Congratulations! You’ve reached a basis for settlement with the Appeals Officer. In previous articles, we’ve provided pointers on the Protest, Preparation, Presentation, and Persistence. The end is in sight, but you must finish it well. In this article, we will discuss Perfection – completing the Appeals process as correctly as possible.

Confirming the basis for settlement. First, you should confirm that you have a true “meeting of the minds” with the Appeals Officer regarding the basis for the settlement. To do so, we recommend that you produce a writing – a letter or even an email – and send it to the Appeals Officer for confirmation. Be sure to cover the resolution of every adjustment in the 30-day letter, including penalties and even automatic or consequential adjustments. Assume that nothing is “understood.” The next step for the Appeals Officer is to obtain a computation and prepare the formal settlement documents.

Settlement documents. The most common form used to settle a matter in Appeals is Form 870-AD. It reduces the settlement to a tax due (or refund) and includes additions to tax, i.e., penalties. It looks very similar to the Form 870 that exam uses to resolve audits, but it is very different. The Form 870-AD includes the following condition (on the reverse side of the form, by the way): “No claim for refund or credit will be filed or prosecuted by the taxpayer for the years stated on this form, other than for amounts attributed to carrybacks provided by law.”[1] Remember: At the conclusion of an examination, the taxpayer has several options to seek relief from the proposed adjustments: Seek an administrative appeal; wait for a notice of deficiency and petition the US Tax Court; or agree to pay the tax due, claim a refund, and file a suit for refund in Federal Court – to name the most common avenues for relief. When the taxpayer agrees to a Form 870-AD, the last option is no longer available.[2] It’s no longer available unless the taxpayer reserves the specific issue(s) on the form itself. Thus, before recommending that the client execute Form 870-AD, the effective advocate will ensure that the client has no issues (or potential issues) for which it may wish to file a refund claim.[3]    

Closing agreements. There are occasions when the resolution of an issue before Appeals may affect other years not at issue. One common example is the basis of an asset. Basis will impact future depreciation or amortization as well as the gain or loss on the asset’s ultimate disposition. Thus, it will save the taxpayer’s and the IRS’s resources to resolve the matter with certainty. A closing agreement pursuant to IRC § 7121 may provide such needed certainty.[4] The most common document used for this purpose is a closing agreement on Form 906.[5] Closing agreements are sometimes complicated and often require IRS Counsel review; thus, Appeals Officers may want to avoid them if they can. An effective advocate will consider whether a closing agreement is appropriate when negotiating a settlement. The appropriateness of a closing agreement is best resolved before the final settlement documents are prepared.

Exit strategy. You’ve secured a settlement from Appeals that your client can live with. Good for you both; however, there are examination cycles yet to come with the same issue. You’re pretty certain that the exam team won’t budge on the issue. Are you stuck going through the exam and then appealing the issue, or is there a more efficient path? Maybe not. The IRS has issued a policy statement (Delegation Order 4-24) that allows LB&I exam management to implement an Appeals’ settlement in a later year provided that:

1. The facts surrounding a transaction or taxable event are substantially the same;
2. The legal authority relating to such issue remains unchanged;
3. The underlying issue must have been settled by Appeals independently of other issues (e.g., no trading of issues); and
4. The issue must have been settled in Appeals with respect to the same taxpayer.[6]

Thus, the effective advocate should be mindful of the potential application of the delegation order when negotiating and memorializing the settlement in Appeals. In particular, the third item – that the issue was settled independently of other issues – should be discussed with Appeals and included in any internal Appeals closing documents.  

In these articles, we have shared pointers on how to have successful appeals from Protest to Perfection. They are based on our experience – both successes and scars. We welcome your comments and additional pointers.

[1] To be fair, the form also restricts the IRS’s ability to examine the settled year. “If this offer is accepted, the case will not be reopened by the Commissioner unless there was: fraud, malfeasance, concealment or misrepresentation of material fact.…”

[2] There have been successful challenges to this restriction. See, e.g., Whitney v. United States, 826 F.2d 896 (9th Cir. 1987). However, the effective advocate will avoid this situation when possible.

[3] “The taxpayer reserves the right to timely file a claim for refund or credit or prosecute a timely filed claim solely on the grounds [for example, ‘that it is entitled to the research credit pursuant to IRC section 41’]. This offer of waiver of restrictions is not to be construed as a claim for refund or credit, formal or informal, concerning the matters for which the right to file a claim is reserved.” See IRM 8.6.4.5.2 (10-26-2007).

[4] “Treas. Reg. 301.7121-1(a) provides that: ‘A closing agreement may be entered into in any case in which there appears to be an advantage in having the case permanently and conclusively closed, or if good and sufficient reasons are shown by the taxpayer for desiring a closing agreement and it is determined by the Commissioner that the United States will sustain no disadvantage through consummation of such an agreement.’ In practice, if the taxpayer shows good reasons for requesting the agreement and furnishes necessary facts and documentation, and the government will sustain no disadvantage, a closing agreement will ordinarily be entered into so long as the content of the agreement can be agreed upon.” IRM 8.13.1.2.1(2) (05-25-2018)

[5] Form 866, Agreement as to Final Determination of Tax Liability, provides the finality of a closing agreement under as to tax liability (like Form 870-AD), but Form 906 provides finality about specific matters (like the amount of an asset’s basis).

[6] See IRM 1.2.2.5.20 (12-03-2020). There are additional clarifications in the manual provision, including expansion on the term “same taxpayer.”