- 8.6.4 Reaching Settlement and Securing an Appeals Agreement Form
- 18.104.22.168 Fair and Impartial Settlements per Appeals Mission
- 22.214.171.124.1 Mutual-Concession Settlements
- 126.96.36.199.2 Split-Issue Settlements
- 188.8.131.52.3 Nuisance Value Settlements
- 184.108.40.206.4 Judicial Attitude Towards Settlement
- 220.127.116.11.5 Burden of Proof
- 18.104.22.168.6 Case Evaluation for Settlement Purposes
- 22.214.171.124.7 Partial Settlements
- 126.96.36.199.8 Settlements That Affect Later Taxable Years
- 188.8.131.52.9 Disagreements to Appeals Determinations
- 184.108.40.206 Settlement of Related Cases
- 220.127.116.11.1 Settlement Procedure in Whipsaw Cases
- 18.104.22.168.2 Settlement of Non-Examined Years Affected by Appeals Settlements
- 22.214.171.124 Agreements Forms Secured in Appeals Cases
- 126.96.36.199.1 Distinction Between General and Special Agreement Forms
- 188.8.131.52.2 Use of Agreement Forms 870 and 4549
- 184.108.40.206.3 Agreement Used When Taxpayer Requests Greater Finality
- 220.127.116.11 Modification of Agreement Forms 870 and 870AD Types
- 18.104.22.168.1 Modification of Agreement for Partial Agreement
- 22.214.171.124.2 Modification of Agreement for Settlements With Reservations
- 126.96.36.199.3 Modification of Form 870AD for Carrybacks Provided by Law
- 188.8.131.52.4 Modification of Agreement When Overpayments Applied Against Deficiencies
- 184.108.40.206.5 Modification of Agreement for Prepayment Credit Adjustments
- 220.127.116.11.6 Modification of Footnotes on Agreement Forms
- 18.104.22.168.7 Modification of Agreement in Joint Committee Cases and in Potential Joint Committee Cases Because of Carrybacks
- 22.214.171.124 Closing Agreement Form 866 and Form 906
- 126.96.36.199 Collateral Agreements
- 188.8.131.52 Informal Agreements as Determinations
- 184.108.40.206.1 Form 2198 Agreement - Personal Holding Company Tax
- 220.127.116.11.2 Form 2259 Agreement - Mitigation and Correction of Errors under IRC 1311
- 18.104.22.168.3 Settlements Which Do Not Become Effective When Form 5402 is Signed
- 22.214.171.124 Electronic Signature Use on Appeals Letters and Documents
Part 8. Appeals
Chapter 6. Conference and Settlement Practices
Section 4. Reaching Settlement and Securing an Appeals Agreement Form
March 16, 2015
(1) This transmits revised IRM 8.6.4, Conference and Settlement Practices, Reaching Settlement and Securing an Appeals Agreement Form.
(1) Added IRM 126.96.36.199 to incorporate the contents of Interim Guidance AP-08-0714-0006 - Electronic Signature Use on Appeals Letters and Documents.
(2) Corrected IRM references.
John V. Cardone
Director, Policy, Quality and Case Support
The Appeals mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service. This is Appeals' general contribution towards achieving the Service mission. (See IRM 1.1.1, IRS Mission and Basic Organization and IRM 1.2.17, Servicewide Policies and Authorities, Policy Statements for the Appeals Process.) In further support of the Service mission, Appeals may defer action on or decline to settle some cases, under Policy Statement 8–47 (described at IRM 188.8.131.52.6), where:
required by other Headquarters Office-issued internal management documents, such as those suspending action on cases or those requiring coordination or control of identified matters with widespread impact; or
such action would produce a greater positive effect on voluntary compliance than would be derived from settlement or other action on the case.
A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in event of litigation, or one which reflects mutual concessions for the purpose of settlement based on relative strength of the opposing positions where there is substantial uncertainty of the result in event of litigation.
It is the experience of Appeals that thorough, reasonable, and objective consideration of all elements of a controversy leads, in a large majority of cases, to resolution of the controversy on a basis agreeable to both the taxpayer and the Government. Agreement is not possible in all cases, however. A taxpayer may not agree with Appeals conclusion as to the probable result in event of litigation, or to the extent of mutual concessions required where there is substantial uncertainty of litigating result, or may prefer to litigate for other reasons.
See IRM 184.108.40.206.1, No Appeals Conference or Concession on Certain Arguments for certain arguments that are not given any weight in settlement.
See IRM 8.7.3, Domestic and International Operations Programs for settlement procedures in the Appeals Coordinated Issue (ACI) Program and the Appeals Industry Specialization Program (ISP).
Case dispositions involving concessions by both the Government and the taxpayer for the purpose of settlement where there is substantial uncertainty in event of litigation as to how the courts would interpret and apply the law, or as to what facts the courts would find, are designated as mutual-concession settlements.
Appeals is expressly authorized by Policy Statement 8–47 to enter into such settlements. In such a case there is substantial strength to the position of both parties, so that neither party, with justification, is willing to concede in full the unresolved area of disagreement. See IRM 220.127.116.11.6.
Resolution of the dispute involves concessions for the purpose of settlement by both parties based on the relative strength of the opposing positions. Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment type of agreement is generally used in mutual-concession settlements.
Do not use the term "overall settlement" in the discussion of an issue being settled unless there is a clear and precise discussion of the specific concessions being made by both parties.
Policy Statement 8–48 states Appeals may enter into settlements based on a percentage or stipulated amount of the tax in controversy, but such settlement, identified as a "split-issue" settlement, is only used when no other method of settlement is appropriate. See IRM 18.104.22.168.7.
A split-issue settlement is a form of mutual-concession settlement of an issue which, if litigated, would result in a decision completely for the Government or the taxpayer. The distinguishing feature of a split-issue settlement is that the agreed result would not be reached, if tried.
In deciding whether to make a split-issue settlement, consider whether it has some effect upon later years, particularly in a carryover or carryback situation, and in most gift tax cases. If so, it is preferable that the split-issue settlement be expressed in terms of an adjustment of taxable income rather than in a percentage or an amount of tax.
It is important the taxpayer have a clear understanding of the effect of the split-issue settlement in terms of tax liability and taxable income. Either a closing agreement or a collateral agreement is advisable.
In all cases involving the "trading" of issues, the discussion of the hazards must clearly support the conclusion that relative values of the issues being traded are equal. Not all issues are traded.
Penalty issues are not traded in Appeals. Penalties are settled, but the settlement is based on the merits and hazards surrounding each penalty issue standing alone.
Policy Statement 8–47 states no settlement will be made if it is based on nuisance value to either party. Nuisance value is any concession made solely to eliminate the inconvenience or cost of further negotiations or litigation and is unrelated to the merits of the issues. Appeals neither exacts a concession nor grants a concession solely to relieve either party of such inconvenience or cost.
The judicial attitude is one which reasonably appraises the facts, law, and litigating prospects; uses sound judgment and ability to see both sides of a question; and is objective and impartial. Any approach which contemplates a maximum possible result in favor of the Government or a deficiency in every case is incompatible with a judicial attitude and the Appeals mission.
Do not take advantage of a taxpayer's lack of technical knowledge. Assist the pro se taxpayer in every way possible. In the absence of an agreement, ensure the taxpayers fully understand their appeal rights.
The Internal Revenue Service Restructuring and Reform Act of 1998 ("RRA 98" ), which was signed into law on July 22, 1998, states under certain circumstances the Internal Revenue Service (" Service" ) has the burden of proof in any court proceeding with respect to a factual issue if the taxpayer introduces credible evidence to ascertain the taxpayer's income tax liability.
Congress believed that placing the burden of proof on taxpayers created a disadvantage for them when they litigated against the Service, and that it should be the Government's responsibility to show that a taxpayer's determination of liability is not correct. Congress also felt it was not appropriate in all cases to make the taxpayer disprove unreported income when the Service determined income solely based upon statistical information from unrelated taxpayers. Furthermore, Congress believed during court proceedings the Service cannot rest on the presumption of correctness if it does not provide any evidence relating to penalties.
The burden of proof provision, under IRC 7491, applies to income, estate, gift, and generation-skipping transfer taxes. (For purposes of this provision, self-employment taxes are treated as income taxes.)
The burden of proof provision applies to court proceedings arising in connection with examinations commencing after the date of enactment (July 22, 1998) of RRA 98. Where there is no examination, the burden of proof provision applies to court proceedings arising in connection with taxable periods or events beginning or occurring after the date of enactment of RRA 98.
An audit is not the only event considered an examination for purposes of the burden of proof provision. For example, matching an information return to an amount reported on an income tax return is an examination for purposes of this provision. Also, the review of a claim for refund prior to the issuance of the refund is an examination for purposes of this provision.
IRC 7491(a) places the burden of proof on the Service in any court proceeding where the taxpayer introduces credible evidence with respect to factual issues relevant to ascertaining the taxpayer's tax liability. To qualify, the taxpayer must:
Comply with all substantiation requirements of the Code and the regulations.
Maintain all the records required by the Code and the regulations.
Cooperate with the Service's reasonable requests for meetings, interviews, witnesses, information, and documents, including providing, within a reasonable period of time, access to and inspection of witnesses, information, or documents within the control of the taxpayer.
Cooperation also includes providing reasonable assistance to the Service in obtaining access to and inspection of witnesses, information, or documents not within the control of the taxpayer (including any witnesses, information, or documents located in foreign countries).
A necessary element of cooperating with the Service is that the taxpayer must exhaust all administrative remedies, including any appeal rights provided by the Service.
Meet certain net worth qualifications if they are a corporation, partnership or trust. These taxpayers, whose net worth exceeds $7 million, are not eligible for the benefits of these burden of proof provisions.
IRC 7491(b) places the burden of proof on the Service in any court proceeding where the Service reconstructs a taxpayer's income solely through the use of statistical information of unrelated taxpayers. This rule only applies to individual taxpayers.
IRC 7491(c) states the Service has the burden of production in a court proceeding relating to the appropriateness of applying any penalties, additions to tax and additional amounts imposed by the Internal Revenue Code to the taxpayer. This rule only applies to individual taxpayers.
The burden of proof encompasses both the burden of production (also known as the burden of going forward with the evidence) and the burden of persuasion.
The burden of production is met if the party who bears it comes forward with evidence supporting its position. The burden of production requires a party to demonstrate it has concrete and positive evidence, as opposed to a mere theoretical argument, that there is substance to their position. Once a party has established this threshold burden, the burden of production (going forward) shifts back to the other party.
In the past, the taxpayer bore the initial burden of production with respect to both the deficiencies and penalties. By requiring the taxpayer to produce credible evidence sufficient to base a decision if not rebutted, "RRA 98" leaves the burden of production on the taxpayer. However, under IRC 7491(c), the Service now bears the burden of production with respect to the determination that a penalty applies. Once the Service meets the burden of production, the taxpayer retains the burden of persuading the court that the penalty is not appropriate, by raising defenses to the penalty, such as reasonable cause.
To say that a party bears the burden of persuasion is to say the party must persuade the court that its position is correct. If the party fails to meet its burden, it loses the case. Stated another way, a party that meets the burden of persuasion persuades the Court that its evidence outweighs the evidence of the other party.
In the past, the taxpayer bore this burden and had to convince the Court the Service was wrong. Based on the legislative history of "RRA 98" , the burden of persuasion shifts to the Government. Since the Government has the burden of persuasion, the Government only prevails if the preponderance of the evidence (more than 50%) favors the Government.
If the taxpayer complies with the statutory requirements, the Service must now assume the burden of showing to the satisfaction of the Court the tax liability as determined is correct, and the taxpayer no longer bears the burden of proof.
It is critical that examiners now document their workpapers to reflect the degree of taxpayer cooperation. In addition, the examiners must fully describe documents used to support audit conclusions and proposed tax adjustments. Examiners must also prepare documents which fully describe the steps taken and the analysis which supports audit conclusions. Similarly, in unagreed cases, Appeals personnel must address the degree of taxpayer cooperation in their Appeals Case Memos. This confirmation is needed by Counsel in addressing the burden of proof issues during preparation for trial.
Good auditing and good litigation practice, similar to most determinations in the past, ordinarily produce sufficient evidence to sustain the burden of proof. The Service and Chief Counsel have not, in the past, generally relied upon the taxpayer's failure of proof to sustain the asserted liability, but rather have affirmatively shown the proper liability. Continued adherence to these practices satisfies the new standard, but is now extremely important that a thorough examination and documentation of the liability be performed prior to the initiation of litigation.
The Service cannot take the following actions:
Rely on the taxpayer's failure to satisfy the burden of proof in court cases where the taxpayer has a reasonable factual dispute with the Service.
Rely solely on statistical information such as Bureau of Labor Statistics (BLS) or Consumer Price Indexes (CPI) to determine unreported income.
Assert penalties arbitrarily and without a firm factual foundation.
The Service can take the following actions:
Emphasize its examination procedures to further stress good examination techniques. Gather and preserve evidence from the earliest stage of a case, documenting where the taxpayer has cooperated and the extent to which he or she did cooperate and produce information. Explore and document all requirements of the law with respect to the treatment of an item for tax purposes. Similarly, Counsel must emphasize good trial preparation and evidence production practice to satisfy the Government's evidentiary burden.
Use statistical data from unrelated taxpayers to determine a taxpayer's income as a component of its traditional indirect methods of establishing income. There is no reason to abandon the usage of statistical information; rather a thorough examination likely produces other circumstantial evidence to support the income determination. In these instances, the use of statistical information cannot be the sole means to determine income.
Objectively apply penalties and document workpapers to demonstrate the applicability of the penalties. Always ask taxpayers to provide an explanation of reasonable cause, if applicable, for a penalty, and document the response.
The settlement approach and elements of evaluation are not affected by the status of the case. An unacceptable settlement in non-docketed status does not become acceptable solely because it is reconsidered in docketed status; nor does it become more acceptable in a trial calendar period than it was in a prior period. This, of course, does not preclude recognition of changes in judicial interpretation of the law and changes in Service position. It is also recognized that in reconsideration of a case or trial preparation, additional facts may arise which could affect evaluation of the case.
If a trial cannot be recommended on an issue, concede the issue even though it may have some merit.
Do not make or accept minor concessions on the basis the outcome of litigation is never absolutely predictable.
Occasionally settlement is required for issues where the "Golsen Rule" is applicable. The "Golsen Rule" originated with the case of Jack E. Golsen, 54 T.C. 742, (1970). In this case, the Tax Court held it would follow the rule of law laid down by the Court of Appeals to which an appeal in the case before it would lie.
Problems arise when the rule of law laid down by the local circuit conflicts with a Revenue Ruling, Revenue Procedure, or other announcement of Service position in regard to the same issue(s). In cases where the "Golsen Rule" is applicable, consult with Counsel as promptly as possible to determine the amount of litigation activity in other circuits and other relevant information on the Service's posture on the issue(s) involved.
Exercise care in a case where a tentative agreement was reached with the taxpayer and a change in the position of an applicable authority occurs which affects the agreement in a substantive and material manner. If a tentative agreement was not finally reflected on Form 870-AD or Form 906 and signed by a Service official authorized by the Commissioner to approve negotiated settlements, the tentative agreement is subject to modification if the law or legal precedent relied upon to formulate the tentative agreement changes. If the change is substantive and material, the agreement is renegotiated. For purposes of this section, the word "substantive" means the change in law or legal precedent results in a meaningful change to Appeals' assessment of the hazards of litigation.
Advise taxpayers that tentative agreements not finalized using Form 870–AD or Form 906 are subject to renegotiation in the circumstances described above.
When evaluating an issue which was the subject of litigation, it is imperative to check whether an "Action on Decision" ("Action" ) was published when the court ruled adverse to the Service's position. "Actions" represent the Service's "litigating posture" on controversial issues in a specific case and provide the legal basis for the Service's position on those issues. "Actions" are valuable guides for evaluating similar issues, so apply them in resolving cases. However, exercise caution in extending the application of the decision to a similar case unless the facts and circumstances are substantially the same, and consideration is given to the effect of new legislation, regulations, and revenue rulings as well as subsequent court decisions and actions. "Actions" are prepared by the Chief Counsel, and simultaneously made available to the public and Service personnel after litigation is completed.
Aim negotiations toward resolution of all issues in a case. If this cannot be done, attempt to reach agreement with the taxpayer on all issues capable of resolution.
Issues such as reasonableness of salaries, capital gain v. ordinary income on recurring sales of property, hobby losses, etc., are resolved on the basis of the facts and circumstances applicable to each year separately. In such cases settlement has no effect on later years where a similar issue arises. Be sure the taxpayer understands this.
Where settlement involves issues such as basis of property, category of income, or amount of income from installment sales, it is desirable to incorporate the effect on later years into the settlement by use of a closing agreement or collateral agreement. See IRM 8.13.1, Processing Closing Agreements in Appeals.
When the disposition involves mutual concessions and the subsequent tax effect is material, a closing agreement is executed. When there are no mutual concessions or when the tax effect is not material, a closing agreement is not required, but it can be executed if in the judgment of Appeals it is desirable or the taxpayer requests it.
When a closing agreement is not required, obtain a collateral agreement since it expresses in writing the understanding of the parties as to the tax effect in later years.
This section provides formal procedures for Compliance to voice their concerns about an Appeals settled case. These procedures are not intended to replace any informal procedures currently in use at the local level. Local management in Compliance and Appeals continue to address and resolve disagreements over case resolutions at the lowest possible level. These formal procedures are used when the informal process results in Compliance still having unresolved significant concerns about the Appeals disposition of an issue.
Formal disagreement is expressed by written dissent. The written dissent must clearly state the reason(s) for the dissent, the rationale supporting the reason(s) for the dissent, and whether Compliance requests a conference with the appropriate Appeals executive (Director, Field Operations, Director, Campus Operations or Director, Speciality Operations). The rationale for the dissent should include:
Citation of the specific facts that were not considered, or given enough weight, if Compliance believes Appeals did not properly consider the facts.
Citation of the applicable law (i.e. Code Sec., Regs., Rev. Ruls., Ct. Cases, etc.) that were not considered and/or been accorded different weight if Compliance believes there was unsound application of the law by Appeals.
Formal dissents by Compliance are not appropriate in an Appeals case where "hazards of litigation" were considered in the settlement of the case. Appeals clearly identifies within the Appeals Case Memo (ACM) those cases resolved by considering the "hazards of litigation." However, they are most appropriate in cases of fraud, malfeasance, or misrepresentation of a material fact. (See IRC 7121 and those involving systemic issues.)
Dissents should be forwarded to the appropriate Appeals Field Operations, Campus Operations, or Specialty Operations Director via the “*AP Formal Dissents" centralized mailbox within 90 days (extensions may be mutually agreed upon) of receipt of an ACM by Compliance. The appropriate Director will retrieve the formal dissent from the centralized mailbox and send Compliance an acknowledgment of receipt.
Upon receipt of the dissent, the Appeals Director will determine whether a reply to the dissent is appropriate, and guided by Policy Statement P-8-3 (formerly P-8-50), and existing regulations and statutes, whether the case should be reopened. See IRM 22.214.171.124.3.
If a TAS case is reopened and the determination changed as a result of this process, Appeals must notify TAS of the change.
The above procedures do not preclude the exchange of non-case specific information that occurs through Advisory Boards or between analysts in Compliance and Appeals.
The best overall use of Service resources and the avoidance of whipsaw situations are the primary considerations in deciding whether interrelated cases are assembled and considered concurrently. Interrelated cases are those in which a determination with respect to an issue in one case has a direct tax effect on another case.
A small related or interrelated case is ordinarily considered on the basis of the record and requests are not made for Compliance to develop further evidence or examine other returns. A fact determination inconsistent with action taken in another small case should not influence the appeals officer. See IRM 126.96.36.199.1. Any further action in a related case is a function of Compliance.
Settlements in related cases should not be made whereby a party - clearly not liable under the facts - agrees to a deficiency of a related taxpayer.
See IRM 8.2.3, Related, Whipsaw and Inactive Cases for additional information on related cases.
A whipsaw situation develops when a settlement in one case can have a contrary tax effect in another case and one of the taxpayers may later, when the period of limitations applicable to the other case has expired or is about to expire, file a claim on a basis inconsistent with the prior closing.
Another whipsaw situation develops when a related party achieves a judicial determination inconsistent with a result already determined by the Service for another related party.
Additional action may be necessary in order to protect the Government's interest in a whipsaw situation.
If a material amount of tax is involved and there are litigating uncertainties, the use of a closing agreement is ordinarily warranted.
In the absence of circumstances stated in (a) above, a collateral agreement is obtained if it is considered useful to express in writing the understanding of the parties. However, a collateral agreement does not have the legal effect of a closing agreement.
For use of closing agreements and collateral agreements in related cases, see IRM 8.13.1, Processing Closing Agreements in Appeals.
See IRM 8.2.3, Related, Whipsaw and Inactive Cases for additional information on whipsaw cases.
In certain instances, resolution of a tax dispute may require incorporating an adjustment into a tax year not currently before Appeals in which a revenue agent's report (RAR) has not been issued. Examples of situations requiring such action include the disallowance or allowance of tax shelter losses and rollover adjustments resulting from a prior year. Once it is determined such an adjustment is appropriate, make an effort to determine whether any further action by Appeals is permissible.
In instances where an RAR was not issued with respect to a year affected by an Appeals settlement, determine if the tax return for the affected year is currently under examination.
If the affected year is not under examination, and the statute of limitations has not expired, notify the Compliance function (which ordinarily has jurisdiction over the related taxpayer) of the proposed action and allow them an opportunity to comment. See IRM 8.2.3, Related, Whipsaw and Inactive Cases.
Where there is no pending case on the related taxpayer (and none planned), prepare, for the benefit of Compliance, a Form 5402, Appeals Transmittal and Case Memo containing the appropriate adjustments for the affected year.
2. Under certain circumstances (when deemed appropriate by the appeals officer and agreed to by an appeals manager) proceed with a settlement of the affected year either by using Form 870 or a restricted Form 870-AD after first updating the taxpayer's affected year to the AIMS database. See IRM 8.20, Appeals Case Processing Manual, for guidance in following the procedures in changing the status of the taxpayer's taxable year. If Form 870–AD is used, the adjustments must be designated by specific restrictions.
If the affected year is currently under the jurisdiction of another IRS office, after contacting that office so that appropriate action can be taken by Appeals, the appeals officer may resolve the issue by having the taxpayer provide the appeals office with an amended return for the affected year based upon the adjustments to that year's tax liability. The appeals officer should immediately forward the amended return to the appropriate Campus and process any payments made by the taxpayer with such return. See IRM 8.7.17, Appeals Remittance Procedures.
In the event the statute of limitations has expired for the affected year prior to the filing of an amended return, the appeals officer may want to consult with area counsel before proceeding with a settlement of the case if offsetting adjustments are to be made involving the years in issue.
Use the general IRS agreement forms except in certain circumstances. Use the special Appeals agreement forms when material mutual concessions are made and in situations when taxpayers request greater finality.
Special agreement forms include:
Income taxes and gift taxes— Form 870-AD.
Estate taxes— Form 890-AD. See IRM 8.7.4, Appeals Estate and Gift Tax Cases.
Excise and employment taxes— Form 2504-AD. See IRM 8.7.10, Excise Tax Cases
and IRA Adjustments and IRM 8.7.16, Appeals Employment Tax Procedures.
Trust Fund Recovery Penalty— Form 2751-AD.
The following are special agreement forms used for TEFRA cases:
Form 870-P (AD), Settlement Agreement For Partnership
Form 870-L (AD), Settlement Agreement For Partnership
Adjustments and Affected items.
Form 870-PT (AD), Settlement Agreement For Partnership
Items and Partnership Level Determinations as to Penalties, Additions to
Tax, and Additional Amounts.
Form 870-LT (AD), Settlement Agreement For Partnership
Items and Partnership Level Determinations as to Penalties, Additions to
Tax, and Additional Amounts, and Agreement for Affected Items.
For information concerning TEFRA agreement forms, see IRM 8.19, Appeals Pass-Through Entity Handbook.
The special agreement forms differ from the Form 870 type in several ways. The following table compares the two categories of forms:
Special Agreement Forms General Agreement Forms Pledges no reopening No pledge Effective upon acceptance by or on behalf of Commissioner Effective when received. Suspension interest under IRC 6601(c) is controlled by date form becomes effective. Suspension interest is controlled by the date received.
Use the Form 870-type agreement (including Form 4549) where a mutual concession settlement is not involved or in a situation where the amount of tax involved in a mutual concession settlement is not material enough to require the finality of the Form 870–AD.
In joint return cases, agreement forms require the signature of both spouses (or authorized representative, if applicable), unless the deficiency is paid in full. Full payment by the taxpayer is considered an agreement to the deficiency (see Rev. Proc. 2005-18, section 4.03 2005-13 IRB 798). Follow normal deficiency procedures for the non-signing spouse when full payment is not received.
Form 4549, Income Tax Examination Changes, can be used in income tax cases closed on an agreed basis. This form combines adjustments to income, computation of tax, and waiver of restrictions on assessment and collection of a deficiency or acceptance of an overassessment. It may be used by technical employees, as defined in IRM 188.8.131.52(3), with registered access to the Report Generation System (RGS) program. Forward the original and one copy of Form 4549 to the taxpayer or taxpayer's representative requesting the original be signed and returned. The copy is for the taxpayer's records. Do not use Form 4549 for the cases listed below:
Cases requiring agreement forms with modifications or reservations
Personal holding company cases
IRC 1311 cases
Cases where effective date of waiver is postponed.
If the taxpayer requests greater finality, explain Service policy with regard to reopenings and make an attempt to persuade the taxpayer a Form 870-type agreement is adequate.
If the taxpayer is not satisfied, explain the provisions of Form 870–AD and attempt to persuade the taxpayer to use it. This is an exception to the general use of these forms, so include appropriate explanation in the Appeals Case Memorandum.
If the taxpayer still insists on greater finality and requests a closing agreement, it can be used if the Government sustains no disadvantage. See IRM 8.13.1, Processing Closing Agreements in Appeals.
Certain circumstances require modifications of agreement forms. The following information details the procedures required when modifying agreement forms in various situations, including -
settlements with reservations;
carrybacks provided by law;
overpayment applied against deficiencies;
prepayment credit adjustments;
joint committee and proposed joint committee cases.
Occasionally agreement is reached on some issues but not all. Under these circumstances, use a partial agreement. If there are material mutual concessions involved, a Form 870–AD agreement is required; however, make modifications limiting the pledges against reopening to the settled issues. Make a notation on the face of the form "For additional provisions see back of this form," and place detailed descriptions of the agreed matters on the reverse side.
If a Form 870–type agreement is used, identification of the settled issues is not required but may be added for clarity.
When overassessments are involved, obtain an agreement for the settled issues but for those issues not settled, advise the taxpayer to consider filing a claim in order to protect the balance of the overassessment against the expiration of the period of limitations. See IRM 8.7.7 for information about time limits for allowing a refund or credit of an overpayment.
The term "settlement - with reservations" applies to a non-docketed case where settlement is reached but the taxpayer or government wishes to reserve one or more issues and no weight is given to the reserved issue in the settlement.
If Form 870-type agreement is used, no modification is necessary. If a Form 870–AD is used the agreement must reflect the complete and exact understanding of the parties.
Add the notation "For additional provisions see back of this form" on the Form 870–AD at the end of the paragraph which begins with "If this offer is accepted * * *" .
For example, "The taxpayer reserves the right to timely file a claim for refund or credit or prosecute a timely filed claim solely on the grounds" might be typed on the reverse side (then a detailed explanation of the reservation followed by) "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."
Following are other situations "where settlements - with reservations" apply:
Corporations with Foreign Subsidiaries: If it is possible for the taxpayer to subsequently receive a refund of foreign taxes paid, the Government reserves the right on Form 870–AD to recompute the taxpayer's deemed paid foreign tax credit and assess a deficiency as a result.
Potential Competent Authority Issues: Whether or not the taxpayer expresses the intent (or lack of intent) to pursue competent authority consideration of the resulting double taxation, the Government reserves the right on Form 870–AD to adjust (increase or decrease) the potential competent authority issue and related foreign tax credits in the event competent authority consideration is sought by the taxpayer and a mutual agreement is reached with the treaty partner country which is acceptable to the taxpayer. Following the instructions in (3), the notation on the back of the Form 870–AD would read, "In the event that the taxpayer seeks competent authority consideration under the mutual agreement provision of a United States income tax treaty with respect to (describe potential competent authority issues) and the competent authorities reach an agreement which is accepted by the taxpayer, the Commissioner reserves the right to increase or decrease the taxable income and related foreign tax credits of the taxpayer and the earnings and profits of the taxpayer and (insert name of related entity) in accordance with the agreement reached by the competent authorities," or
Taxpayers with a Distributive Share of Partnership Income or Loss on Their Returns: The Government reserves the right on Form 870 or Form 870–AD to adjust the taxpayer's share of partnership income or loss and recompute the partner's tax liability when any related partnership returns are examined or have not yet been examined. For taxpayers having an interest in partnerships and S corporations (with taxable years beginning before January 1, 1997) that come under the provisions of subchapters C and D of Chapter 63 concerning the tax treatment of partnership and subchapter S items determined at the partnership and corporate level, see IRM 184.108.40.206 and IRM Exhibit 8.19.4-5 .
Where a carryback from a specific year has been taken into account, modify Form 870–AD to reflect any carrybacks given effect in the settlement.
In related cases the taxpayers may ask to have an overassessment offset a deficiency. To do this add a paragraph substantially as follows to the agreement form:
"The undersigned taxpayer also consents and agrees to the application of that part of the overassessment that represents an overpayment, and interest allowable thereon, as a credit to the deficiency, in tax of $ ____________ , and interest thereon, due from (related taxpayer) for the year ____________ ; provided the amount of any overpayment and interest allowable thereon that is in excess of the deficiency and interest is otherwise credited or refunded in accordance with IRC 6402 or corresponding provisions of prior laws."
Also make appropriate notation in "Remarks" section of Form 5402, Appeals Transmittal and Case Memo, and Form 5403, Appeals Closing Record.
If there is a prepayment credit adjustment required in an agreed case together with an overassessment or statutory deficiency, the total or the difference is shown as a deficiency or overassessment.
If considered necessary for an understanding of the agreement, add an explanation similar to the following to the agreement form:
Prepayment credit overstated (understated) $ _______ Statutory deficiency $ _______ Deficiency (overassessment) $ _______
When provisions of printed agreements are modified, Change the printed footnotes to ensure consistency and clarity.
Instructions for modification of agreements in joint committee cases (other than potential Joint Committee Cases described below) are contained in IRM 8.7.9, Joint Committee (JC) Cases.
Form 866 provides the finality of a closing agreement under IRC 7121 as to tax liability, and Form 906 provides finality with regard to specific matters. Modifications are made to suit an intended purpose. IRM 8.13, Closing Agreements.
A closing agreement determining tax liability can cause the taxpayer to lose reopening rights not contemplated in a settlement. To avoid this possibility, use a closing agreement as to specific matters.
In rare cases where there is doubt the taxpayer or taxpayer's representative will abide by the finality provisions of Form 870–AD type of agreement, consider using a closing agreement.
Other than in compromise cases under IRC 7122, collateral agreements do not establish statutory finality for the matters covered. They are used only when considered useful to express the understanding of the parties with respect to effect of a settlement. A closing agreement is used if statutory finality is desired. See IRM 220.127.116.11.3, Collateral Agreements Distinguished.
Some informal agreements are used as determinations of liability.
Form 2198, Determination of Liability for Personal Holding Company Tax, is used by the Service as an informal agreement as to liability for personal holding company tax under IRC 547(c)(3). For authority to enter into such agreements, see Delegation Order 4-1 (formerly DO-8, Rev. 11) in IRM 1.2.43. This agreement form is not accepted on behalf of the Service, unless the taxpayer has executed an appropriate agreement form, such as Form 870 or Form 870–AD, covering the proposed adjustments both to the income tax and to the personal holding company tax for the years involved. If Form 870 is used, it contains conditional paragraphs as shown in IRM Part 4. It will ordinarily be unnecessary to insert conditional paragraphs on Form 870–AD since the acceptance of Form 870–AD and Form 2198 are concurrent. See also Rev. Proc. 63-1, 1963–1 C.B. 471. For further information relative to the handling and disposition of Form 2198, see IRM Part 4.
For use of closing agreements as determinations under IRC 547(c)(2), see IRM 8.13, Closing Agreements and Rev. Proc. 68-16, 1968–1 C.B. 770.
IRC 1313(a)(4) provides that a determination under IRC 1311 can be in the form of an agreement between the Secretary or his delegate and any person, relating to the liability of such person (or the person for whom he or she acts) in respect of a tax under Subtitle A of the 1986 Code for any taxable period. Form 2259, Agreement as Determination Pursuant to IRC 1313(a)(4) has been prescribed for use by Appeals and Compliance employees in executing informal agreements to effect determinations under IRC 1311 and related regulations. The provisions of IRC 1311 through 1314 and applicable regulations are carefully complied with in the preparation of such agreements. For authority to enter into such agreements, see Delegation Order 4-5 (formerly DO 35, Rev. 15) in IRM 18.104.22.168.
Inasmuch as Form 2259 does not contain sufficient space for the statements required by Treasury Regulation section 1.313(a)-4(b)(2) and (3), such information is set forth on a separate sheet, or sheets, of paper which are securely fastened to the form. The attachment has a heading substantially similar to the following: "This statement is attached to, and made a part of, Form 2259 in the case of ____________ ." The original and/or executed copies of Form 2259 are associated with the appropriate tax return of each taxpayer involved. A copy of executed Form 2259 is also furnished to each taxpayer. Note the reverse side of Form 2259 for additional instructions.
For use of closing agreements as determinations under IRC 1313(a)(2), see IRM 8.13, Closing Agreements and section 4.02 of Rev. Proc. 68-16, 1968–1 C.B. 770.
Occasionally settlements of non-docketed cases are made which are conditioned upon approval of a closing agreement; a case pending in another Appeals Office or before the Department of Justice; or the disposition of some other matter not under Appeals jurisdiction. All these cases, of course, require special handling, and generally the Form 5402 is not signed until the settlement has been approved in all respects. In some instances, however, as in the case of a closing agreement referred to the Headquarters for final action, the Form 5402 may have been approved conditionally, and in a few instances the transmittal memorandum may possibly have been signed in anticipation of final action by another Bureau or Government agency, or other Appeals Office.
If Form 5402 is approved conditionally, and Form 870–AD type agreement is secured, acceptance of the agreement form may be deferred until the conditions have been met. It may be preferable in some cases to obtain an agreement form modified to become effective upon termination of the conditions. However, a modified agreement made effective upon acceptance of a closing agreement determining tax liability would be ineffective either as a waiver of restrictions on assessment or for the purpose of suspension of interest. See IRM 8.13, Closing Agreements.
This section provides guidance to Appeals employees regarding the appropriate use of electronic signatures on certain Appeals letters and documents. See IRM 22.214.171.124 (4) for applicable documents. Appeals has adopted the following electronic procedures that comply with the Government Paperwork Elimination Act (GPEA):
A person (i.e., the signer) must use an acceptable electronic form of signature;
The electronic form of signature must be executed or adopted by a person with the intent to sign the electronic record (e.g. to indicate a person’s approval of the information contained in the electronic record);
The electronic form of signature must be attached to or associated with the electronic record being signed;
There must be a means to identify and authenticate a particular person as the signer; and
There must be a means to preserve the integrity of the signed record.
Note: See Use of Electronic Signatures in Federal Organization Transactions, dated January 25, 2013, prepared by General Services Administration (GSA).
As clarification regarding an acceptable and legally sufficient electronic handwritten signature, Appeals will use a method that:
Identifies and authenticates a particular person as the source of the electronic message;
Indicates such person’s approval of the information contained in the electronic message; and
Displays the signer’s signature pictorially either as a scanned image of the signer’s written signature or as the signer’s signature captured by use of a signature pad or written stylus device.
For assistance in creating an electronic handwritten signature, see step-by-step digital signature instructions on Appeals Guidance, Policy, Research web page under "Research Tools" .
The appropriate Appeals official may use an electronic signature on the following documents:
Document Description Form 866 Agreement as to Final Determination of Tax Liability Form 870-AD Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment Form 870-IS Waiver of Collection Restrictions in Innocent Spouse Cases Form 890-AD Estate Tax Offer of Waiver on Assessment and Collection of Deficiency in Tax and of Acceptance of Overassessment Form 906 Closing Agreement on Final Determination Covering Specific Matters Form 2504-AD Excise or Employment Tax Offer or Agreement to Assessment and Collection of Additional Tax and Offer of Acceptance of Overassessment Form 2751-AD Trust Fund Recovery Penalty - Offer of Agreement to Assessment and Collection Letter 894 Notice of Deficiency (See IRM 126.96.36.199.1) Letter 901 Statutory Notice Letter (See IRM 188.8.131.52.1) Letter 3193 Notice of Determination Concerning Collection Actions Under Sections 6320 and 6330 (See IRM 184.108.40.206.2)
In addition to the documents identified above, electronic handwritten signatures may be used on closing letters to taxpayers and internal use documents. For example, Form 5402 (Appeals Transmittal and Case Memo) and Letter 913 (Closing Letter – Agreed Case) would be appropriate for electronic signature use.
Original signatures are required on the documents listed below:
Document Description Form 872 series Consent to Extend the Tax to Assess Tax Form SS-10 Consent to Extend The Time to Assess Employment Taxes Form 656 Offer in Compromise