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Unlike Compliance, Appeals Officers (AO) may consider the hazards of litigation in attempting to reach a settlement. A hazards settlement is a resolution of an issue based on the probable outcome if the case were to go to court. It is generally expressed as a percentage. Hazard settlement will require you to complete a Form 870-AD. Once this is agreed to by you and the AO, you will not be able to litigate the issue at a later time, the settlement is final.
There is some risk in almost every case when the Government goes before a judge or jury. The Courts tend to decide some issues on an all or nothing basis. Even though the Government seems to have a strong case, it could still lose.
Some factors used by AOs in applying the hazards of litigation include:
- Whether your case is pro-se (without representation) or you have a representative;
- What the amount of the tax at issue is. Cases with liabilities under $25,000 are considered “small” cases. Those types of cases are treated differently in the US Tax Court;
- Whether there have been a lot of cases decided in a certain way impact the risk to the government to litigate. For example, if an issue has often been litigated and IRS has always won, then the hazards to litigate are low;
- Whether the information supplied is credible and support the facts of the case;
- Whether the position you have taken have merit. Meaning the reason why you disagree is based on law. For example, if you disagree with a deduction being denied, you must provide a basis for keeping the deduction. This can be receipts, other documents supporting the expense, a cite of some Internal Revenue Code/Regulation or other statutory sources.
