of compliance with I.R.C. § 6751(b)(1) when supervisory approval is required.¹⁵ The taxpayer ordinarily retains the burden of proving an affirmative defense such as reasonable cause. That burden rule should be kept analytically distinct from the substantive timing rule in Treas. Reg. § 301.6751(b)-1 for penalties assessed on or after December 23, 2024. Strict substantiation provisions can also eliminate ordinary evidentiary flexibility. Counsel should identify any statute that requires specified records and should not assume that a court can estimate an amount merely because some expenditure probably occurred.

The point is practical: a fifty-fifty factual record is not a fifty-fifty litigation hazard if one side loses when the proof is in equipoise. The protest should make the burden consequence explicit when it favors the taxpayer, and counsel should price it into the settlement analysis when it does not.

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VII. PRESENT THE GOVERNING LAW IN LITIGATION ORDER

Legal analysis should begin with the Code and controlling regulations, then move to controlling Supreme Court and appellate authority, Tax Court or other trial-court precedent, and relevant published administrative guidance. Authorities should be organized by hierarchy and proposition rather than accumulated as a string citation. Every important authority should answer a question in the analysis: what is the rule, what element does it establish, and why does it govern these facts?

The likely appellate forum matters. Under Golsen v. Commissioner, the Tax Court follows a squarely on-point decision of the court of appeals to which the case would be appealable.¹⁶ A protest for a Virginia taxpayer therefore should not treat a Second Circuit decision as if it were controlling merely because the decision is favorable. The same forum analysis matters in refund litigation, where district-court or Court of Federal Claims jurisdiction leads to different appellate precedent.

Contrary authority should be addressed rather than ignored. The practitioner should ask not only whether a case reaches an adverse result, but why. Was the burden different? Were the records missing? Did the court reject the taxpayer's witness as not credible? Was the disputed statutory language different? Is the case outside the controlling circuit? Appeals needs a reason to discount adverse authority, not evidence that counsel did not find it.

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VIII. PRESERVE LEGAL GROUNDS WITH THE CORRECT PROCEDURAL INSTRUMENT

"Preservation" does not mean the same thing in every federal tax controversy. In a deficiency case, omission of a legal argument from the protest does not automatically create the same bar that may arise from an inadequate refund claim. Nevertheless, a practitioner should ordinarily put material alternative legal grounds before Appeals so that the government evaluates the complete controversy before litigation.

Refund cases require more formal precision. Treasury Regulation § 301.6402-2(b)(1) generally requires the administrative refund claim to set forth each ground and sufficient facts to apprise the Commissioner of the basis for the claim. The variance doctrine can prevent a taxpayer from litigating a substantially different ground later.¹⁷ A beautifully drafted Appeals protest cannot be assumed to cure a defective administrative refund claim.

Some arguments also fall outside Appeals' ordinary settlement authority. Treasury Regulation § 301.7803-2(c) limits Appeals consideration of specified challenges, including certain constitutional arguments and challenges to the validity of regulations or published guidance.¹⁸ Counsel may still need to state such a position to protect the litigation record while recognizing that Appeals may be unable to compromise the case on that theory.

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IX. TREAT PENALTIES AS INDEPENDENT CONTROVERSIES

A protest should not place penalties in a final paragraph and assume they rise or fall with the substantive adjustment. The penalty provision has its own elements, procedural requirements, burden rules, defenses, and evidentiary record. A taxpayer can lose the substantive issue and prevail on the penalty, or vice versa.

A. § 6751(b) After T.D. 10017

For penalties subject to I.R.C. § 6751(b), the practitioner should identify who first proposed the penalty, who approved it, what writing constitutes approval, and when approval occurred. Treasury finalized Treas. Reg. § 301.6751(b)-1 in T.D. 10017, effective December 23, 2024. The regulation establishes different timing rules depending on whether the penalty is subject to pre-assessment Tax Court review, is first raised after a Tax Court petition, or is assessable without pre-assessment Tax Court review.¹⁹

The practical point is that older cases concerning a "30-day letter" or earlier approval deadline cannot be applied without accounting for the final regulation, the applicable circuit, the assessment date, and any challenge to the regulation itself. In a deficiency proceeding involving an individual, counsel should also connect the timing analysis to the Commissioner's § 7491(c) burden of production discussed above. In a 2026 protest, supervisory approval is not a checklist phrase. It is a discrete procedural issue that should be tested against the actual penalty path.

B. Privilege and waiver can determine how a reasonable-cause defense is presented

A taxpayer who relies on professional advice faces a disclosure decision before attaching an opinion, email chain, memorandum, or adviser workpaper to the protest. I.R.C. § 7525 creates a limited privilege for certain tax advice by federally authorized tax practitioners, but it is narrower than the attorney-client privilege and does not apply to criminal tax matters or specified tax-shelter communications.²⁰ Accountant communications may be protected when the accountant is used in a Kovel-type role to assist counsel in rendering legal advice, but Kovel does not create a general accountant privilege.²¹

The more consequential issue is waiver. A taxpayer cannot ordinarily use privileged advice as a sword while preventing the government from testing the substance of the advice on which the taxpayer claims reliance. The scope of any resulting waiver is fact and jurisdiction dependent; Federal Rule of Evidence 502(a) also limits subject-matter waiver from an intentional disclosure to circumstances in which fairness requires related communications to be considered together.²² Before a protest describes or attaches advice, counsel should decide what defense is actually being asserted, what material must be disclosed to support it, what related communications could become discoverable, and whether work-product protection is also implicated.

That decision should be made before the protest is filed. Once a privileged opinion is voluntarily attached to an administrative submission, the disclosure cannot be undone. In appropriate cases, counsel may be able to establish a defense through nonprivileged facts without placing the substance of legal advice at issue. In other cases, reliance on advice is the defense and disclosure is unavoidable. The protest should reflect a conscious waiver strategy rather than accidental production.

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X. DRAFT FOR THE HAZARDS-OF-LITIGATION ANALYSIS

Appeals' comparative advantage over Examination is settlement authority based on litigation risk. Current IRM guidance describes a fair resolution as one that reflects the probable result in litigation or, where substantial uncertainty exists, mutual concessions based on the relative strength of the parties' positions. The Appeals Case Memorandum requires the employee to identify hazards, weigh them, determine relative strengths, and convert the evaluation into a settlement determination.²³

The protest should make the relevant hazards visible without prematurely announcing the taxpayer's minimum settlement position. Common legal hazards include ambiguous statutory language, competing regulatory interpretations, unresolved circuit law, tension among trial-level decisions, and uncertainty about the standard of review. Common factual hazards include missing contemporaneous records, inconsistent documentation, unavailable witnesses, witness credibility, valuation range, authenticity questions, and admissibility problems. Burden allocation can magnify or reduce each of those risks.

A useful hazards paragraph does not say, "The government has a 40 percent hazard." It says why the government could lose. For example: the government's characterization depends on an inference that conflicts with contemporaneous contracts; the controlling circuit has not resolved the statutory question; and the government's principal witness lacks firsthand knowledge of the transaction. Appeals can translate those propositions into settlement value. Counsel usually should not volunteer the taxpayer's internal percentage unless doing so serves a defined negotiation objective.

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XI. ADDRESS THE GOVERNMENT'S BEST CASE, NOT MERELY THE REVENUE AGENT'S REPORT

The protest should answer the argument that Chief Counsel would make if the case were tried. The Revenue Agent's Report may not contain that argument. Counsel should therefore test the adjustment against the strongest statutory theory, the best adverse precedent, the best inference from the record, and any alternative ground that could sustain the result.

This exercise can expose a new issue, but the distinction between a new issue and a new theory matters. Appeals can consider alternative legal theories and authorities in evaluating an existing issue, while factual development of a genuinely new issue may require coordination with Examination. In docketed cases, Rev. Proc. 2016-22 contains specific procedures for new issues raised while the case is with Appeals.²⁴ The protest should not manufacture a new controversy unnecessarily, but it should not leave an obvious government theory unanswered.

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XII. USE THE EXAMINATION REBUTTAL AND EX PARTE RULES STRATEGICALLY

The originating function ordinarily reviews a protest before transfer and may prepare a rebuttal. That rebuttal can be more useful than the examination report because it shows how Examination answers the taxpayer's developed factual and legal case. Counsel should compare the rebuttal issue by issue, identify any changed theory, and determine whether new factual assertions require a response.

In a nondocketed case, Rev. Proc. 2012-18 and the corresponding IRM provisions limit substantive ex parte communications between Appeals and the originating function when those communications would appear to compromise Appeals' independence.²⁵ The rules do not prevent all communication.

The docketed rule is different. Rev. Proc. 2016-22 § 2.03 provides that the ex parte prohibition continues to apply between Appeals and the originating function but does not apply to communications between Appeals and Chief Counsel. Counsel and Appeals nevertheless share responsibility for interacting in a manner that preserves Appeals' independence. A practitioner should therefore identify the procedural posture before applying an ex parte rule, request copies of substantive materials to which the taxpayer is entitled, and raise an independence concern only when the facts support it. Routine communication between IRS functions is not itself a procedural violation.

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XIII. OBTAIN AND TEST THE ADMINISTRATIVE FILE

I.R.C. § 7803(e)(7) gives a qualifying "specified taxpayer" a statutory right to access nonprivileged portions of the Appeals case file concerning disputed issues. For this purpose, a specified taxpayer generally means a natural person whose adjusted gross income for the taxable year at issue does not exceed $400,000, or another taxpayer whose gross receipts for that year do not exceed $5 million, subject to the aggregation rules incorporated by I.R.C. § 7803(e)(7)(C)(ii), which applies rules similar to those of § 448(c)(2). The file must generally be provided no later than 10 days before the conference, unless the taxpayer elects an expedited conference, and the statute excludes privileged material and documents the taxpayer itself provided to the IRS.²⁶ Even when that provision does not apply, understanding what Appeals received from Examination can materially affect conference preparation.

The file may reveal examination workpapers, computations, factual assumptions, the protest rebuttal, internal issue descriptions, and other nonprivileged material. Counsel should identify assertions that are factually wrong, documents that are missing, and statements that conflict with the record. A protest is stronger when it anticipates those points, but a case-file review before the conference still provides an opportunity to correct the factual premise on which Appeals may otherwise negotiate.

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XIV. MANAGE INTEREST WHILE THE CASE IS PENDING

An Appeals process can add months to a controversy, and interest is part of the economics of settlement. If the taxpayer expects to owe some amount, counsel should analyze whether to make a payment or a deposit under I.R.C. § 6603. Both can stop underpayment interest from accruing on the remitted amount, but a § 6603 deposit is not treated the same as a payment and can preserve different procedural flexibility, including the ability to request return of the deposit subject to statutory and procedural rules. If a deposit is returned, interest is allowed only to the extent attributable to "disputable tax" and is computed at the federal short-term rate under § 6621(b), compounded daily.²⁷

For corporate taxpayers, the increased rate for a large corporate underpayment under I.R.C. § 6621(c) can make delay materially more expensive.²⁸ Interest management is not part of the merits protest, but it should be part of the same case plan. Counsel should quantify the cost of waiting, the effect of a remittance on forum and deficiency procedures, and the taxpayer's cash constraints before recommending a deposit or payment.

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XV. BBA PARTNERSHIPS REQUIRE A DIFFERENT PROTEST ARCHITECTURE

The centralized partnership audit regime cannot be treated as an ordinary corporate examination with a different cover sheet. The partnership representative has statutory authority to act for the partnership in the BBA proceeding, and the procedural deadlines are partnership-level deadlines.²⁹ Current IRS guidance provides that a partnership representative who disputes issues in the summary report may request Appeals consideration through the 30-day-letter process if at least 18 months remain on the I.R.C. § 6235 period.³⁰

The sequencing is also distinct. Appeals consideration of the substantive examination issues generally occurs before issuance of the Notice of Proposed Partnership Adjustment. After the NOPPA, the partnership enters the statutory modification process; I.R.C. § 6225(c) generally provides a 270-day window, subject to extension by agreement, to request modification of the imputed underpayment.³¹ A later Appeals conference concerning a modification determination is limited to the modification determination and is not a second opportunity to relitigate the examination adjustments.

The protest should therefore identify whether the dispute concerns the substantive partnership adjustment, the imputed-underpayment computation, a penalty, or a later modification determination. It should also confirm the partnership representative's authority, the § 6235 statute, and the appropriate statute-extension instrument. A general protest template that ignores those distinctions can misstate both the relief requested and the stage at which Appeals has authority to grant it.

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XVI. TWO PRACTICE-SPECIFIC VARIANTS

A. Exempt-organization adverse determinations

An exempt organization protesting a proposed adverse determination must consider not only administrative settlement but also exhaustion of remedies for declaratory judgment jurisdiction under I.R.C. § 7428. Current IRS guidance states that failure to pursue an available administrative appeal can prevent the organization from establishing exhaustion.³² The protest should therefore build a record that can serve both administrative resolution and, if necessary, judicial review of qualification or classification.

That record often differs from a conventional income-tax deficiency file. Organizational documents, actual operations, compensation arrangements, grantmaking procedures, conflicts policies, board records, and evidence of private benefit or inurement can be central. Counsel should also determine whether the dispute concerns initial recognition, continuing qualification, foundation classification, or a related excise-tax issue because the available judicial route and record can differ.

B. International information-return penalties

International information-return penalties provide a current example of why forum-specific hazards matter. On April 8, 2024, the Tax Court in Mukhi I followed its own Farhy decision and held that penalties under I.R.C. § 6038(b) were not administratively assessable. On May 3, 2024, the D.C. Circuit in Farhy v. Commissioner reversed the Tax Court and held that § 6038(b) penalties are assessable. On November 18, 2024, the Tax Court in Mukhi II, on reconsideration, adhered to Mukhi I because appeal would lie to the Eighth Circuit, which had not decided the question. On February 27, 2026, the Second Circuit in Safdieh v. Commissioner joined the D.C. Circuit and held that § 6038(b) penalties are assessable.³³

As of August 31, 2026, the issue is therefore not accurately described as a simple Tax Court-versus-one-circuit split. Two courts of appeals have rejected the Tax Court's position, while the Tax Court has adhered to its own precedent where Golsen does not require otherwise. A protest involving § 6038(b) should identify the taxpayer's likely appellate circuit and should separate the assessability question from reasonable cause, procedural defenses, and the underlying filing facts. This is precisely the type of legal uncertainty that can create a meaningful litigation hazard, but its value is forum dependent.

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XVII. KNOW HOW THE CASE WILL CLOSE BEFORE NEGOTIATING THE LAST NUMBER

A settlement is not complete merely because the parties agree on a percentage. The closing instrument determines finality, assessment mechanics, future-year effects, and what remains open. Under current Appeals procedures, ordinary Form 870-type agreements generally are used when material mutual concessions are not involved, while Form 870-AD is generally used for material mutual-concession settlements and includes an Appeals nonreopening pledge subject to the form and IRS policy.³⁴ Form 870-AD is not a statutory closing agreement under I.R.C. § 7121.

When statutory finality is appropriate, I.R.C. § 7121 closing agreements are available. Appeals procedures distinguish Form 866, which determines tax liability, from Form 906, which can provide finality as to specified matters.³⁵ A specific-matter agreement can be preferable when the parties need finality on basis, character, valuation, or another recurring item but do not intend to foreclose unrelated matters for the same year.

Docketed Tax Court cases close differently. If Appeals settles a referred docketed case, the settlement is reflected in a stipulated decision document that Chief Counsel signs and files with the Court. In cases in which the Court determines liability but the arithmetic remains to be computed, Tax Court Rule 155 supplies the post-opinion computation procedure.³⁶ The practitioner should understand the intended closing mechanism before accepting settlement language that may have consequences beyond the immediate deficiency.

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XVIII. CONCLUSION

A strong Appeals protest is the product of case control, not stylistic advocacy. Counsel first determines the procedural route, protects every limitations and litigation deadline, confirms that Appeals will have enough statute time to accept the case, and decides whether ADR should precede ordinary Appeals. Counsel then builds the record issue by issue, identifies burdens and forum-specific law, resolves privilege questions before disclosure, and drafts toward the hazards that would matter if the controversy were tried.

The result should allow Appeals to see the case as a court would see it. The disputed issues should be precise. The facts should be provable. The authorities should be hierarchical and forum aware. The penalties should be analyzed independently. The government's strongest position should be answered. The closing mechanism should be understood before settlement. When those tasks are completed, the protest does more than preserve administrative review. It gives Appeals a defensible reason to resolve the controversy before litigation.

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APPENDIX A. ANNOTATED MODEL PROTEST FRAMEWORK

The following abbreviated model is a drafting framework, not a form for filing without adaptation. Bracketed drafting notes identify the purpose of each component. The hypothetical concerns a § 162/§ 263 characterization issue and an accuracy-related penalty.

1. IRS Independent Office of Appeals - Formal Protest

2. Request for Appeals Consideration

Sample Manufacturing, Inc. protests the proposed adjustments identified below and requests consideration by the IRS Independent Office of Appeals. This protest is timely under the letter identified above. The taxpayer does not agree to the proposed capitalization adjustment or the related accuracy-related penalty.

3. Background Facts Common to All Issues

Sample Manufacturing, Inc. manufactures [product] at a facility in [location]. During 20XX, it incurred $[amount] for work performed on [identified property]. The taxpayer deducted the expenditure on its federal income tax return. Examination proposed capitalization of the expenditure and a related I.R.C. § 6662 accuracy-related penalty. The facts stated here apply to each protested issue; facts unique to an issue are stated in that issue discussion.

4. Issue 1

Whether the expenditure of $[amount] incurred to restore [identified property] is currently deductible under I.R.C. § 162 or must be capitalized under I.R.C. § 263 and Treas. Reg. § 1.263(a)-3.

5. Government Position

Examination determined that the work constituted a restoration or betterment of the relevant unit of property and therefore must be capitalized. Examination relies principally on [identify Form 886-A proposition and factual premise].

6. Taxpayer Position

The expenditure did not materially increase capacity, productivity, efficiency, strength, quality, or output; did not restore the property after a casualty or to a like-new condition; and did not adapt the property to a new or different use. The expenditure returned the property to its ordinary operating condition and is deductible under the authorities discussed below.

7. Material Facts

8. Applicable Law and Analysis

I.R.C. § 162 allows a deduction for ordinary and necessary business expenses, while I.R.C. § 263 and the capitalization regulations require capitalization of amounts paid to improve a unit of property. The dispositive regulatory questions are whether the expenditure resulted in a betterment, restoration, or adaptation to a new or different use. The record should be analyzed against each applicable regulatory test rather than against the labels used in the accounting records.

9. Burden and Litigation Hazards

The taxpayer has maintained the relevant books and records and has produced the vendor invoices, maintenance records, asset history, and witness evidence identified above. The principal litigation uncertainty is factual characterization of the work under the regulatory standards. The government's position depends on [identify inference], while contemporaneous records support [identify competing inference]. The availability and credibility of the operations witness and vendor witness further affect the expected trial result.

10. Issue 2 - I.R.C. § 6662 Penalty

The proposed penalty should be conceded independently of the substantive characterization issue because [state applicable defense]. The taxpayer also requests confirmation that the supervisory-approval requirements applicable to the penalty were satisfied under I.R.C. § 6751(b) and Treas. Reg. § 301.6751(b)-1.

11. Requested Disposition

The taxpayer requests that Appeals concede the capitalization adjustment and the related I.R.C. § 6662 penalty. In the alternative, the taxpayer requests a conference to address the legal and factual hazards identified above and any computational consequences of an agreed resolution.

12. Declaration and Signature

Insert the current penalties-of-perjury declaration required by the applicable IRS instructions and obtain the proper taxpayer or representative signature. Confirm signing authority before submission.

13. Transmission and Proof of Filing

Submit the protest by the method and to the address specified in the controlling IRS letter or other current instructions. Retain the complete filed copy, proof of transmission or delivery, and any IRS acknowledgment in the administrative file.

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APPENDIX B. PRACTITIONER STRUCTURE FOR THE FORMAL PROTEST

For a substantial nondocketed examination case, the following structure is usually more effective than a narrative letter:

The formal requirements are the floor. The drafting standard should be whether an Appeals employee can understand the dispute, test the proof, research the controlling law, and identify a principled settlement range without reconstructing the taxpayer's theory from the examination file.

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APPENDIX C. PRE-FILING CHECKLIST