Academic journal article Journal of Accountancy

Understanding Closing Agreements

Academic journal article Journal of Accountancy

Understanding Closing Agreements

Article excerpt

When an IRS audit identifies deficiencies in a tax return, the taxpayer may be asked to sign a closing agreement. There are two types of closing agreements. The first--contained on Form 866, Agreement as to Final Determination of Tax Liability--establishes the final tax liability. The other, contained on Form 906, Closing Agreement on Final Determination Covering Specific Matters, makes a determination on only those items specifically listed on the form. Other items still can be adjusted by the IRS in subsequent actions. These agreements are binding on both sides absent fraud, malfeasance or misrepresentation of material fact.

In a form 866 closing agreement, a deficiency notice is not necessary Both sides agree to a final liability and, therefore, there is no need to provide an opportunity for the taxpayer to request a court review. With form 906, all unstated items are left open for future review. If the IRS adjusts any of these items, the taxpayer has the right to request court review. Therefore, the IRS must issue a deficiency notice before attempting to collect.

Bernhard Manko was a 99% partner in Comco. The IRS audited the partnership returns for 1987 to 1991 and reached an agreement with Manko and the other partners on necessary adjustments. Since the adjustments affected Manko's individual return, he agreed to an indefinite extension of the time for assessment of additional tax. After agreeing to the partnership adjustments, Manko signed a form 906 closing agreement. Although the partnership items were settled, the IRS used this form because it wanted to retain the right to make other adjustments to Manko's individual return. The IRS then examined the individual return and issued an Income Tax Examination Changes form reflecting both partnership and individual adjustments. It assessed the extra tax shown on the change form without issuing a deficiency notice. …

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