Closing Agreement

Definition

A closing agreement is a binding, written agreement between a taxpayer and the Internal Revenue Service (IRS) that conclusively settles a tax liability for a specific taxable year that ends prior to the agreement date or addresses and resolves one or more issues affecting a tax liability. These agreements help to provide finality and certainty to tax matters, erasing the possibility of future disputes or audits for the agreed tax issues.

Key Features

Final Resolution: Once a closing agreement is executed, both the taxpayer and the IRS are bound by its terms, finalizing the tax liability or issues discussed.
Specific Period: The agreement applies to the agreed tax year(s) and does not cover future tax years unless specified.
Legally Binding: It is legally enforceable, and cannot be revisited or renegotiated unless there is evidence of fraud, malfeasance, or misrepresentation of a material fact.

Examples

Individual Taxpayer Settlement: An individual taxpayer disputes their tax liability for the year 2021. After negotiations, they enter into a closing agreement with the IRS determining the final amount owed, which conclusively settles the liability for that year.
Corporate Taxpayer Agreement: A corporation faces questions regarding specific deductions claimed in 2020. The corporation and the IRS agree on which deductions are permissible via a closing agreement, thereby resolving any potential disputes for that year’s taxes.

Frequently Asked Questions

What is the purpose of a closing agreement?

A closing agreement conclusively resolves a tax liability or specific issues affecting a tax liability, providing legal certainty to both the taxpayer and the IRS.

Who can request a closing agreement?

Both individual taxpayers and businesses can request a closing agreement from the IRS when seeking final resolution on disputed tax matters.

Is a closing agreement final?

Yes, once signed, a closing agreement is legally binding and final, except in cases of fraud, malfeasance, or material misrepresentation.

Can a closing agreement cover multiple years?

Typically, a closing agreement covers specific tax years in question, but it can address issues affecting multiple years if explicitly stated in the agreement.

How do you request a closing agreement?

Taxpayers can request a closing agreement by submitting a formal request to the IRS, typically accompanied by detailed documentation supporting their position on the disputed issues.

Tax Settlement: A broader term referring to any resolution between a taxpayer and the IRS regarding tax liabilities, which may include closing agreements.
Tax Liability: The total amount of tax that an individual or business is legally obligated to pay to a tax authority.
Taxable Year: Specific 12-month period for which a taxpayer calculates tax liability. For individuals, this is usually the calendar year.
IRS Audit: A review by the Internal Revenue Service of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the amount of tax reported is accurate.

Online References

Suggested Books for Further Studies

U.S. Master Tax Guide by CCH Tax Law Editors
Tax Procedure and Tax Fraud in a Nutshell by Camilla E. Watson
Federal Tax Research by William A. Raabe, Gerald E. Whittenburg, and Debra L. Sanders
Practical Guide to U.S. Taxation of International Transactions by Michael S. Schadewald and Robert J. Misey Jr.

Fundamentals of Closing Agreements: Taxation Basics Quiz

### What does a closing agreement with the IRS seek to finalize? - [ ] Ongoing audits - [ ] Future tax liabilities - [x] A specific tax liability or issue for a prior year - [ ] Employment tax filings > **Explanation:** A closing agreement conclusively finalizes a specific tax liability or issue for a taxable year that ends prior to the agreement date. ### When is a closing agreement between the taxpayer and the IRS binding? - [x] Immediately upon signing - [ ] After a three-year waiting period - [ ] Only during an audit - [ ] If the taxpayer is audited annually > **Explanation:** A closing agreement becomes legally binding and enforceable immediately upon signing by both parties. ### Which of the following is NOT a condition under which a closing agreement can be revisited? - [x] Change in financial status - [ ] Fraud - [ ] Malfeasance - [ ] Misrepresentation of material facts > **Explanation:** Change in financial status cannot be grounds for revisiting a closing agreement once it's finalized. Only fraud, malfeasance, or misrepresentation warrant revisiting the agreement. ### Can a closing agreement address future tax liabilities? - [ ] Always - [ ] Never - [x] Only if explicitly stated - [ ] Only for individual taxpayers > **Explanation:** A closing agreement generally addresses past tax liabilities but can include future liabilities if explicitly stated in the agreement. ### What ensures the finality of a closing agreement? - [ ] The involvement of multiple tax professionals - [ ] An annual reassessment - [ ] IRS's ability to audit at any time - [x] Its legally binding nature > **Explanation:** Its legally binding nature ensures the finality and enforceability of a closing agreement. ### How does a closing agreement impact an IRS audit? - [x] It can prevent audits for the years covered by the agreement. - [ ] It mandates annual audits for the taxpayer. - [ ] It has no impact on IRS audits. - [ ] It requires a subsequent review of the settlement. > **Explanation:** A closing agreement conclusively resolves disputes and can prevent future audits for the tax years covered in the agreement. ### Who can request the finality of a closing agreement? - [ ] Only the IRS - [ ] Only tax attorneys - [x] Any taxpayer - [ ] Only businesses > **Explanation:** Any taxpayer, whether an individual or a business, can request a closing agreement to conclusively settle tax liabilities or issues. ### Is an agreement with conditions to revisit in the future still a closing agreement? - [ ] Yes - [x] No - [ ] Only if both parties agree - [ ] Only if IRS stipulates so > **Explanation:** A true closing agreement is final and legally binding, and does not include conditions to revisit in the future, except for cases of fraud or misrepresentation. ### What allows a taxpayer to challenge a closing agreement? - [ ] Change in tax law - [x] Proof of fraud or material misrepresentation - [ ] Dissatisfaction with the settlement terms - [ ] Higher future tax liabilities > **Explanation:** Only proof of fraud or material misrepresentation allows a taxpayer to challenge a previously finalized closing agreement. Other reasons do not warrant reopening the agreement. ### When does the IRS agree to a closing agreement? - [x] When it resolves a disputed tax issue conclusively and fairly. - [ ] When it benefits the IRS exclusively. - [ ] Only during taxpayer bankruptcy. - [ ] When audit resources are available. > **Explanation:** The IRS agrees to a closing agreement when it serves to conclusively and fairly resolve the disputed tax issue, serving the interests of both the taxpayer and the IRS.

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