Taxpayers Could Not Rely on IRS Correspondence Waiving Penalties

In a recent U.S. District Court decision, the taxpayers were audited, and ultimately received a letter from the auditing agent that “the penalties had been waived.” The taxpayers signed a Form 4549 document which did not assess penalties.

Subsequently, the IRS sent a Form 4549-A assessing a civil penalty under §6707A for failure to disclose a listed transaction. The taxpayers argued that the IRS had waived penalties and could not assess this new penalty, or alternatively the IRS was equitably estopped from asserting the penalty. The court ruled in favor of the IRS and allowed the penalty.

Code §7121(a) authorizes the IRS to enter into agreements in writing as to tax liabilities of a taxpayer. Treas. Regs. § 301.7121-1(d)(1) provides that closing agreements must be executed on forms prescribed by the IRS. Rev.Proc. 68-16, Section 6 provides that the appropriate forms are Form 866 or Form 906. Since neither of those Forms were issued by the IRS, the court held that there was no binding closing agreement as to penalties, and thus allowed the new penalties. The court noted that a Form 4549 is not an authorized closing agreement.

The court also noted that since the IRS had not asserted a §6707A penalty at the time of its waiver offer, that penalty was not waived.

While there is case law allowing valid closing agreements to arise outside of a Form 866 or Form 906, the court noted that the precedent in this area applies only to settlement of pending litigation in docketed cases, which was not the case for the taxpayers.

The court also disposed of the equitable estoppel claim by finding a lack of “affirmative misconduct” on behalf of the IRS.

Hinkle, 121 AFTR2d Para. 2018-861( DC New Mexico)

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