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Settlement Agreement Forms For Tax Tax Appeals Cases

When you finally come to an agreement with the Tax Appeals Officer to settle your case, the settlement should be recorded on a particular type of written form. In general, the IRS uses one of four forms for cases settled in Tax Appeals:

  1. Form 870, the waiver of restrictions on assessment;

  2. Form 870-AD, a special-purpose waiver form used by the Tax Appeals Office;

  3. a closing agreement; or

  4. a collateral agreement.

Each type of form is has different applications and may be more appropriate for certain types of cases. When a settlement is reached in a docketed case, it will be recorded on a stipulated decision instead of one of the IRS forms. The stipulated decision will be signed and filed by the presiding judge, at which point it is considered as a final judgment of the tax court.

Option 1: Form 870 and Form 870-AD

Form 870 and Form 870-AD are used in the settlement of non-docketed cases in Tax Appeals. The basic Form 870 is typically used where a mutual concession settlement is not involved, or if there is a mutual concession settlement, the amount of the settlement is not significant enough to use a Form 870-AD. The Form 870-AD is used in mutual concession settlements. The forms are related, but there are some important differences between them. A typical Form 870 does not contain a provision against re-opening the case in the future, but the AD version does contain such a pledge. Thus, if an AD form is used, the taxpayer is protected against additional action by the IRS; the IRS cannot later attempt to make an additional assessment against the taxpayer. At the same time, the taxpayer also cannot later sue for an additional refund when an 870-AD form is used. In contrast, when a regular Form 870 is used, the IRS can make additional assessment against the taxpayer, and the taxpayer is allowed to later sue for a refund.

The two types of 870 forms also differ in the manner in which they become effective. A regular Form 870 become effective as a waiver of restrictions on assessment as soon as it is received by the IRS. In contrast, the Form 870-AD become effective only once it has been accepted by the Commissioner or on behalf of the Commissioner. Finally, the date that suspension of interest provided for in IRC § 6601(c) is determined varies depending on the type of 870 form used. When a Form 870-AD is used, the suspension of interest is controlled by the date that the AD agreement becomes effective, whereas with a Form 870, the date the IRS receives the agreement is controlling.

Finality of Form 870 and Form 870-AD

When signing a Form 870, the taxpayer agrees to the following statement: “Your consent will not prevent you from filing a claim for refund (after you have paid the tax) if you later believe you are so entitled.” In this way, the Form 870 settlement agreement acts as a waiver on the restrictions on assessment, and allows the taxpayer to later file a claim for refund of the paid deficiency after the statutory period of assessment has run. In addition to allowing the taxpayer to file a claim for refund, the form contains a cautionary statement that the execution of the agreement also does not prevent the IRS “from later determining, if necessary, that [the taxpayer] owe[s] additional tax.” By requesting a Form 870, the taxpayer is also putting the Tax Appeals Office on notice that finality is not contemplated.

Generally, the Tax Appeals Office prefers to use Form 870-AD because it provides for finality in the settlement. Form 870-AD specifically states that “[n]o claim for refund or credit will be filed or prosecuted” for the years stated on the form. The IRS promises that if you sign a Form 870-AD, it will not re-open the case unless there is “fraud, malfeasance, concealment or misrepresentation of a material fact,” “an important mistake in mathematical calculation,” “a deficiency or overassessment resulting from adjustments made under Subchapters C and D of Chapter 63 concerning the tax treatment of partnership and subchapter S items determined at the partnership and corporate level,” or “an excessive tentative allowance of a [net operating loss] carryback provided by law.” In those circumstances, re-opening a case would require high-level approval.

Despite the language of Form 870-AD, there has been some disagreement as to the taxpayer’s ability to request a refund after the expiration of the period for assessment. There is a question as to whether the Form 870-AD still prevents the taxpayer from seeking a refund. Sometimes, a taxpayer has a legitimate reason for seeking the refund; for example when there is a retroactive change in the statute or an intervening court decision favorable to the taxpayer. The disagreements among courts on this question has led to two distinct groups of cases. Some courts have held that signing a Form 870-AD does not prevent the taxpayer from later filing a refund claim because IRC § 7121 should be the exclusive method for the IRS to settle a tax case. Other courts have held that the doctrine of equitable estoppel prevents a taxpayer who signs a Form 870-AD from re-opening the case.

How a Tax Attorney Can Help with Tax Appeals

Understanding the different settlement forms used by the Tax Appeals Office is important to achieving a favorable outcome to your case. If you think that your tax situation might make you a candidate for an Tax Appeals process, you should consult with a knowledgeable tax attorney.

The Tax Lawyer - William D Hartsock Tax Attorney Inc. has been successfully helping clients with Tax Appeals since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.

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The Tax Lawyer - William D. Hartsock, Esq. – San Diego Tax Attorney

Author: William D. Hartsock, Esq

A "Certified Tax Law Specialist" for over 37 years, Mr. Hartsock is one of the most trusted and respected tax attorneys in Southern California. Call today to discuss the facts of your case and learn about your options. Mr. Hartsock offers free consultations and all conversations are protected under attorney-client privilege; meaning that no information shared with a tax attorney will be shared with the IRS or California Franchise Tax Board.