A closing agreement may cause problems for defense contractors when it comes to claiming lucrative tax benefits.

What are Closing Agreements?

Closing agreements are sometimes required by the IRS when there is a deficiency in a tax return. These agreements are binding and will conclusively settle the issue between the IRS and the taxpayer.

There are two types of closing agreements: Form 866 Agreement as to Final Determination of Tax Liability and Form 906 Closing Agreement on Final Determination Covering Specific Matters. Form 866 establishes final tax liability and Form 906 makes a determination only on certain items on the form.

The IRS’s Internal Revenue Code states the following about closing agreements:

“A closing agreement may be entered into in any case in which there appears to be an advantage in having the case permanently and conclusively closed, or if good and sufficient reasons are shown by the taxpayer for desiring closing agreements and it is determined by the Commissioner that the United States will sustain no disadvantage through consummation of such an agreement.”

Regulations and laws regarding closing agreements can be complicated, and complying with them may be extremely tricky. If individuals are struggling with understanding closing agreements, they may want to speak to a legal professional.

When Might Closing Agreements be Utilized?

According to the IRS, closing agreements are appropriate in the following situations:

• The taxpayer has a good reason for requesting the agreement;
• The taxpayer is willing to provide facts and documentation to establish their tax liabilities;
• An agreement is in the best interest for all parties;
• The federal government won’t be harmed by an agreement;
• Any violation or tax deficiency was unintentional on the part of the consumer.

When are Closing Agreements Bad?

Unfortunately, closing agreements may be detrimental in certain circumstances. Legal professionals argue that military contractors in particular may be getting the short end of the stick when it comes to these agreements. If these contractors are forced to sign closing agreements, they may be prohibited from taking the lucrative Foreign Earned Income Exclusion when they calculate their taxes.

What is the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion is available for U.S. citizens or resident aliens of the United States who live abroad and are taxed on their worldwide income. There are certain stipulations to this exclusion, but if military contractors are eligible they may be able to secure a massive tax break.

Military contractors working overseas should be able to claim this exclusion benefit under Section 911 of the Internal Revenue Code. However, some of these individuals may have been forced or coerced into signing closing agreements which prohibit their ability to claim the exclusion.

Luckily, these agreements may not be legally enforceable according to attorneys. If the agreement is found to violate a defense contractor’s taxpayer rights, they may be able to take action against their employer and seek compensation along with proper tax benefits.

This may be the case for employees of AECOM, Boeing, E&M Technologies, General Dynamics, HP, IBM, Leidos, Northrop Grumman, Raytheon, SAIC, and Stellar Solutions.

This article is not legal advice. It is presented
for informational purposes only.