Tax Court Settlement Negotiations: How Cases Can Resolve Before Trial

Who Negotiates for the IRS

In the Tax Court, the IRS is represented by attorneys in the IRS Office of Chief Counsel. After the IRS files its answer, an IRS employee typically contacts the taxpayer to schedule a conference. According to the Court’s guidance for petitioners, one purpose of that conference is to try to reach agreement on some or all of the issues and to stipulate facts.

Under Rev. Proc. 2016-22, Chief Counsel generally refers docketed cases to the IRS Independent Office of Appeals for settlement consideration, although some cases or issues are not referred. While Appeals has the case, it has exclusive authority to settle it. If the case does not settle, Appeals returns it to Counsel to prepare for trial, and discussions with Counsel can continue.

Congress has described the function of the Independent Office of Appeals as resolving federal tax controversies without litigation on a basis that is fair and impartial to both the government and the taxpayer (section 7803(e)).

The Standard: Hazards of Litigation

Appeals evaluates cases based on the hazards of litigation. The Internal Revenue Manual describes this as substantial uncertainty, in the event of litigation, about how the courts would interpret and apply the law or what facts the courts would find. Settlements reached on that basis often involve concessions by both sides.

Under the Internal Revenue Manual, Appeals does not make settlements based on nuisance value, meaning concessions made only to avoid the inconvenience or cost of litigation without regard to the merits. A settlement proposal is therefore most effective when it is grounded in the facts, the evidence, and the applicable law.

What Shapes a Settlement

The evidence. Because the taxpayer generally bears the burden of proof, the quality of records and the credibility of witnesses matter.

The law. Statutes, regulations, and court decisions on the specific issue affect each side’s view of the likely outcome.

Issue-by-issue analysis. Cases with several issues are often resolved in part, with the strongest disputes reserved for trial.

Penalties. Penalties are evaluated along with the underlying adjustments, including any defenses such as reasonable cause.

How Negotiations Typically Proceed

The Court expects the parties to exchange information informally before using formal discovery. Taxpayers typically provide documents supporting their position and a written explanation of the facts and law. As trial approaches, the standing pretrial order sets deadlines for exchanging documents and stipulating facts.

The Tax Court’s rules also provide structured options. Under Rule 110, a party in a calendared case may request a pretrial conference, which can assist in narrowing issues or in disposing of the case in whole or in part without trial. Under Rule 124, the parties may jointly request voluntary nonbinding mediation, or voluntary binding arbitration of factual issues.

Documenting a Settlement

When the case is settled in full, the IRS prepares a stipulated decision. Both sides sign it, the IRS submits it to the Court, and the Court enters the decision. If this happens before the trial date, the taxpayer does not need to appear in court.

When only some issues are settled, the parties can record the agreement in a stipulation of settled issues and try the remaining issues. In a joint case, both spouses’ signatures may be needed on settlement documents.

If the Case Does Not Settle

Cases that do not settle are tried. Even then, the Court’s guidance notes that settlement discussions sometimes resume during or after trial, as each side’s assessment of the case changes.

Before signing any settlement document, it is important to confirm that the agreed terms and the tax computations are accurate, because a stipulated decision becomes the Court’s decision in the case.