A current US Tax Court docket Memorandum Opinion held {that a} settlement settlement embodied in Inner Income Service (IRS) Kind 870-AD doesn’t preclude the IRS from reopening an audit and issuing a discover of deficiency.
In Howe v. Commissioner, T.C. Memo 2020-78, the Tax Court docket held that equitable estoppel didn’t bind the Commissioner to an settlement in Kind 870-AD. Solely settlements that adjust to Inner Income Code (IRC) sections 7121 and 7122 are binding on each the taxpayer and authorities, and an IRS Kind 870-AD doesn’t adjust to these provisions. Additional, the Court docket held that equitable estoppel didn’t bar the IRS from asserting a bigger deficiency in opposition to the taxpayer as a result of, even when true, the alleged failures to comply with inner IRS procedures wouldn’t rise to the extent of affirmative misconduct.
An IRS income agent initially started an audit of the 2008 tax return for the taxpayer, who was CEO and majority shareholder of a healthcare firm, in 2011. On the conclusion of the audit, the income agent issued a Discover of Proposed Adjustment (NOPA) and IRS Kind 886-A. The taxpayer responded to the NOPA by submitting a protest letter on the IRS Appeals Workplace. In settlement of the difficulty throughout the IRS Appeals Workplace overview, the taxpayer and the IRS appeals officer (on behalf of the IRS) signed a Kind 870-AD that diminished the asserted tax deficiency and eradicated the IRC part 6662 accuracy-related penalty. The IRS Appeals Officer filed an IRS Appeals Case Memorandum (ACM) summarizing the information and authorized arguments.
In response to the ACM, the income agent who performed the audit, in session together with her supervisor and native IRS counsel, internally filed a Dissent for Appeals Resolution. The Dissent for Appeals Resolution sought to reopen the case in opposition to the taxpayer on the grounds that the taxpayer made materials factual misrepresentations throughout the IRS Appeals course of. The IRS Appeals Director authorised reopening the case, and the IRS issued a Discover of Deficiency.
The taxpayer sought overview within the Tax Court docket on the grounds that the IRS improperly reopened the case and that the settlement represented in Kind 870-AD equitably estopped the Commissioner from issuing the Discover of Deficiency. The Tax Court docket rejected the taxpayer’s argument. Following its holding in Greenberg’s Specific, Inc. v. Commissioner, 62 T.C. 324, 327 (1974), the Tax Court docket will solely look behind a Discover of Deficiency when there’s “substantial proof of unconstitutional conduct on the Commissioner’s half and the integrity of our judicial course of could be impugned if we had been to let the Commissioner profit from such conduct.” (Howe, at *12.) The Tax Court docket discovered there was no substantial proof of unconstitutional conduct by the IRS.
Additional, there’s a heightened customary for making use of equitable estoppel in opposition to the IRS. Along with the normal detrimental reliance parts, asserting equitable estoppel claims in opposition to the federal government requires a displaying that: “(1) the federal government engaged in affirmative misconduct going past mere negligence; (2) the federal government’s wrongful acts will trigger a critical injustice; and (3) the general public’s curiosity won’t endure undue harm by imposition of estoppel.” (Howe, at *15 (quoting Baccei v. United States, 632 F.3d 1140, 1147 (ninth Cir. 2011)).) The Tax Court docket reasoned that even when the taxpayer made no materials misrepresentations and the IRS didn’t adjust to its inner procedures, the IRS didn’t interact in ongoing energetic misrepresentations, a sample of false guarantees or affirmative misconduct. Thus, the heightened customary for asserting equitable estoppel in opposition to the federal government was not glad.
Furthermore, the Tax Court docket raised doubts about whether or not the taxpayer would fulfill the normal detrimental reliance take a look at. Particularly, the Tax Court docket recommended that the taxpayer ought to have identified that the IRS was not certain by IRS Kind 870-AD. Additional, there was no detrimental reliance as a result of agreeing to and making funds on a deficiency should not ample to represent detrimental reliance underneath the prevailing case legislation.
Observe Level: Howe is an efficient reminder that whenever you settle a problem with the IRS, if you wish to be certain that it’s binding, you need to adjust to the procedures in IRC sections 7121 or 7122. Every other paperwork that that IRS makes use of to “settle” a tax concern should not finally binding. The information of Howe, nonetheless, are distinctive, and in our expertise usually whenever you signal an IRS Kind 870-AD with the IRS the settlement is successfully last.
