What is a Closing Agreement With the IRS?
A closing agreement with the IRS refers to a written settlement agreement with the IRS. It conclusively settles the taxpayer’s tax liability or the tax consequence of a transaction.
The closing agreement is used to settle cases where it is not clear what the amount of the tax liability is. The closing agreement is used to close out a case before the IRS Office of Appeals or a tax litigation case. Closing agreements are usually proposed or initiated in the IRS appeals process. This is why they are often referred to as “IRS appeals closing agreements.”
The IRS’s attorneys will usually be asked by IRS appeals officers to review or draft the closing agreement. It is common for IRS attorneys to question the terms and discourage the use of closing agreements. This is why many IRS appeals officers prefer to just use Form 870 to close agreed cases in Appeals (Form 870 is just an agreement to the bottom line tax number with no mention of the reason for the change).
The IRS Closing Agreement is Final
The IRS closing agreement is final. It is binding on the IRS and on the taxpayer for the issues included in the agreement.
The agreement only covers those issues specifically identified in the agreement. Issues that are not included in the agreement are not covered by the agreement even if they factored into the IRS or the taxpayer’s decision to enter into the agreement.
This is set out in Section 7121. Section 7121 is the statute that authorizes the IRS to enter into closing agreements.
The only exception is if the taxpayer committed fraud or malfeasance or made misrepresentations of material facts when entering into the closing agreement.
When Does the IRS Use Closing Agreements?
The IRS uses closing agreements in cases where it prefers finality. This may include large cases or issues that could impact other tax years.
The IRS also uses closing agreements when pressed by the taxpayer. The IRS will sometimes grant these requests if the taxpayer provides a good reason for having the case closed using this type of agreement.
Closing agreements are more common in business transactions, such as the liquidation of legal entities. They are also common with estates and trusts that distribute assets. The IRS often uses closing agreements for tax issues involving retirement plan disqualification/qualification and exempt entitys’ nonprofit/profit status.
Is a Closing Agreement Different Than an Offer in Compromise?
It should be noted that the closing agreement differs from an offer in compromise. The IRS’s offer in compromise program is used to settle tax debts. The amount of the tax liability is certain, the ability to pay that debt is not. With a closing agreement, the amount of the tax liability is not certain. The closing agreement provides certainty as to the amount of the tax liability.
The offer-in-compromise based on doubt as to liability is similar to a closing agreement. It is used when the taxpayer asserts that they are not liable for the tax. These agreements are submitted to a special offer group within the IRS. If accepted, they are also binding on the IRS. They are not binding on the taxpayer.
What is Included in an IRS Closing Agreement?
The closing agreement is usually completed using Form 906. The courts have said that an IRS letter or notice is not a closing agreement.
The Form 906 closing agreement is for specific tax matters. It will recite the facts for the closing agreement, such as the parties, the years and amounts at issue, and the facts that are relevant to the amounts at issue.
The form will then list the agreement for the specific tax matters. The conclusion may be as simple as the following:
The Taxpayer may deduct $XXX under § 162 of the Code.
The closing agreement will then include language saying that it is binding under Section 7121.
Rev. Proc. 68-16, 1968-1 C.B. 770 and Rev. Proc. 94-67, 1994-2 C.B. 800 provide detailed guidelines that have to be met for these agreements.
After the IRS Enters Into a Closing Agreement
If the IRS agrees to enter into a closing agreement, it may still ask the taxpayer to sign a Form 870. Form 906 provides the terms of the agreement; whereas, Form 870 provides the tax calculation for the agreement.
The IRS will also issue a statutory notice of deficiency for the tax year if there is any tax due.
The IRS will then accept the position in the closing agreement. While rare, the IRS may, however, take a contrary position on a related issue. This has to be considered when deciding whether to enter into a closing agreement with the IRS.
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