Form 870-AD: A Binding IRS Settlement Agreement

Form 870-AD, officially titled “Offer of Waiver of Restrictions on Assessment and Collection of Tax Deficiency and of Acceptance of Overassessment,” is a document used to resolve tax disputes within the IRS Independent Office of Appeals. It is used to finalize a settlement between a taxpayer and the government for specific tax periods. When an agreement is reached at the Appeals level, this form memorializes the terms. It represents a formal offer from the taxpayer to agree to a tax deficiency or overassessment, which, once accepted by the IRS, closes the case for that year and provides a definitive end to the dispute.

Understanding the Terms of the Agreement

The finality of Form 870-AD stems from it being a mutual concession agreement. While not a formal closing agreement defined by statute, the IRS treats it as a final settlement. When both parties sign, they make concessions to resolve the dispute; the taxpayer agrees to the tax adjustment, and the IRS agrees to settle based on the hazards of litigation. Because of these mutual concessions, courts have prevented either party from reopening the case. By signing, the taxpayer agrees not to file a claim for a refund for the tax years covered, and the IRS agrees not to reopen the case for additional deficiencies, except in cases of fraud, malfeasance, or a significant mathematical error.

Executing Form 870-AD also involves waiving specific statutory rights. The “Waiver of Restrictions on Assessment” in the form’s title refers to the requirement that the IRS issue a formal Notice of Deficiency, often called a “90-day letter,” before it can assess additional tax. This notice grants the taxpayer 90 days to file a petition with the U.S. Tax Court. By signing Form 870-AD, the taxpayer gives up the right to receive this 90-day letter and forfeits the ability to take the settled issues to the Tax Court.

The agreement has direct implications for the calculation of interest on the tax deficiency. Interest on an underpayment accrues from the original due date of the return until the date of payment. The form becomes effective on the date it is accepted by an authorized IRS official. If the IRS does not issue a notice and demand for payment within 30 days of that acceptance date, the accrual of interest is suspended. The suspension starts on the 31st day and continues until the IRS issues the notice and demand, but interest will begin to accrue again if the taxpayer does not pay the bill promptly.

Distinguishing Form 870-AD from Form 870

It is important to distinguish Form 870-AD from the similarly named Form 870, “Waiver of Restrictions on Assessment and Collection of Tax Deficiency.” While both forms are used to agree to a tax assessment, their legal effects are distinct. The standard Form 870 is a non-binding agreement. A taxpayer who signs a Form 870 agrees that the IRS can assess the tax, which stops interest from accruing, but it does not prevent the taxpayer from later filing a claim for a refund after paying the tax. This preserves the right to sue for a refund in a U.S. District Court or the U.S. Court of Federal Claims.

The IRS also retains the right to assess further deficiencies for the same tax year when a Form 870 is used, subject to the statute of limitations. This form is often used at the examination or audit level to signify agreement with proposed changes and facilitate an efficient conclusion to the audit. It is a procedural tool that allows for assessment and collection without the finality of a formal settlement.

In contrast, Form 870-AD is a settlement document used exclusively by the IRS Office of Appeals. The “AD” signifies its use in the Appeals Division and its purpose to create a final settlement. Unlike Form 870, it is based on mutual concessions that provide closure for both the taxpayer and the government. Form 870 is about agreeing to an assessment, while Form 870-AD is about finalizing a settlement.

The Process After Signing

Once a taxpayer agrees to the negotiated terms and signs Form 870-AD, a clear procedural sequence begins. The taxpayer returns the signed form to the Appeals Officer, but the agreement is not immediately effective. It is considered an “offer” from the taxpayer that must be formally accepted and signed by an authorized representative of the IRS to have legal force.

Following formal acceptance by the IRS, the agreed-upon tax deficiency is assessed on the taxpayer’s account. This assessment is the administrative step that establishes the debt. Shortly after, the IRS will mail a formal notice and demand for payment to the taxpayer. This bill will show the amount of the tax deficiency, plus any accrued interest and penalties as stipulated in the agreement.

The final step is payment and case closure. The taxpayer is required to pay the amount due as specified in the notice. Full payment of the assessed amount satisfies the settlement terms. Once the payment is processed, the case for the specific tax period is considered closed, bringing the dispute to a definitive conclusion.