Boston, February 10, 2014 - In her remarks before the Annual State Tax Conference of the Massachusetts Society of CPAs at the Sheraton Framingham on Thursday, January 23, 2014, Commissioner Pitter announced an impressive goal – that one-third of all appropriate cases be mediated. She listed the following four criteria for mediation:
a. Minimum Amount in Dispute is $250,000. In the DOR’s pilot mediation program, the minimum amount in dispute was set at $1 million in taxes, exclusive of interest and penalties. The new minimum amount of disputed taxes has been reduced to $250,000. Where the tax in dispute is less than $250,000, the Commissioner supports expedited settlements, discussed below.
b. Both Sides Must Face Perceived Hazards of Litigation. Both the taxpayer and the DOR Audit Bureau must concede that they face significant hazards of litigation so that a mediated settlement is in their best interests.
c. Decision Makers Are In the Room With Full Authority to Settle. The taxpayer’s and the Department of Revenue decision makers must be in the room with full authority to settle. This helps guarantee that the case will settle in a single day.
d. Full Documentation. The case must be fully documented. The relevant facts must be fully developed and not in dispute. The taxpayer must provide a position paper demonstrating how relevant statutes, rulings, regulations and case law support its tax position. Similarly, I would argue that it is appropriate and essential for the DOR to provide full documentation of its position to the taxpayer’s representatives well in advance of the mediation.
Appeals Officers May Be Mediators. The DOR has trained appeals officers to be mediators. The commissioner is willing, however, to consider using mediators who do not work for the Department of Revenue.
When Mediation Is Unsuccessful. Where mediation is unsuccessful, taxpayers will be given the opportunity to pursue tax dispute resolution through the traditional appeals process within the Office of Appeals. If a taxpayer pursues the traditional appeals process, the Office of Appeals will assign new personnel from the Office of Appeals to ensure fairness and impartiality.
Additional Details on Mediation. For additional details, see the DOR’s recent blog and revised AP 635: Early Mediation Program.
Other Types of Dispute Resolution – “MENU.” The Commissioner also announced that she envisions mediation to be one of four types of alternative tax dispute resolution:
M – Mediation. The mediation process set forth above.
E – Expedited Settlements. While the Commissioner did not elaborate, it appears that expedited settlements will contain each of the four elements for mediation – except that a mediator will not be present. Otherwise, Commissioner Pitter envisions that the goal for expedited settlements is settlement within a day. To lay the foundation for successful tax dispute resolution, both sides must perceive that there are hazards to litigation, the decision makers must be in the room with full authority to settle, and the case must be fully documented.
In later remarks, the Commissioner suggested that an expedited settlement might be appropriate where the taxpayer’s representatives and the DOR auditor have reached a tentative settlement agreement. Under current DOR procedures, auditors do not have the authority to approve a settlement. The DOR auditors’ lack of settlement authority will not change. The expedited settlement process, however, will allow the auditor and the taxpayer’s representatives to explain and defend their proposed settlement before appropriate DOR executives.
N – Negotiated Settlements. This is the traditional settlement process through the Department of Revenue Appeals Office.
U – Undocumented Appeals. The Commissioner was quite vague as to exactly the type of cases that would come under “undocumented appeals.” Presumably these are cases that are too small to justify paying tax professionals to provide full documentation. These cases, however, are very important to the taxpayers involved and should be resolved promptly and inexpensively.
The commissioner promised to clarify these four dispute resolution categories in instructions contained in a revised Form DR-1: Appeals Form to be issued in March 2014.
How Mediation May Work. Before the mediation, the DOR’s top tax lawyers and the taxpayer’s representatives will each separately decide on an appropriate settlement range. If both sides perceive that there are significant hazards of litigation, these two settlement ranges will likely overlap, permitting a mediated settlement.
Preparation for Mediation – What Taxpayers Must Do. Taxpayers will not want to enter into mediation without careful preparation and thought. Specifically, the taxpayer’s representatives will want to:
a. Confirm that the Facts Are Not In Dispute. An unresolved factual dispute can derail a mediation. Thus, the taxpayer’s representative must confirm with appropriate representatives of the DOR that the relevant facts are not in dispute.
b. Understand the Weaknesses in the DOR’s Position. The taxpayer’s representatives will want to obtain and analyze the DOR’s position papers well in advance of the mediation. The taxpayer’s representatives will want to analyze carefully the weaknesses in the DOR’s case so that they can present forcefully the DOR’s hazards of litigation. These major weaknesses in the DOR’s case should be presented at the beginning of the mediation to confirm to the DOR’s decision makers that serious hazards of litigation do exist and that settlement of the dispute is appropriate.
c. Be Prepared To Confront and Rebut Perceived Weaknesses in the Taxpayer’s Case. The taxpayer’s representatives will also want to identify perceived areas of weakness in the taxpayer’s case. Then, the taxpayer’s representatives will want to demonstrate how these weak areas can be successfully defended if the case does not settle. There is, of course, a danger to this candid approach. If the case does not settle, the taxpayer has revealed its most effective weapons in advance of litigation. This risk of full disclosure, however, may be more apparent than real. The DOR has a good track record with litigation. Thus, taxpayer must assume that the DOR representatives are also highly qualified professionals and are likely aware of the taxpayer’s most telling arguments. In addition, the risk of full disclosure must be weighed against the potential achievement of a prompt and fair settlement. For these reasons, I typically present my client’s strongest case as soon as possible.
d. Obtain Agreement On A Realistic Range of Settlement. The taxpayer’s representatives will want to obtain agreement, well in advance of the mediation, of a realistic range of settlement. In determining the range of settlement, representatives will want to help their clients obtain a realistic understanding of the costs of non-agreement. These costs include: (1) potential legal fees arising from continued litigation; (2) opportunity costs incurred when a business taxpayer’s executives are distracted by the on-going litigation; (3) loss of peace of mind; and (4) in some cases, a significant impact on a taxpayer’s ability to borrow money and thereby to remain in business.
Preparation for Mediation – What the DOR Must Do: The Commissioner will not achieve her impressive goal – one-third of all appropriate cases mediated – unless the public supports mediation and the word gets out that mediation produces a better result than litigation. This poses three challenges to Commissioner Amy Pitter:
a. Educating the Public. Public support for mediation is critical. Laypeople often assume that there is only one “right” answer to a tax question. It takes a level of sophistication that few laypeople possess to understand there is often a range of principled solutions to a complex tax dispute. Thus, the DOR will want to educate the public as to how mediation works and to dispel completely the idea that mediation involves special deals for anyone. In addition, the public must be educated as to the value of prompt settlement of tax disputes to the taxpayer, to the Massachusetts treasury, and to the perceived climate for doing business in Massachusetts.
b. Educating the Audit Bureau. Audit Bureau personnel who issue notices of intention to assess (NIA’s) often become personally involved in the outcome of the dispute. Effective mediation requires that DOR’s top executives take the time to educate the DOR’s auditors that not all audit positions have equal strength and that sometimes it is best for the DOR to compromise an NIA.
c. Working Within the DOR’s Corporate Culture. The Department of Revenue is a “top-down” organization, where almost all important decisions are made by a very small group of top executives. The requirement for full documentation gives the DOR’s top executives the basis for making an informed decision as to the range of settlement. The requirement that there be at least $250,000 in controversy makes the expenditure of the executives’ time reasonably cost effective. Thus, it is realistic to expect DOR’s top executives to delegate settlement authority within an agreed-upon settlement range to their representatives “in the room.”
Conclusion. When mediation works all benefit: Massachusetts is paid sooner. Taxpayers incur lower dispute resolution costs. Massachusetts will eventually achieve a better reputation for its business climate. It is “win-win” all around.
 The Managing Director of M. Robinson & Company, P.C., Attorney Morris N. Robinson, LL.M., Esq., wrote an article about the Massachusetts Early Mediation Program that was published in State Tax Notes. See Morris N. Robinson, LL.M., Esq., Massachusetts DOR Initiates Early Mediation Program, State Tax Notes (Nov. 12, 2012) at p. 1. Attorney Matthew A. Morris, LL.M., Esq., an Associate at M. Robinson & Company, P.C., wrote a recent blog post about the IRS Fast Track Settlement Program, on which the Massachusetts Department of Revenue’s mediation program is based. See IRS Announces Expansion of Fast Track Settlement Program for Businesses Nationwide, http://www.massachusettstaxalert.com/ (Feb. 7, 2014).