Closing Agreement, Defined

A “closing agreement” is a final agreement between the IRS and a taxpayer on a specific issue or liability. It is entered into under Internal Revenue Code Section 7121, and it is final unless fraud, malfeasance, or misrepresentation of a material fact can be shown. 

A closing agreement may be entered into when it is advantageous to have a matter permanently and conclusively closed or when a taxpayer can show that there are good reasons for an agreement and that making the agreement will not prejudice the interests of the government.

A taxpayer may request a closing agreement with a letter ruling or in lieu of a letter ruling, with respect to a transaction that would be eligible for a letter ruling. If the IRS agrees that a closing agreement is appropriate, the Associate Chief Counsel with subject matter jurisdiction signs the closing agreement on behalf of the IRS.

In appropriate cases, the IRS may ask a taxpayer to enter into a closing agreement as a condition for the issuance of a letter ruling or in lieu of issuing a letter ruling.

If, in a single case, a closing agreement is requested for each person or entity in a class of taxpayers, separate agreements are entered into only if the class consists of 25 or fewer taxpayers. If the issue and holding are identical for the class and there are more than 25 taxpayers in the class, a “mass closing agreement” will be entered into with the taxpayer who is authorized by the others to represent the class.