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Taxpayers Are Liable for Penalties After IRS Assurances That No Penalties Would be Assessed

(Parker Tax Publishing June 2018)

A district court held that where (1) the IRS assessed but then waived an accuracy related penalty, (2) an IRS revenue agent told the taxpayer that all penalties had been waived, and (3) the taxpayer signed a Form 4549 which assessed no penalties, the IRS did not breach a closing agreement or other contract when it later assessed a penalty under Code Sec. 6707A because no closing agreement was ever executed and there was insufficient evidence that a contract existed. The court also found that the IRS was not equitably estopped from imposing the Code Sec. 6707A penalty because there was no evidence that it engaged in an affirmative misrepresentation or concealment constituting affirmative misconduct. Hinkle v. U.S., 2018 PTC 176 (D. N.M. 2018).

Bryan Hinkle and Matilda Garcia were notified in 2009 by IRS revenue agent Russell Gadway that their 2007 and 2008 tax returns had been selected for examination. Hinkle and Garcia each received a letter from Gadway asking if they would agree to an enclosed examination change report and stating that penalties would be waived if they agreed to resolve the issues at the revenue agent level. The letters included Forms 4549, Income Tax Examination Changes, which assessed an accuracy related penalty under Code Sec. 6662. However, in July 2010, Hinkle and Garcia signed Forms 4549 which assessed neither a Code Sec. 6662 penalty nor any other penalty.

Later that month, the IRS notified the taxpayers that it was considering assessing penalties under Code Sec. 6707A for failure to disclose a listed transaction. However, a September 2010 letter from an IRS Area Director stated that it would not make any additional changes to their returns unless they changed a return for a partnership or other entity in which the taxpayers had an interest in.

In March 2011, the taxpayers received Forms 4549-A, Income Tax Discrepancy Adjustments, assessing a penalty under Code Sec. 6707A. The taxpayers' accountant, Robert Bivins, sent a letter to Gadway protesting the penalty and noting that the taxpayers were assured no penalties would be assessed through acceptance and payment of the taxes due.

Over a year later, in September 2012, the taxpayers received a "Notice of Penalty Charge." Bivins responded with another letter protesting the imposition of the penalty. Bivins submitted a Form 843, Claim for Refund and Request for Abatement, requesting an abatement of the Code Sec. 6707A penalty. In December 2013, IRS manager Jeffrey Barrett sent a letter stating that all penalties had been waived as agreed by agent Gadway.

The taxpayers sued for a refund in a district court, asserting claims for breach of contract and, alternatively, equitable estoppel. The taxpayers argued that the December 2013 IRS letter was evidence of an offer that included the waiver of all penalties, and that they had accepted the offer by signing the Forms 4549 in July 2010. The taxpayers contended that, although no closing agreement was executed on a Form 866 or 906, a closing agreement form was not required under Haiduk v. Comm'r, T.C. Memo. 1990-506 and other Tax Court cases, if the intent of the parties was otherwise ascertainable. Alternatively, the taxpayers asserted that they reasonably relied on Gadway's representations and did not know the falsity of the representations, which the court construed as an argument for equitable estoppel. The IRS filed a motion for summary judgment on both claims.

The district court granted summary judgment for the IRS. The court explained that under Code Sec. 7121(a), closing agreements must be executed on the forms prescribed by the IRS, and that the appropriate forms are Forms 866 or 906. The court found that Form 4549 documents do not create closing agreements because they are not the forms identified by the IRS and do not include the legal language indicating the IRS's intent to settle a disputed tax liability.

The court also disagreed with the taxpayers' contention that the IRS breached a contract. First, the court found that IRS manager Barrett's December 2013 letter was not an offer because there was no promise to take or forego some action. At most, the letter implied an agreement to waive penalties as defined by Gadway's 2010 letter accompanying the Form 4549 documents. The court found that the previous Form 4549 documents showed only a Code Sec. 6662 penalty but not a Code Sec. 6707A penalty and there was no evidence of a Form 4549 assessing a Code Sec. 6707A penalty before Gadway's June 2010 letter. Second, neither the Form 4549 documents nor the December 2013 letter were in a form required to create a binding closing agreement. Furthermore, the court found that the exception in Haiduk to the closing agreement standard applied only in the context of pending litigation.

The court rejected the taxpayers' equitable estoppel argument because it found that evidence of affirmative misconduct must be present when making such a claim against the government, and the taxpayers failed to present such evidence. The court found that while Gadway's letter stated that the Code Sec. 6662 penalty would be waived, the taxpayers failed to show that the Code Sec. 6707A penalty was ever included in a Form 4549 document prior to Gadway's letter. The court also found that Barrett's 2013 letter did not specifically mention the Code Sec. 6707A penalty but only referred to the penalties previously agreed to by Gadway. The court concluded that Barrett's letter therefore did not demonstrate the affirmative misrepresentation or concealment necessary to find that the IRS engaged in affirmative misconduct as required for a claim of equitable estoppel.

For a discussion of closing agreements, see Parker Tax ¶263,160.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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