Closing a case: the form used can expand or limit taxpayers' options.

• Author: Rood, Joan L.

On reaching an agreement in a tax audit, practitioners face one additional strategy consideration--how to memorialize the agreement. The IRS has three basic types of forms for closing an "agreed" case. All three types have a common element: They permit the Service to assess an income tax deficiency (or abate an overassessment in the case of a refund) without issuing a statutory notice of deficiency. Each type of form, however, has different consequences that must be considered.

Noncommittal Agreements

The first type of form permits the IRS to assess tax, but also allows the taxpayer to file a refund claim after paying the assessed tax. In the income tax context, Form 4549, Income Tax Examination Changes (used by Examination), and Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment (used by both Examination and Appeals), are generally employed to close "agreed" cases. By signing either form in Examination, the taxpayer loses its right to go to Appeals or to petition the Tax Court.

Form 870 may be used in Appeals if the taxpayer wants to litigate its case in Federal district court or the Court of Federal Claims. Because these are refund forums, the Service must first assess the disputed tax, and the taxpayer must pay the tax and file a refund claim before bringing suit. Form 870 is used in this context simply to expedite the case; otherwise, the IRS would have to issue a deficiency notice and wait 90 days before assessing the tax.

Committal Agreements

The second type of form (Form 870-AD, Offer to Waive Restrictions on Assessments and Collection of Tax Deficiency and to Accept Overassessment, in the income tax context) permits the Service to assess the tax, but generally prohibits refund claims for issues agreed upon by the parties. These forms are used only by Appeals (not by Examination), and are typically used for settlements in which both the IRS and the taxpayer are conceding something in order to settle the case (i.e., mutual concession settlements).

Courts have frequently applied the doctrine of equitable estoppel to prohibit either the Service or the taxpayer from reneging on an agreement embodied in a Form 870-AD (see Whitney, 826 F2d 896 (9th Cir. 1987); General Split Corp., 500 F2d 998 (7th Cir. 1974). However, estoppel typically will not apply if a refund claim issue was not addressed in Form 870-AD, not mentioned during audit and not known by either party at the time...