The U.S. Tax Court has ruled that an employer was not coerced into signing an IRS closing agreement, and that the closing agreement could still be enforced even though it did not contain the correct employer identification number (EIN) [Tree-Tech Inc. v. Commissioner, TC Memo 2011-162, 7/11/11].
The facts. On Feb. 1, 2007, the IRS notified William Moon, attorney-in-fact for Tree-Tech Incorporated, that it was conducting an audit of the company. The sole officer and director of the company was Julie Moon (i.e., William Moon's wife). The exam was originally going to focus on the company's failure to report officer's compensation as wages, but after his first meeting with Mr. and Mrs. Moon, IRS examiner William Cookenour expanded the examination to include worker classification issues.
Cookenour met with Mr. and Mrs. Moon after the audit was concluded to explain the terms of an IRS settlement offer under the Classification Settlement Program. The Moons said that at the meeting, Cookenour presented them with two different calculations of the company's liabilities and told them that if they did not accept the offer to settle for the lower amount, the IRS would assess the higher amount. The Moons also said that Cookenour told them that they could appeal the assessment, but that they would not win on appeal. Mrs. Moon accepted the settlement offer at that meeting by signing a closing agreement titled “Closing Agreement on Final Determination Covering Specific Matters Regarding Worker Classification.” Mrs. Moon agreed to pay the amount shown on the closing agreement in full satisfaction of the company's liability stemming from its incorrect worker classification, and she agreed to begin treating company workers as employees.
The closing agreement signed by Mrs. Moon contained an incorrect EIN in the document heading. However, the closing agreement did contain the correct EIN in the first paragraph and it identified the employer by name as “Tree Tech Incorporated.”
On Sept. 18, 2008, the IRS mailed the Moons a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing” (notice of intent to levy). The Moons timely filed Form 12153, Request for a Collection Due Process or Equivalent Hearing. The Moons contested the company's underlying tax liability, arguing that the company was entitled to employment tax relief under Section 530 of the Revenue Act of 1978. Section 530 provides retroactive and prospective relief from employment tax liability for employers who misclassified workers as independent contractors. The Moons also argued that Cookenour had coerced Mrs. Moon into signing the closing agreement, and that the agreement was invalid anyway since it included an incorrect EIN for the company. The IRS Appeals Office said that the Moons could not contest the company's underlying tax liability during the collection due process hearing because the assessments were made in accordance with the closing agreement signed by Mrs. Moon.
The law. Code Sec. 7121(b) states that an IRS closing agreement is final and conclusive “except upon a showing of fraud or malfeasance, or misrepresentation of a material fact.”
The ruling. The Tax Court granted summary judgment to the IRS on the coercion and incorrect EIN issues. The court said that Cookenour's settlement offer was precisely the kind of arrangement contemplated under the IRS Classification Settlement Program. The court noted that the very nature of a settlement offer is that one party offers the other party a concession to induce that party to agree to the deal. The IRS agreed to assess only a portion of the taxes due under the reclassification in exchange for the Moons' agreement to settle the matter. The court also said that the closing agreement was final and conclusive because the Moons did not raise any issues with respect to fraud, malfeasance, or misrepresentation of a material fact.
The Tax Court acknowledged that there was a minor error in the company's EIN on the closing agreement, but it said that the Moons were in no way prejudiced or confused by the minor error.
The Tax Court said that it lacked jurisdiction to address the Section 530 issue, but pointed out that the company may still be eligible for Section 530 relief under Rev Proc 85-18, 1985-1 CB 518 , if it has not yet completely paid the employment tax liability in the closing agreement.