Sounding out the IRS in advance, part 2: closing agreements

In the first part of this post, we discussed the possibility of getting a preliminary (but not binding) ruling from the IRS about an upcoming transaction with significant tax consequences.

As we explained last week, a private letter ruling may be used for that purpose. But what about a transaction in the past that carries tax consequences that you would like to put behind you? In this part of the post, we will discuss sounding out the IRS about a closing agreement.

A closing agreement is a procedure for coming to terms with the IRS about either prior or subsequent tax liability. It can be requested in a private letter ruling. But unlike a private letter ruling, it can reach back into the past.

A closing agreement is a legally binding agreement. Though it is not exactly a contract, under Treasury Department regulations it is not merely advisory either. It is, rather, a written agreement by which a taxpayer can resolve a tax issue with the IRS.

This agreement can take shape on Form 866 or on Form 906. But it is important to be wary. The IRS could accuse you, for example, of engaging in fraud or misrepresentation regarding a past transaction.

That is why it is so important to have a knowledge tax attorney to guide you through the process of dealing with the IRS when seeking a closing agreement. The same is true of negotiating for an offer in compromise (OIC), which is a way to potentially settle tax debt for less than the full amount owed.