Entering into a Closing Agreement with the FTB

A closing agreement is, in essence, a contract between the 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 the taxpayer and the FTB 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 the FTB and the taxpayer. 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. It is extremely important that both the FTB and the taxpayer understand the nature and terms of the agreement before it is finalized.

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 FTB's settlement program.

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. 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. The FTB does 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 the FTB 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 the FTB. As such, the FTB will not enter into a closing agreement where facts are unknown, hypothetical or contingent.

Common areas in which the FTB has 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.

The FTB will consider any taxpayer's request for a closing agreement; however, the FTB 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 the FTB and/or is suspended by the California Secretary of State; and
• The proposed closing agreement would satisfy or be in lieu of the taxpayer's filing obligations.

A taxpayer may request a closing agreement at any time during the administrative process. If the taxpayer is currently in the audit, protest, or appeal phase of the administrative process, the taxpayer should make a request to the FTB professional that is currently working with the taxpayer. When the request is made, the FTB professional will review the request to determine if a closing agreement is the proper instrument for the taxpayer's particular situation and notify the taxpayer as to whether a closing agreement would be an appropriate tool in the current dispute.

In order to ensure that a Closing Agreement meets the intended goals of both the taxpayer and the FTB, the FTB Closing Agreement includes all relevant and necessary information to memorialize the agreement. This includes information such as the name(s) of the taxpayer(s), the tax year(s) involved, a recital of all facts relevant to the transaction or year at issue, a statement of the parties' intent, and what are the provisions being agreed upon.

See the sample closing agreement for more information.