IRS audits do happen. When they do, it seems like they drag on. But they do end. At the end of an audit, IRS auditors will almost always hand over a stack of paper. Sign here, initial there, and the case closes. The forms are dense. They almost always reference other forms.
Sometimes the other form is not in the stack. The signature page says the missing document is “incorporated by reference.” The page in front of you shows no dollar figures and no adjustments, so you sign. A year later the bill shows up.
Can the IRS hold you to numbers you never saw? And once you have signed, is there any way back in front of a judge?
The court addressed this in Ballengee v. Commissioner, T.C. Memo. 2026-73. The case provides an opportunity to consider what a signed IRS agreement form actually gives up.
Facts & Procedural History
The taxpayer founded, grew, and sold companies in the oil and gas industry. This work required him to regularly review legal documents. He usually ran them past a lawyer or a CPA before signing.
For this case, it involves an interest the taxpayer and wife held through a partnership. The partnership was itself owned in part by a second partnership. In 2019 the IRS started an audit of the taxpayers’ individual return and of the partnership returns for 2016 and 2017.
The partnership had claimed net operating loss carryforwards for debt it treated as recourse. The amounts were large. Roughly $19 million in one year and $64 million in the other. The IRS auditor took the position that the debt was really nonrecourse. The auditor did this as the recharacterization of the debt caused the losses to not be useable to reduce tax for these returns.
The taxpayers hired two CPAs. In 2020 the IRS auditor sent an examination summary and a set of Forms 870-LT. Part I of that form binds the partnership to partnership-level adjustments. Part II binds the partners in their individual capacity and waives the restrictions on assessment found in Sections 6225(a) and 6213(a).
The form the taxpayers received listed the partnership names, their names, the years, and one line in the remarks section: “See attached 870-LT Continuation Page.” The Schedule of Adjustments was blank. No numbers at all.
The Continuation Page said accuracy-related penalties would apply to the underpayment. It also said this: “The accompanying Form 886-A, Explanation of Partnership Items and Partnership-Level Adjustments, is hereby incorporated by references.”
Form 886-A was not attached. The taxpayers signed anyway. They did so without calling either CPA or lawyer. The taxpayer later testified that he signed because the blank schedule told him the IRS was proposing nothing.
Eight months later the IRS sent the taxpayers a letter saying it had completed its review of the individual return and made no changes. Then, about a year after that, the IRS sent notices of computational adjustment with the actual numbers attached. That was the first time one of the taxpayers CPAs saw the adjustments.
The IRS then issued a notice of intent to levy and filed a notice of federal tax lien. The taxpayers requested collection due process hearings and asserted that they were not liable for the tax. The IRS Appeals Settlement Officer concluded the signed form was binding and that the audit could not be reopened. The taxpayers petitioned the U.S. Tax Court to contest the determination.
What Does an IRS Waiver Form Actually Waive?
The basic protection rules are found in Section 6213. It says that the IRS generally cannot assess an income tax deficiency until it mails a notice of deficiency and the taxpayer’s 90 days to petition the U.S. Tax Court run out. That is the ticket to court before you pay anything.
Section 6330(c)(2)(B) says a taxpayer can challenge the existence or amount of the underlying liability in a collection hearing, but only if the taxpayer did not receive a notice of deficiency and did not otherwise have an opportunity to dispute the liability. Waiving the notice of deficiency should leave the door open. You never got the notice, so how did you have the opportunity?
The courts have not read it that way. Signing the waiver is itself treated as the opportunity. There are cases suggesting the analysis is more fact-specific than this, but this is the general rule.
When Is a Signed Agreement Final?
Part II of the form in this case did more than waive assessment restrictions. It said the treatment of the affected items “will not be reopened in absence of fraud, malfeasance, or misrepresentation of fact.” That language tracks Section 7121–the closing agreement statute.
Section 7121(b) says that a closing agreement “shall not be annulled, modified, set aside, or disregarded” in any suit, action, or proceeding. The only escape is a showing of fraud or malfeasance, or misrepresentation of a material fact.
The court explained that misrepresentation here means something narrow. One party has to have intentionally made an incorrect or misleading representation about the express terms of the agreement, and the other party has to have relied on it to its detriment. A mere incorrect, erroneous, or mistaken statement does not count.
So naturally, there is an argument that handing a taxpayer a form with a blank adjustment schedule and no attached explanation is exactly that kind of misleading representation. The taxpayers made it.
“Incorporated by Reference” for Absent Documents
This gets to the issue in this case. The Form 886-A was missing. How can that missing document be pulled into the agreement, when it was missing?
The court pointed to two places on the paperwork where Form 886-A was named. Part II said the accompanying Form 886-A was incorporated by reference. The Continuation Page said the same thing and listed the general subject matter of the adjustments. Two separate references, in the court’s view, were enough to put the signers on notice that another document existed and was part of the deal.
Thus, the court did not decide whether Form 886-A was actually attached when the taxpayers signed. It did not have to. Even assuming the taxpayers were right that it was missing, they had not shown the omission was a deliberate or intentional attempt by the IRS to misrepresent the terms.
The absence worked in the IRS’s favor because of tax procedure. The taxpayer carries the burden of proving intent inside the IRS. Proving what an IRS agent meant to do when assembling a packet of forms is close to impossible without discovery. A collection case is the only remedy in this situation, but it is not a remedy that is a place where you get adequate discovery. This is a real gap in due process.
The taxpayers also argued mutual mistake. Both sides thought there were no adjustments, so there was no meeting of the minds. The court rejected this too. Mutual mistake is not one of the three grounds listed in section 7121(b), as the Court noted.
What About the No Change Letter?
The letter saying the IRS made no changes to the individual return seems determinative. It arrived eight months after the signature. If the IRS closed the audit with no changes, how can there be a deficiency?
The answer is in the letter. It said the taxpayers would hear nothing further about that year unless the IRS made a change to a partnership return in which they held an interest. That is what happened. The individual return was fine on its own terms. The numbers flowing up from the partnership were not.
This trips up a lot of people with flow-through entities. A no change letter on your Form 1040 does not close out adjustments coming from a partnership or an S corporation. Those move on a separate track and can land on your personal return via later computational adjustments.
The Takeaway
Signing an IRS agreement form is not a formality. It is a contract, and the tax code gives it a finality that ordinary contracts do not have. A blank adjustment schedule may not be evidence that the IRS is proposing nothing. If the form names a document you do not have, stop and get the document before you sign, and put the request in writing so there is a record of it. This can preserve your right to fight the adjustment later. Sign the form and the only way out is proving the IRS intentionally misled you, and that is a very hard case to make.
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