Taxpayer Executed an 870-AD? Depending on the taxpayers circuit it may still be able to amend returns to claim R&D credits and deductions
R&D Tax Alert - October 2007
Background
A Form 870-AD is an “Offerto Waive Restrictions on Assessment and Collection of Tax Deficiency and toAccept Overassessment.” It is used byAppeals to settle cases informally, and contains a representation by the IRS that, except in extreme cases (fraud, misrepresentation) the case willnot be reopened by the IRS. Importantly, it also contains the following language relating tosubsequent refund claims: “No claim forrefund or credit will be filed or prosecuted by the taxpayer for the yearsstated in this form, other than for amounts attributed to carrybacks providedby law.” In addition, we know that IRS regards an 870-AD as sufficiently final that it will not allowreconsideration of an audit after one has been executed.
Guidance
Despite the form’s language,the Internal Revenue Manual, reflecting case law, states that “[a] Form 870-ADis an informal agreement, which standing alone, is not binding.” The recent CCA 200738010 rejected a DistrictCounsel’s initial reaction that a refund claim based on section 174 deductionsand section 41 credits should be rejected on the basis of estoppel because aForm 870-AD had been executed by the taxpayer for the very years which were thesubject of the refund claims.
In doing this, Chief Counselwas merely reflecting the case law of the 9th Circuit, in which the taxpayerwas domiciled. Not all judicial circuits,however, agree that the Form 870-AD is informal and non-binding. The split in the circuits at present is asfollows: Refund after Form 870-ADpermitted: 7th, 9th and 10thCircuits. Not permitted: 2nd, 3rd, 8th Circuits and Court ofClaims. No opinion located: 1st, 4th, 6th, 11th Circuits and the Courtsof Appeals for the Federal and DC Circuits.
Importantly, this only meansthat, in a limited geography, amendedreturns/refund claims filed after a Form 870-AD will survive to be consideredon their merits, not that they will automatically be granted.
For more information
If you have questions thatyou would like to discuss further, please contact Jerry Parshall, National Tax,at 301.296.3624 or gerald.parshall@rsmi.com.
