IRS Form 870-AD: A Deal or a Trap at Appeals following an IRS Audit?

When you're in the midst of a dispute with the Internal Revenue Service (IRS), the process can feel like navigating a labyrinth. If your case has made its way to the IRS Independent Office of Appeals, you may be presented with a settlement offer, often formalized on a document known as Form 870-AD. While signing this form can bring a sense of relief and closure, it's crucial to understand exactly what you're agreeing to. This article provides a comprehensive overview of IRS Form 870-AD, drawing on the Internal Revenue Code, Treasury Regulations, and relevant case law to help you make an informed decision. 

What is IRS Form 870-AD? 

Form 870-AD, officially titled "Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment," is a settlement document used exclusively by the IRS Office of Appeals. The "AD" signifies its use by the Appeals Division. It is utilized when a taxpayer and the IRS reach a settlement based on mutual concessions. By signing this form, the taxpayer offers to waive certain procedural rights, allowing the IRS to assess the agreed-upon tax deficiency without delay. 

Form 870-AD is distinct from other IRS agreement forms, most notably the standard Form 870. The primary purpose of Form 870-AD is to provide a greater degree of finality to a settlement reached in Appeals, particularly in cases involving significant mutual concessions 

The Illusion of Finality: Is Form 870-AD Truly Binding? 

A common misconception among taxpayers is that Form 870-AD is a final and binding contract. While it provides a stronger sense of closure than a standard Form 870, it is not a statutory closing agreement as defined under IRC § 7121. This distinction is critical and has been the subject of numerous court cases. 

In the notable case of Howe v. Commissioner, the U.S. Tax Court held that a settlement on Form 870-AD did not prevent the IRS from reopening the case and issuing a notice of deficiency for a larger amount. The court reasoned that only settlement agreements that comply with the strict statutory requirements of IRC § 7121 (closing agreements) or IRC § 7122 (offers in compromise) are truly binding on both the taxpayer and the government. 

The courts have generally held that the government is not barred by the doctrine of equitable estoppel from reopening a case after a Form 870-AD has been executed. To successfully argue estoppel against the government, a taxpayer must show more than just a broken promise; they must demonstrate affirmative misconduct on the part of the government, a very high legal standard to meet. 

Despite its lack of statutory finality, in practice, the IRS rarely reopens a case after a Form 870-AD has been accepted. Generally, cases closed with an 870-AD will not be reopened except in cases of fraud, malfeasance, or misrepresentation. 

When to Sign Form 870-AD 

Deciding whether to sign a Form 870-AD requires a careful weighing of the pros and cons. 

Advantages of signing include: 

•Certainty: It provides a high degree of practical finality to your tax dispute. 

•Interest Suspension: It stops the clock on interest accumulation, provided the IRS issues a notice and demand for payment within 30 days of the form's acceptance. 

•Avoiding Litigation: It allows you to resolve your case without the time, expense, and uncertainty of going to Tax Court. 

Disadvantages and considerations include: 

•Waiver of Rights: You waive your right to petition the U.S. Tax Court for the tax periods and issues covered by the agreement. 

•No Refund Claims: You agree not to file a claim for a refund for the matters settled in the agreement. 

•Not Fully Binding on IRS: As discussed, the IRS may, in rare circumstances, reopen the case. 

Modifications and Reservations 

Form 870-AD is not a one-size-fits-all document. It can be modified to reflect the specific terms of your settlement. For instance, in a partial agreement where only some issues are resolved, the form can be altered to limit the no-reopening pledge to only those settled issues. 

Taxpayers can also include "reservations" on the form, explicitly preserving their right to file a refund claim on a specific, unsettled issue. This must be clearly detailed on the form to be effective. 

The Gold Standard of Finality: The Closing Agreement 

For taxpayers who require absolute and statutory finality, the appropriate tool is a Closing Agreement under IRC § 7121. A closing agreement is a formal, written agreement that is legally binding on both the taxpayer and the IRS, and can only be set aside upon a showing of fraud, malfeasance, or misrepresentation of a material fact. If a taxpayer insists on greater finality than a Form 870-AD can provide, they can request a closing agreement, though the IRS is not obligated to grant one. 

Conclusion 

IRS Form 870-AD is a critical document in the Appeals settlement process. It represents a significant step toward resolving your tax dispute, offering a practical end to the matter and stopping the accrual of interest. However, it is essential to recognize that it is not a statutorily binding contract in the same way as a formal closing agreement. Before signing a Form 870-AD, you should have a clear understanding of the rights you are waiving and the degree of finality you are obtaining. Consulting with an experienced tax professional is always the best course of action to ensure your interests are protected.  

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