The Internal Revenue Service is authorized to enter into written agreements with a taxpayer relating to the taxpayer’s total tax liability or to specific issues affecting that tax liability for a specified period. These closing agreements may be used when there is an advantage in having a case closed or when the taxpayer shows a good reason for the agreement and the IRS concludes that there is no disadvantage to the government. In addition, the IRS may ask a taxpayer to enter into a closing agreement as a condition to the issuance of a letter ruling.
Generally, closing agreements are final, conclusive, and binding on both parties. The case cannot be reopened as to any of the agreed-upon items, and the agreement cannot be set aside or modified in any other suit or proceeding. However the IRS is permitted to reopen a case to make an adjustment unfavorable to the taxpayer if there is evidence of fraud, malfeasance, collusion, concealment, or misrepresentation of a material fact, the prior closing involved a clearly defined substantial error based on an established IRS position existing at the time of the closing agreement, or other circumstances exist indicating that the failure to reopen the case would result in a serious administrative omission.
An unintentional mistake by an IRS agent in failing to include certain deductions in arriving at a taxpayer’s liability upon which a closing agreement is based is not a misrepresentation of material fact upon which the agreement can be set aside. In addition, innocent spouse relief is barred from negating a closing agreement unless a taxpayer can show that the IRS acted improperly. The agreement does not have to specifically state that both spouses personally assume liability for the tax.
Closing agreements may relate to tax periods ending before the date of the agreement. In these cases, the matter agreed upon may relate to the total tax liability or to one or more separate items affecting the tax liability.
Closing agreements may also be related to periods ending after the date of the agreement. These agreements deal with matters relating to one or more separate items affecting the taxpayer’s liability. This type of closing agreement is subject to any change in the tax law enacted after the date of the agreement that applies to the affected tax period.
The taxpayer and the IRS may enter into a closing agreement even though, under the terms of the agreement, the taxpayer is not liable for any tax. For example, corporations in the process of liquidation or dissolution might desire a closing agreement in order to wind up affairs, as might a fiduciary of a trust or a receivership before making a final distribution.
Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.