Sometimes, a taxpayer’s case may involve issues that will impact the taxpayer for years to come. Thus, an agreement with the Tax Appeals Office can affect the taxpayer’s tax return for the current year, future years, as well as related issues on those tax returns. For this reason, it may be beneficial to both parties if consistent action is taken on both related issues.
When the issue is something that may impact successive tax years, such as the basis in property, it may be advantageous to the taxpayer to either have the settlement followed or limited in successive years, depending on the impact on the taxpayer. At the same time, with respect to the same issue, the IRS may benefit if the issue is completely resolved without any additional administrative action such as tax court litigation.
Another concern for the IRS is settling one taxpayer’s case, while another taxpayer files another action for a refund on an issue that is related to the first taxpayer’s case. In that situation, the Tax Appeals Office may determine that the cases are related and may choose to hear them together in order to ensure consistent treatment.
What is a Related Case for the Purposes of IRS Tax Appeals?
Under the Internal Revenue Manual, two cases are considered to be “related cases” when they involve:
- a common or similar issue;
- different years of the same taxpayer and are received at different times; or
- the same taxpayer but different kinds taxes (1).
These related cases are referred to as “interrelated cases” or “other related cases.” An interrelated case is one in which the determination made in one case will have a direct impact on the tax outcome of another case. An example of an interrelated case under this definition would be the determination of the distribution amount of net income in a partnership or estate; or the value of goodwill in the sale of a going business.
Another very common type of interrelated case is a trust fund recovery penalty case in which assessments are made or proposed against a number of different individuals.
An “other related case” is distinguished from an interrelated case in that consistent action is desirable, but the outcome in one case does not necessarily have a direct effect on the other case.
What Taxpayer Options Exist for Dealing with Related Cases in Tax Appeals?
As a taxpayer, if you are involved in an tax appeals situation and you want your settlement to be applied to the examination of future years, you have several possibilities for how to proceed:
- You can request for the Tax Appeals Office to assume jurisdiction of any later years for which returns have been filed;
- If there was an overassessment in the taxpayer’s case, that amount can be applied to cover a deficiency in a related action. In order to elect this option, you must draft specific language into the settlement agreement. If the overpayment occurs in later years, then it may be possible to request a refund and then ask the Tax Appeals Office to consider the cases as related;
- The taxpayer can request a statement reflecting the settlement, which can then be shown to revenue agents in future years. In general, the IRS does not automatically consider cases to be related under Tax Appeals, even if they concern common or similar issues. Certain issues, such as reasonable compensation, determination of capital gain versus ordinary gain in the sale of assets, and hobby losses are typically resolved each year based on the facts and circumstances in that tax year. Although the IRS takes the official stance that settlement on these types of issues does not impact future tax years, the taxpayer might be able to argue for special treatment by receiving a statement reflecting the settlement. If the statement explains the basis for the computation and settlement amount, then the statement may be shown to a revenue agent, who may decide to treat similar issues according to the settlement agreement;
- Taxpayers may sometimes request a closing or collateral agreement. This strategy is most often successful in cases involving the basis in property, categorization of income, or the amount of income from installment collections. If the case involves mutual concessions and the impact on tax may be significant, then there is a greater advantage to the taxpayer to request a closing agreement. A collateral agreement is a document that expresses in writing the understanding of the parties concerning how the settlement is to impact future tax years.
How a Tax Attorney Can Help with Tax Appeals
Understanding how the IRS views new issues is important for practitioners and taxpayers pursuing Tax Appeals. If you think that your tax situation might make you a candidate for an Tax Appeals process, you should consult with a tax attorney who is knowledgeable and experienced in appeals.
San Diego Tax Lawyer - William D Hartsock, Esq. 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.
Tax Law References
- I.R.M. 220.127.116.11.