Mediation under Announcement 95-2: IRS proposes dramatic extension of alternative dispute resolution

Tax Executive, The, Jan-Feb, 1995 by Donald F. Wood, Robert D. Adams

Editor's Note: This article addresses the use of mediation in resolving tax disputes. Tax Executives Institute undertook to educate its members about mediation and other forms of alternative dispute resolution in the fall of 1993, at its 48th Annual Conference. In March 1994, the Institute's IRS Administrative Affairs Committee sponsored a conference session on the use of mediation in the Tax Court and Appeals. (The authors of this article - together with Chief Judge Lapsley Hamblem, then-acting IRS Chief Counsel David Jordan, and IRS National Director of Appeals James Dougherty - participated in the session.) TEI anticipates that it will testify at an upcoming public hearing on Announcement 95-2, and invites TEI members and other readers to submit their comments.

The Internal Revenue Service has recently taken its most dramatic and potentially most useful step toward adoption of traditional alternative dispute resolution techniques for tax matters. In Announcement 95-2, 1995-2 I.R.B. 59, the IRS proposed to test for a one-year period the use of mediation procedures to resolve certain issues under consideration in Appeals. This farsighted decision is a welcome change of position on this matter by the IRS. Outside the tax area there have been numerous studies showing mediation to be the most successful of all forms of alternative dispute resolution (sometimes called ADR).[1]

Although the Appeals' mediation procedures would as proposed apply only in a limited set of circumstances in Appeals, the scope of the procedure may well be expanded in response to taxpayer comments or the results of the one-year test period. The IRS has solicited comments on the proposed mediation procedures and will hold a hearing on February 23, 1995.

This article describes the traditional mediation procedure, explains its benefits and why it is successful, and analyzes the proposed mediation procedures outlined in Announcement 95-2.

Overview of the Traditional Mediation Process

Traditional mediation is a non-binding, voluntary method of ADR that has been used successfully in civil litigation around the country. Its centerpiece is a trained, impartial third-party mediator who helps parties negotiate their own settlement of their dispute. The mediator has no power to impose a settlement on any party; he or she makes no rulings, but simply facilitates settlement discussions. Mediation is based entirely on compromise accomplished with the help of a neutral mediator.

Mediation proceedings are strictly confidential. The public does not know the settlement reached other than what is disclosed in the entry of a court decision. Nothing said or used in the mediation can later be used by any party at trial.[2] There is no fact-finding, decision, or opinion by the mediator-only a settlement developed and agreed to by the parties to the dispute.

Parties can undertake mediation at any point in the dispute process, and it can be done more than once. In a large multi-issue case, mediation can occur at different stages of the case on different issues; or some issues may be the subject of mediation while others would not be. Indeed, mediation sometimes settles some issues in a case and not others. It might even occur before or after another form of ADR is utilized.

The mediation process generally involves six steps. The first step occurs several days prior to the mediation when each side gives the mediator a written submission summarizing the party's position in the case and discussing factors considered germane to the mediation. Often, important pleadings or evidentiary materials are attached. On the day of the mediation, all parties and their lawyers gather in a single room. Each party has present at the mediation someone with authority to agree to a final settlement of the case for that party-a crucial aspect of a successful mediation procedure. The mediator begins the second step with an opening statement describing how the mediation will be conducted and setting forth the ground rules for all the parties.

The third step is for the parties to explain their respective positions in the case to the entire group. This may include giving factual information that is helpful to their side of the case. There is no formal procedure and the normal rules of evidence and discovery do not apply. Everyone in attendance, including the parties, party representatives, or evidentiary witnesses, may participate. At this stage, the mediator's role is to ask questions and enforce reasonable rules of courtesy.

The fourth step involves the mediator's caucusing with the parties. The mediator puts the contesting parties and their representatives in different rooms and then meets with each side privately and confidentially to determine the core issues for each party and the party's candid evaluation of its position. Anything said to the mediator during these meetings is confidential and cannot be repeated to the other party without the express consent of the party making the statement. One of the benefits of this step, and mediation in general, is that it allows the mediator to collect confidential information that can be used to facilitate settlement. The mediator will generally give each side his or her evaluation of the case and the risks each party faces in court.