A closing agreement under IRC 7121 is an agreement authorized under that statute. While exhibiting some of the attributes of a contract, it is not strictly subject to the law of contracts. For example, legal consideration is not required. Nevertheless, court decisions have held that closing agreements are interpreted using ordinary contract law principles. The greatest disparity between the ordinary contract and a closing agreement is the finality accorded the latter by the terms of the statute. See IRM 8.13.1.6.

Treas. Reg. 301.7121-1(a) provides that: "A closing agreement may be entered into in any case in which there appears to be an advantage in having the case permanently and conclusively closed, or if good and sufficient reasons are shown by the taxpayer for desiring a closing agreement and it is determined by the Commissioner that the United States will sustain no disadvantage through consummation of such an agreement. " Subject to the guidelines provided by the regulations, whether or not an agreement will be entered into is a matter within the Commissioner’s discretion and therefore, within the discretion of those to whom the Commissioner has delegated the authority to enter into and approve such agreements. In practice, if the taxpayer shows good reasons for requesting the agreement and furnishes necessary facts and documentation, and the government will sustain no disadvantage, a closing agreement will ordinarily be entered into so long as the content of the agreement can be agreed upon.

IRC 7121 states that such an agreement may be entered into with "any person," rather than " any taxpayer." There need be no tax liability with respect to the period to which the closing agreement relates. The words "in respect to any internal revenue tax" in the Code section requires some connection between the determination agreed upon and some tax liability, past or future, or, in appropriate cases, the lack of tax liability. The term " taxpayer" in this handbook will ordinarily have the same meaning as the word "person" in the Code section.

The term "tax liability" in the Code section requires that any adjustment to the taxpayer’s liability be at least arguably consistent with the federal taxing statutes. Any closing agreement that results in an additional assessment of taxes but is based upon adjustments clearly contrary to the taxing statutes could be challenged as not being "in respect of any internal revenue tax." In Utah Power & Light Co. v. United States, 243 U.S. 389, 409 (1917), the United States Supreme Court stated, "[T]he United States is neither bound nor estopped by acts of its officers or agents in entering into an arrangement or agreement to do or cause to be done what the law does not sanction or permit." However, the statutory language does not require that the matter be clearly consistent with the applicable Code provision, since closing agreements are intended to dispose of debatable matters. Once a closing agreement is entered into determining a debatable matter, later inconsistent interpretative clarification of the applicable statute by the courts will not affect the matter determined.

Agreements with respect to taxable periods ended prior to the date of the agreement determine either total tax liability of the taxpayer with respect to one or more types of tax for such periods or one or more separate items affecting such liability or both. Agreements may be entered into with respect to specific matters related to such periods and affecting future periods. Agreements having the foregoing characteristics are the types that will be entered into under paragraphs 2 through 7 of Delegation Order 97, Closing Agreements Concerning Internal Revenue Tax Liability, as revised. Amplification of jurisdictional instructions are covered below. See IRM 8.13.1.1.4. Closing agreements may be entered into by certain designated Service officials with respect to prospective transactions or completed transactions affecting returns to be filed.

There may be more than one closing agreement relating to the tax liability for a single period, although no such closing agreement may modify any matter previously determined by closing agreement, except as provided by statute. Such closing agreements may provide determinations under IRC 1313 or may be the vehicle for allowing a deficiency dividend deduction under IRC 547. See, however, IRC 547(c)(3), IRC 1313(a)(4) and related regulations for information as to other types of determinations for those cases. See IRM 8.13.1.5.1. Also see IRM 8.7.1, Personal Holding Company - Deficiency Dividend.

A closing agreement with respect to a taxable period ending subsequent to the date of the agreement is subject to any change in or modification of the law enacted subsequent to the date of the agreement and applicable to such taxable period, and each such closing agreement determining specific matters should state this. A subsequent "change in the law" does not refer to a subsequent interpretation and clarification of the law by a court decision. Information with respect to the effect of later legislation is discussed later in this section. See IRM 8.13.1.7.3.

A closing agreement may be entered into at any time before the tax period comes within the jurisdiction of an appropriate court and may thereafter be entered into in appropriate circumstances when authorized by the court (e.g., certain bankruptcy situations). A closing agreement must not determine the amount of tax liability (or deficiency or overpayment) for any taxable period over which the United States Tax Court has jurisdiction since the liability for such docketed years is determined by the Tax Court.

Closing agreements may arise from matters originating in the tax year in litigation. In these situations, these closing agreements are limited to "related specific items" affecting other non-docketed taxable periods. This type of closing agreement makes a determination for a year before the court, and that determination affects other years. Assuming it is proper to enter into this type of closing agreement, it is important to use a stipulation of settled issues along with a closing agreement that includes a condition precedent. Generally, the condition precedent will provide that the determinations in the closing agreement do not become effective until the corresponding stipulation of settled issues is accepted by the court. Basically, an agreement for a year before the court is a stipulation of settled issues, but a court is not required to accept a stipulation of settled issues of the parties. Consequently, a closing agreement should not purport to determine a matter if the resolution of the matter cannot be final until accepted by a court. Generally, it is better to execute the closing agreement and the corresponding stipulation at the same time. Otherwise, the government could be at risk that a taxpayer could rescind the offer to enter into a closing agreement before it is signed by the Service.

Closing agreements may be reflected on Form 866, Agreement As to Final Determination of tax Liability; Form 906, Closing Agreement on Final Determination Covering Specific Matters ; or the agreement may be drafted electronically utilizing the pattern language of Form 866 or Form 906. In addition, a combined agreement may be drafted that determines both tax liability and specific matters. See IRM 8.13.1.2.

Treas. Reg. 301.7121-1(d)(2) provides that a deficiency or overpayment determined pursuant to a closing agreement shall be assessed and collected or credited and refunded in accordance with applicable provisions of the law. A discussion of interest and waivers is covered later in this section. See IRM 8.13.1.2.18. See IRM 8.13.1.4.3.

Tax liability closing agreements may be entered into when it is advantageous to have the matter permanently and conclusively closed, or when a taxpayer can show that there are good reasons for an agreement and that making the agreement will not prejudice the interests of the government. The following represent examples of acceptable reasons for entering into a determination of tax liability by closing agreement:

At the request of the taxpayer or the government, a determination of one or more specific matters may be accomplished by entering into a closing agreement for good reasons. However, a closing agreement should not be entered into where there is a disadvantage to the government. A few examples of circumstances that may merit entering into such closing agreements follow:

Collateral agreements are utilized in compromise cases, estate tax cases and related income tax valuations, gift tax cases, and in other Appeals cases under appropriate circumstances. This subsection applies to all of the above categories of collateral agreements except those involving offers in compromise. Collateral agreements refer to statements secured from, and signed by or for, taxpayers or related parties to clarify, or obtain a commitment relative to, some related matter other than the amount of assessment or overassessment involved in the case disposition.

Collateral agreements have often been used to commit related taxpayers where there is privity of interest (mutual or successive relationship to the same rights of property) and legal consideration involved. For example, collateral agreements have been frequently obtained from trustees or beneficiaries who have received or will receive assets from an estate. The signing of a collateral agreement may commit a trustee or beneficiary to use the same valuation for income tax purposes as was used for estate tax purposes.

One important distinction between collateral agreements and closing agreements is that the former do not purport to bind the Service. They are one-sided commitments. The Service does not enter into and sign these agreements.

The most significant distinction between collateral agreements and closing agreements is that the former are administrative devices not expressly provided for by the Code while the latter are authorized by IRC 7121. Courts have pointed out that the Code provides two methods of disposing of tax matters by agreement with finality and that those methods are by offer in compromise under IRC 7122 and by closing agreement under IRC 7121. Therefore, if large amounts are involved and the government is potentially subject to a substantial loss of revenue if a taxpayer or related party should fail to comply with a contemplated disposition, a closing agreement should be secured instead of a collateral agreement.

IRC 7121 empowers the Secretary of the Treasury to enter into closing agreements. Treasury Order No. 150-07, dated November 18, 1953, transferred all of the Secretary’s closing agreement functions to the Commissioner of Internal Revenue.

The statement of Procedural Rules at Treas. Reg. 601.202(b) provides "A request for a closing agreement which determines tax liability may be submitted and entered into at any time before the determination of such liability becomes a matter within the province of a court of competent jurisdiction and may thereafter be entered into in appropriate circumstances when authorized by the court (e.g. in certain bankruptcy situations.)"

If a closing agreement originating in a case under the jurisdiction of a Compliance field or Appeals office affects a year for which tax liability is being litigated or to matters related to those being so litigated (e.g., a recurring issue), an expression of acquiescence (or a lack of objection) to the securing of the closing agreement must be obtained from Counsel before the agreement is executed. See IRM 8.13.1.3.2.

IRC 7121 states that the " Secretary" may enter into closing agreements. Treas. Reg. 301.7121-1 defines the Commissioner’s authority relating to closing agreements. Delegation Order 97, Closing Agreements Concerning Internal Revenue Tax Liability, contains the Commissioner’s primary re-delegation of that authority to various offices within the IRS and the Office of Chief Counsel.

The following list of authorities is not intended to be an exclusive listing nor to limit the use of closing agreements in other appropriate situations.

The statement of Procedural Rules, at Treas. Reg. 601.202 contains published procedural instructions with respect to closing agreements.

There have been court cases dealing with some of the aspects of closing agreements. A discussion of some of these aspects is covered later in this section. See IRM 8.13.1.6. See IRM 8.13.1.7. Technical advice, technical information, or technical assistance may be requested to help resolve these problems. See IRM 8.13.1.4.7. See IRM 8.13.1.5.2.4.

Rev. Rul. 56-322, 1956-2 C.B. 963, discusses the Service position that "A valid closing agreement establishing final determination of Federal tax liability for a prior taxable period is not affected by subsequent legislation retroactively applicable to the taxable period to which such closing agreement relates where such legislation is silent as to its effect on closing agreements."

Rev. Rul. 57-305, 1957-2 C.B. 856, states that once a closing agreement (determining tax liability) has been executed by both the taxpayer and the Commissioner, the restrictions upon assessment which IRC 6213(a) imposes are no longer applicable and any waiver filed after that date is meaningless.

Rev. Rul. 60-287, 1960-2 C.B. 188, states: "A determination of a taxpayer’s liability for personal holding company tax made in an informal agreement entered into between the taxpayer and the Commissioner of Internal Revenue, as described in section 547(c)(3) of the Internal Revenue Code of 1954, does not have the effect of a final closing agreement under section 7121 of the Code."

Rev. Rul. 72-486, 1972-2 C.B. 644, states that a closing agreement between a corporation and the IRS may not be set aside because of fraud committed by an officer against the corporation.

Rev. Rul. 72-487, 1972-2 C.B. 645, states that the right to examine the taxpayer’s books is not affected by the execution and approval of a closing agreement and that an investigation may be made at any time to determine whether there is any fraud, malfeasance, or misrepresentation of material fact in connection with the execution of the agreement.

Rev. Rul. 73-459, 1973-2 C.B. 415, holds that a Revenue Agent’s unintentional mistake in failing to include certain deductions in arriving at the result upon which a closing agreement was based does not constitute a misrepresentation of a material fact for which the agreement may be set aside.

Rev. Rul. 73-514, 1973-2 C.B. 416, holds that the taxpayer’s filing of a claim for refund on the basis that an adjustment to the taxpayer’s return was erroneous, and the sending of a letter to the Commissioner to the same effect, subsequent to the payment of a deficiency and the execution and submission of a closing agreement based on such adjustment but prior to the Commissioner’s approval of the agreement, constitute implied revocations of the offer to enter into the closing agreement.

Rev. Proc. 65-17, 1965-1 C.B. 833, and Amendment 1, 1966-2 C.B. 1211, state Service position and procedure governing the adjustment of accounts and the transfer of funds as the result of allocations of income or deductions made pursuant to IRC 482. The procedure provides relief, conditioned upon the execution of a closing agreement for taxpayers who wish to receive payment from the related entity from, or to whom the Service made the allocation without further federal income tax consequences. For further information see Rev. Proc. 99-32, 1999-2 C.B. 296.

Rev. Proc. 68-16, 1968-1 C.B. 770, as modified by Rev. Proc. 94-67 , 1994-2 C.B. 800, is a comprehensive explanation of procedures applicable to closing agreements other than those originating in and involving rulings prepared by the Office of Chief Counsel.

Rev. Proc. 78-15, 1978-2 C.B. 488, provides the procedure to be followed by a taxpayer who has requested an advance ruling seeking a variation from the general rule of Treas. Reg. 1.1017-1 relating to the adjustment to basis of property resulting from a discharge of indebtedness, and who desires to enter into a closing agreement pursuant to Treas. Reg. 1.1017-2(b) because the property of the taxpayer consists solely of stock of other corporations.

Rev. Proc. 85-44, 1985-2 C.B. 504, provides the procedure to be followed by a taxpayer who has requested an advance ruling seeking a variation from the general rule of Treas. Reg. 1.1017-1 , relating to the adjustment to basis of depreciable property resulting from a discharge of indebtedness, and who desires to enter into a closing agreement pursuant to Treas. Reg. 1.1017-2(b) because the taxpayer has a substantial number of depreciable properties.

Rev. Proc. 94-67, 1994-2 C.B. 800, explains when and how a taxpayer, subject to a CIC or IC audit, requests an Accelerated Issue Resolution (AIR) agreement (which is a closing agreement under IRC 7121) from Compliance.

In general, Rev. Proc. 99-32, 1999-2 C.B. 296 supersedes Rev. Proc. 65-17, 1965-1 C.B. 833, for taxable years beginning after August 23, 1999. Rev. Proc. 99-32 states the Service position and provides procedures for the adjustment of accounts and the transfer of funds in connection with allocations of income or deductions pursuant to IRC 482 (primary adjustments), including certain taxpayer-initiated adjustments for purposes of reporting an arm's length result under the IRC 482 regulations. The revenue procedure applies to corporate taxpayers that enter into closing agreements with the Service. The revenue procedure permits the taxpayer to receive payment from, or make payment to, a controlled party after a Service-initiated primary adjustment, without being subject to federal income tax consequences that would otherwise follow from the secondary adjustment.

Rev. Proc. 2002-52, 2002-2 C.B. 242, explains the procedures to be used by the IRS and taxpayers in certain cases of double taxation that are governed by income tax treaties of the United States. The cases covered by this revenue procedure concern the allocation of income and deductions between a United States taxpayer and a related person (including a branch office) subject to the taxing jurisdiction of a country ("treaty country" ) that has entered into an income tax treaty with the United States.

Generally, a revenue procedure is issued annually which updates and restates the general procedures of the IRS in issuing rulings, determination, opinion, notification, and information letters to taxpayers and in entering into closing agreements on specific issues as to the interpretation or application of the federal tax laws.

Final determinations of tax liability pursuant to IRC 7121 are ordinarily reflected on Form 866, Agreement as to Final Determination of Tax Liability. In those cases where space on the form is insufficient to indicate all the periods, taxes, and liabilities covered by the agreement, insert "See Attachment" in that space and put the information on a separate sheet in the same format indicated on the form. Any separate sheets should be clearly identified at the top as: "Closing Agreement with (name of taxpayer)." See IRM 8.13.1.2.4.2.

A determination of tax liability should reflect the total corrected tax liability for each period and the type of tax covered in the agreement, after application of credits reducing liability but before application of payments or prepayment credits. Special care should be taken when preparing closing agreements where earned income tax credits or other refundable credits are involved. See IRM 8.13.1.7.2.

Where any matter in addition to tax liabilities is to be finally determined by the agreement, a combination agreement should be used. See IRM 8.13.1.2.3.

Qualified liability determinations should be avoided whether determined on a Form 866 or in a combined agreement.

Generally, closing agreements determining self-employment tax liability should be avoided. A later disagreement between the IRS and the Social Security Administration on the incidence of self-employment tax may arise as a result of an application for Social Security benefits and may be referred to the Department of Justice for resolution. It is possible that a determination on self-employment tax liability by closing agreement may not be consistent with the final decision on the incidence of such tax and the resulting Social Security benefits. If the final disposition is inconsistent with the closing agreement, the taxpayer may have overpaid tax that cannot be refunded or may owe additional tax that cannot be collected.

Final determinations of specific matters pursuant to IRC 7121 are ordinarily reflected on Form 906, Closing Agreement on Final Determination Covering Specific Matters.

Typed agreements (i.e., where no form is used) should contain all of the printed clauses reflected on Form 906. The form number should not be reflected on the agreement where the form has not been used.

In a specific matter closing agreement, the signature page should contain at least some portion of the last determination clause.

Neither Form 866 nor Form 906 is specifically designed for closing agreements which determine both tax liability and specific matters. Instead, a combined agreement should be prepared in accordance with the format and standard language reflected in Exhibit 8.13.1-4.

The principal necessity for combined agreements is that a determination of liability alone does not determine the amount of any item of income or deduction (or any other related matter) that may have been considered in arriving at that liability. This becomes important where the amount of one or more such items affects or could affect the computation of taxable income for another year.

Another situation where the use of a combined agreement may be appropriate is where the parties are resolving an issue with respect to the basis of depreciable property.

See IRM 8.13.1.7.1. This section discusses the use of combined agreements for barred years.

Instructions are provided for proper format and language to use when preparing closing agreements.

Closing agreements must always be signed by the taxpayer before they are signed for the Commissioner. The taxpayer’s signature constitutes an offer to agree and the signature for the Commissioner constitutes an acceptance and approval of the offer. All copies should be signed by or for all parties, with an exception. IRM 8.13.1.2.5.2.

The signature lines are at the end of the agreement or, where there are attachments, at the end of the main body of the agreement. See IRM 8.13.1.2.16. The signatures should not be on a page by themselves.