The IRP closing agreement: settling a mass 1099 error without reissuing every form

What the agreement is

Closing agreements under IRC 7121, on Form 906, are final settlements of a tax matter. The Appeals manual lists, among their uses, one aimed squarely at information reporting: "To address a mass error that affects a higher volume of information returns but involves a de minimis amount of understated reported income for select information returns" (IRM 8.13.1.2.2, May 25, 2018). Exhibit 8.13.1-12 is the pattern, titled "Information Reporting Program (IRP) Closing Agreement for Understatement of Income on Forms 1099 by a Payer."

The instructions define it: "An IRP closing agreement is an agreement made in writing between the A/C Examination Function and a payer when a mass error has been made that affects a significant volume of information returns issued by that payer, but involves only an average de minimis amount of understated reportable income. This agreement will relieve the payer from having to file corrected information returns with the Service and from having to issue corrected payee statements. ... This agreement will also relieve the payees from having to file amended tax returns."

The ten terms

The pattern recites the error (total understated income, form number, number of payees, years, and the account or fund it came from), that the payer "has identified and fixed the error," and that it has "voluntarily worked with the Service." It then agrees:

1. The payer pays a stated compliance fee by certified check.
2. "The Taxpayer (payer) is not to be required to file corrected information returns with the Service, and is not to be required to issue corrected payee statements."
3. "The Taxpayer's payment of the compliance fee satisfies the Taxpayer's liability under IRC Sections 6721 and 6722, if any, arising from the understatement of reportable income described above."
4. No part of the fee is income to any payee.
5. "The Payees are not required to include in their gross income any amount with respect to the understatement of reportable income as described above."
6. Payees benefit from the agreement only to the extent of terms 4 and 5.
7. The fee "is not deductible or otherwise amortizable or recoverable for tax purposes by the Taxpayer in any taxable year."
8. The fee "is not refundable, or subject to credit or offset, under any circumstances."
9. It resolves only the matters described; "No inference is intended with respect to whether this resolution satisfies other Federal law."
10. It creates no liability from the payer to the payees.

Terms 3 and 5 are the substance: the payer's 6721 and 6722 exposure for the error is closed, and the payees' underreported income is forgiven.

Who qualifies

The instructions set three requirements (paragraph 2). "First, payers should voluntarily bring the error to the attention of the Service." An error the IRS finds can still be settled this way "if both parties agree that it is in the best interest of the Government, the payer and the payee," at a higher rate. "Second, a payer cannot make the same or similar errors repeatedly and repeatedly request or be granted an IRP closing agreement." "Third, the dollar amount of the average understated reportable income for the payees in question for a particular tax year must be de minimis." The manual does not put a number on de minimis.

The payer supplies "A listing ... that reflects the amount that was actually reported and the amount that should have been reported for each payee account," but "The taxpayer identification numbers for the payees do not need to be provided to the Service by the payer."

Scope: "This procedure is available for all forms in the Form 1099 series and if the criteria set forth herein are met, the Service will readily consider such an agreement. It should be noted that an IRP closing agreement is not guaranteed or automatic" (paragraph 4). The IRS may also enter one where the requirements are not met "if the individual facts and circumstances warrant" (paragraph 5).

The compliance fee

The fee is a stand-in for the tax the payees would have owed, estimated at a flat rate because "the individual tax returns of the payees are not available and will not be used. Therefore, an estimate of the amount that would make the government whole is an acceptable settlement amount for IRP issues" (paragraph 3).

The agreement should state that the fee "is paid in satisfaction of any potential IRP penalties," and the manual explains why the label matters: "The term used for the payment is important to help prevent the payment from being posted to a master file account." For a $40 average understatement on 50,000 accounts, a voluntary disclosure means a fee of 28 percent of $2 million, or $560,000, against what could otherwise be 50,000 corrected returns, 50,000 corrected statements, and penalties under 6721 and 6722 for each.

How a request is handled

• The IRS answers an initial request in writing, approving or disapproving it. A disapproval explains why and instructs the payer "to file the corrected information returns with the Service, as well as, corrected payee statements to the payees" (paragraph 7).
• On approval the IRS sends an unsigned agreement and asks for the fee. The payer signs and returns it "with a check for the compliance fee and the requested listing of payee accounts," after which "the Director of Field Operations should sign the closing agreement" and a copy goes back to the payer.
• For deposits the instructions direct staff to "the Large Business and International Technical Advisor, Financial Services Industry, New York, New York" (paragraph 6), which is a fair indication of who uses the procedure.
• The IRS keeps a file by payer name and fiscal year and checks it "prior to granting a closing agreement to determine if that payer has been issued previous closing agreements" (paragraph 8). The repeat-error bar is enforced.

Closing agreement or corrections

For an error that changes a few accounts, or that changes amounts materially for individual payees, the ordinary correction rules apply; the correction decision tree and how to correct a 1099 cover them, and the de minimis safe harbor for small dollar errors may mean nothing needs correcting at all. The closing agreement fits the case between: too many forms to correct sensibly, too much money in total to ignore, and a payer willing to disclose it before the IRS finds it.

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