Unbeknownst to many tax practitioners, the Internal Revenue Service has an alternative dispute resolution program called Fast Track Settlement (FTS). The IRS developed this program in response to taxpayer complaints about the sometimes-extraordinary time and expense associated with the IRS' Office of Appeals (Appeals) and U.S. Tax Court processes.

The FTS program is designed to resolve disputed tax matters in a relatively quick and efficient manner. In many situations, it's far better to resolve disputes within the FTS program than to incur the prolonged suffering and economic hazards associated with Appeals procedures and Tax Court litigation.

Of course, FTS is not a free ride and does have potential hazards. The preparation and expert assistance needed to conduct a well run FTS process can be substantial. There are no guaranteed outcomes. However, with proper assessment of the relevant issues and appropriate levels of preparation, the outcome can be favorable from a cost, timing and risk standpoint. We know; we've been there and have enjoyed very favorable outcomes for taxpayers using the FTS process.

What Is It?

The IRS formalized the FTS program in 2003. At the time, the IRS Large and Mid-Size Business (LMSB) Division and Appeals jointly administered the program. In 2006 and 2008, the IRS expanded the program to include taxpayers involved with the Small Business/Self Employed (SB/SE) Division and Tax Exempt/Government Entities (TE/GE) Division, respectively. Tax practitioners need to be aware of the differences in these various FTS programs. For ease of explanation, we will ignore them for now and focus this discussion on the LMSB FTS program.

The FTS program allows taxpayers, LMSB and Appeals to gather in the same room and attempt to resolve tax disputes. Although Appeals officers are IRS employees, they function as neutral third-party mediators in these face-to-face sessions. The program is designed to be completed in 120 days. If needed, participants may negotiate for additional time.

The taxpayer, LMSB and Appeals are all active participants in the process and all must agree to any proposed resolution to the dispute. When a resolution is reached, Appeals is able to exercise its authority and accept the settlement in a closing agreement that describes the final treatment of the issues. If the FTS program fails to produce a resolution, Appeals may propose a resolution — but the taxpayer and LMSB are not compelled to accept. If the FTS program fails to produce a full resolution of all issues, the taxpayer is free to pursue resolution through the normal Appeals process.

Although the IRS does not release FTS statistics, it's a fair bet that only a fraction of the total tax disputes with the IRS are settled using the program. Why? The two principal reasons likely are: (1) There is not widespread knowledge of the existence of the FTS program, and (2) there are specific circumstances that qualify, or disqualify, a particular matter for the FTS the program.


FTS is generally considered when the taxpayer and LMSB are unable to resolve a limited number of specific issues. When this occurs, the taxpayer and LMSB team manager may jointly agree to use the FTS program. If so, appropriate forms are submitted to the LMSB territory manager and Appeals FTS program manager who determine whether the matter is appropriate for FTS based on the answers to three questions:

  1. Have all issues been raised and is the examination process substantially complete?
  2. Have all claims been filed and issues examined by LMSB?
  3. Are the controversial issues “fully developed” and limited in number?

Issues are generally considered “fully developed” if:

  1. LMSB has issued a “notice of proposed adjustment” that clearly states the government's position; and
  2. the taxpayer has provided a written response clearly defining his position and the basis for disagreement.

Cases/issues that are not appropriate for FTS program resolution are:

  • Cases in which a “30-day letter”1 has been issued.

  • Cases in which the taxpayer has requested competent authority assistance.

  • Cases and/or issues that are outside LMSB jurisdiction.

  • Issues that challenge the constitutionality of tax laws.

  • Issues that are designated for litigation.

  • Issues that create “whipsaw”2 situations.

  • Issues that are specifically excluded from the FTS process.

Once the FTS application is accepted, the IRS assigns Appeals officers and negotiations begin to select a site for the face-to-face FTS session. Appeals officers attempt to accommodate the location preferences of the taxpayer and LMSB when making the site selection. In addition, Appeals officers will consider special requests for assignment of IRS personnel with particular experience or technical expertise. Appeals officers also may bring in engineers, lawyers or economists with specific expertise to assist in the mediation process.

Planning For a Session

Preparation is critical and should begin well in advance of the FTS session. Because the taxpayer and LMSB are unable to raise new issues once the FTS program begins, it's imperative that the legal, tax and economic attributes are fully understood and interwoven into an appropriate presentation strategy.

Depending on the complexity of issues, FTS sessions may last a few hours or several days. If the session ends with unresolved issues, the case is referred back to LMSB for disposition through the normal examination and appeals processes. Such an outcome can be very undesirable as the taxpayer and LMSB will have expended time, effort and expense preparing for the session.

The taxpayer and LMSB should select their best legal, tax and valuation representatives to participate in the session. FTS sessions can be stressful, emotional, and, at times, confrontational. The representatives for the taxpayer and LMSB are typically sitting across the table from each other criticizing the work of their counterparts. Participants need a thick skin and should be accustomed to operating under dynamic conditions. Unlike in a courtroom proceeding, there are no rules, other than those of civility and common decency — and at times even those limits may be pushed. Our experience has been that a respectful but firm approach (backed up by solid preparation and documentation) generally works best.

As with any negotiation, the strengths and weaknesses of the arguments can have a profound effect on the eventual resolution or lack thereof. Although Appeals officers are unable to impose resolutions, these individuals work diligently to mediate an unbiased solution based on the strengths and weaknesses of the arguments presented.

If valuation issues are at the center of the controversy, LMSB may use IRS engineers or seek outside experts to assist with the valuation aspects. These experts are likely to participate in the preparation of the “revenue agents report” as well as the FTS session.

Because planning, communication, deliverables and strategy are interrelated and critical to the FTS session, the taxpayer should select and employ experts at the earliest possible moment. Communications between the taxpayer and LMSB before and during the FTS process are sensitive and should be fully vetted. Documents and information disclosed during the FTS process become available to the LMSB examination team and may be used during or after the FTS process. It's wise to be careful.

Note that there is no prohibition against ex parte communication between Appeals officers and other IRS personnel. This is because Appeals officers are acting as mediators and not as Appeals officers during the FTS process.

The Session

An FTS session takes place at a facility mutually agreed upon by the taxpayer, LMSB and Appeals. At a minimum, there should be a conference room with a table and sufficient seating for all participants. It's helpful to have additional rooms for the taxpayer and IRS personnel to meet separately during break sessions. Also, a laptop computer, projector and screen are necessary if the participants intend to make an electronic presentation. We've seen a variety of FTS session facilities, from the relatively modest regional offices of the IRS to the opulent conference rooms of major corporations. At the end of the day, it doesn't make much difference where the session is held or whether the facilities are modest or extravagant. Other elements of the FTS session are far more important.

Before the FTS session, a specific timeframe is developed; an agenda also is negotiated and distributed to the participants. All participants must be identified and all appropriate decision makers must be present at the session. Certain participants may be required to complete IRS Form 8821 Tax Information Authorization to participate in the session.

Usually, the LMSB division presents its case first. This presentation typically involves oral arguments as well as distribution or visual presentation of various documents. The presenters may include the LMSB's team manager, counsel, examination personnel, specialists, technical advisors, and engineers as well as outside experts. It is not uncommon for the IRS to have six or more representatives attend a session. Usually, the parties agree to allow each side to present its case without interruption.

Once the LMSB has completed its presentation, the taxpayer's representatives are permitted to ask questions and give comments. This part of the session can be a somewhat freewheeling, but respectful, exchange between the taxpayer's representatives and LMSB. There are very few rules governing these exchanges. But, unlike at a trial, the parties are not compelled to respond to questions or comments. If the exchanges become unproductive, Appeals officers may assist in getting the process back on track.

Once the LMSB presentation is completed, the taxpayer presents his information, followed by another question and answer period. The taxpayer and LMSB are afforded wide latitude in the materials they can present and questions they can ask. There are no rules governing the evidence, direct testimony or cross-examination.

Because it's difficult to anticipate with certainty what direction the session will take, the experts are well-advised to be prepared with supportive documentation on all elements of any controversial issues.

After both sides have presented their cases, they're likely to retire to different rooms to discuss the strengths and weaknesses of the other side's presentation. Appeals officers may shuttle back and forth between the rooms to help keep the mediation process moving forward. At some point, the parties reconvene to discuss what concessions and resolutions are supportable and possible.

It's our experience that the side that has done its homework best and presented a compelling case will generally be more successful in defining the final resolution.

Finalizing The Process

Once the parties reach an agreement, Appeals officers prepare an FTS report and submit it to the taxpayer and LMSB for signature. The FTS process is not finalized until the FTS report has been signed and Appeals has issued a closing agreement that also is signed by the taxpayer and LMSB. Until then, Appeals or LMSB may reconsider the settlement — under certain circumstances. These circumstances include changes in tax law or legal precedent that may affect the assessment by Appeals of the hazards of litigation. Also, any FTS agreement may be revisited if fraud, malfeasance, concealment or misrepresentation of material facts is part of the process. Outside these parameters, the LMSB and Appeals are compelled to respect the settlement terms agreed to in the FTS report.

Consider It

Although not appropriate in all situations, the vast majority of tax disputes qualify for FTS resolution. Given the substantial and increasing costs and potential hazards of Appeals resolution or Tax Court litigation, more taxpayers should consider the FTS program. Taxpayers also may find very attractive the fact that the FTS process is confidential and subject to the privacy provisions of the Internal Revenue Code.

Because the IRS does not publish statistics related to the number or outcome of FTS sessions, we're unable to state the percentage of total FTS sessions that taxpayers would consider favorable. But in our experience, the FTS program has resulted in very favorable outcomes for the taxpayer.


  1. A “30-day letter” is generally accompanied by a “revenue agents report” and a “notice of proposed adjustment.” These documents provide the taxpayer with Internal Revenue Service computations of the proposed adjustments to a tax return. If the Fast Track Settlement (FTS) program is being considered, the IRS and taxpayer should initiate the FTS process after the IRS has issued a “notice of proposed adjustment” and the taxpayer has provided a written response — but before the IRS has issued a 30-day letter.
  2. A “whipsaw” transaction occurs when the government may be subjected to conflicting claims of different taxpayers that may benefit one and hurt the other for tax purposes.

Daniel R. Van Vleet, far left, is a managing director in the Valuation & Financial Opinions Practice at Stout Risius Ross, Inc. in Chicago. Lawrence B. Gibbs is a member of Miller Chevalier in Washington and is a former Commissioner of the Internal Revenue Service