If you are currently involved in our administrative process resolving a tax related dispute, a closing agreement may be a possible avenue for you to resolve specific tax, interest, and/or penalty issues with us. We have the statutory authority to enter into closing agreements with a taxpayer to help resolve a dispute with respect to any tax, penalty, and/or interest assessment. However, before you decide whether you want to pursue a closing agreement, it is important to understand what a closing agreement is and if it is an appropriate option for you.
What is a Closing Agreement?
A closing agreement is, in essence, a contract between FTB and a taxpayer agreeing on the proper tax treatment of a particular tax issue or transaction for a specific time frame. The purpose of the closing agreement is to provide you and us with assurance as to the agreed upon, proper treatment of a specific tax issue. As a result, the closing agreement provides a final, conclusive, and binding agreement between us and you. The agreement is binding on both parties for any matters covered in the agreement in any legal proceeding, administrative action, or litigation. The agreement cannot be modified except on a showing of fraud, malfeasance, or a misrepresentation of material fact. Thus, it is extremely important that both us and you understand the nature and terms of the agreement before it is finalized.
Please note that a closing agreement is not in lieu of a settlement agreement and a closing agreement cannot be used to settle a tax liability. Since closing agreements are an agreement as to the proper tax treatment of an issue or transaction and not a settlement agreement, risks and hazards of litigation are not considered. If you wish to pursue a settlement of your tax liability, see
FTB Notice 2007-2 to learn more about the our settlement program.
When can a Closing Agreement be used?
In determining whether a closing agreement is appropriate for your situation, consider the following items:
- Closing agreements can be used at any time during the administrative process.
- Closing agreements provide finality as to the proper tax treatment of an issue or transaction. However, closing agreements, by operation, do not end an audit, protest, or other administrative action. If there are multiple issues or transactions in dispute, the administrative process will continue for those items not covered in the closing agreement.
- Closing agreements may cover transactions or issues that have occurred in a prior tax year. We do not enter into closing agreements for future years.
- All of the material, relevant facts relating to the transaction or issue in dispute must have been determined before we will enter into a closing agreement. If you are currently in the audit and/or protest process, it is important that you have previously provided all relevant information requested by us. As such, we will not enter into a closing agreement where facts are unknown, hypothetical, or contingent.
Common areas in which we have typically used closing agreements to resolve a dispute are:
- Issues covered in federal closing agreements where the California Revenue and Taxation Code conforms or is substantially similar to the Internal Revenue Code;
- Determining available losses or credits available as of a specific tax year;
- Determining a proper accounting method;
- Determining the correct apportionment factors; and
- Resolving issues related to unity.
We will consider any taxpayer's request for a closing agreement; however, we will not enter into a closing agreement if any of the following situations are present:
- The proposed closing agreement attempts to settle a tax liability or reach a resolution based on the risks and hazards of litigation.
- The years covered by the proposed agreement include years that have not yet occurred or are closed by the applicable statute of limitations.
- The taxpayer is not in good standing with us and/or is suspended by the California Secretary of State.
- The proposed closing agreement would satisfy or be in lieu of the taxpayer's filing obligations.
When and how can I request a Closing Agreement?
You may request a closing agreement at any time during the administrative process. If you are currently in the audit, protest, or appeal phase of the administrative process, you should make a request to the FTB professional that is currently working with you. When the request is made, the FTB professional will review the request to determine if a closing agreement is the proper instrument for your particular situation and notify you as to whether a closing agreement would be an appropriate tool in the current dispute.
For more information regarding closing agreements, contact our Litigation Bureau at 916.845.4581.
California Revenue and Taxation Code Section 19441.