IRS Agent’s Settlement Authority

August 11, 2016  | By Erik Lincoln

With respect to questions of law, agents have no authority to settle or compromise a case based upon the hazards of litigation (i.e., they may potentially lose in court based on other court decisions), but in practice settlements or “resolutions” can occur during the examination process. However, an agent has limited, if any, authority to settle an issue once set forth in an examination report.

Questions of fact present a less formidable obstacle. The problem is best illustrated in the following hypothetical situation. Assume the taxpayer has claimed $10,000 in contributions but has receipts for only $1,000. As in questions of law, the agent has no authority to settle the case because the agent fears the Service would lose on the issue in court.  The agent does, however, have the authority to accept “credible oral testimony” or “credible written testimony. The reason for that authority is that there are numerous ways of proving the existence of a deduction or other tax benefit. With respect to contributions, for example, the taxpayer might prove contributions made during the year by canceled checks, by a statement from recipients of contributions who have access to accurate accounting records, or by the taxpayer’s own testimony. Although the first two methods would certainly be acceptable to the IRS agent, the third, although not so weighty as the first two, is evidence of the existence of the claimed deduction. Consequently, the agent can state in his or her work papers that he or she is allowing the deduction “per receipt,” “per canceled check,” or “per oral testimony.”

Would an agent accept the taxpayer’s oral testimony to the extent of $9,000, as in the hypothetical? The answer would certainly depend upon the other facts and circumstances of the case. The point is, however, that the agent does possess the authority to accept the testimony of the taxpayer. Does this mean that the agent has settlement authority?  In theory, no, the agent is merely accepting an amount that the agent feels is reasonable under the facts; in practice the agents tend to accept the taxpayer’s testimony for the purpose of resolving the case.  In this regard, it is important for the taxpayer’s representative to understand – and important enough to warrant repeating – that the agent is under continuing pressure to conclude the audit in as little time as possible.  The taxpayer’s representative may be able to capitalize on this by having all the work papers and notes prepared and all the arguments ready to establish the taxpayer’s position at the start, conceding losing points when appropriate, and attempting to terminate the audit as quickly as possible, with an eye toward obtaining the best possible results for the taxpayer.

If you need help with an IRS tax audit, please contact us.  We are located in Charlotte, NC and help clients through the Southeast.

Erik Lincoln is a founding member of Lincoln. In addition to being an attorney he is also a CPA. Erik has consistently been recognized as one of the top attorneys in North Carolina, by Business North Carolina.