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How To Settle Your Tax Court Case

Most Tax Court cases settle before trial. Here's how settlement works, how to evaluate an offer, and what you're signing when you agree.

Liam Williams

Liam Williams

— 8 min read

You filed your Tax Court petition. The IRS filed its Answer. Now someone from the IRS—an Appeals officer or a government attorney—is reaching out about settling your case. This is the moment where most Tax Court cases are actually decided. Not in a courtroom with a judge. In a phone call or a conference room, with both sides weighing what they'd likely win or lose at trial.

Settlement is not giving up. It's both sides acknowledging the strengths and weaknesses of their positions and reaching a resolution that reflects those realities. The question isn't whether you'll get a settlement offer. It's whether you'll know how to evaluate it, what you're signing, and when it makes sense to say no.

Why Most Cases Settle

Most (76%) of Tax Court cases close by formal settlement. When you include dismissals and other non-trial dispositions, more than 99% of cases resolve without a trial on the merits.

Both sides have strong reasons to settle. The IRS avoids the cost of preparing and trying a case. You avoid the uncertainty of trial—where the burden of proof is generally on you—and the additional interest that accrues on any balance while the case drags on.

Settlement applies to both regular and small (S) cases. The process is essentially the same, though the finality rules differ (more on that below).

Who You'll Be Negotiating With

After the IRS files its Answer, the case typically gets referred from the Office of Chief Counsel to the IRS Independent Office of Appeals for settlement consideration. Once Appeals receives the case, it has exclusive authority to settle.

Appeals assigns an Appeals Technical Employee (ATE) to your case. The ATE is not the same person who audited you—Appeals operates independently from IRS Examination. The ATE evaluates your case using the "hazards of litigation" standard: what would likely happen if this case went to trial? That analysis drives the settlement offer.

Not every case goes to Appeals. Chief Counsel may keep cases it wants to litigate—those involving novel legal issues, designated for litigation, or where referral wouldn't be productive. When Counsel retains a case, you negotiate directly with the IRS attorney assigned to it.

If you already went through pre-petition Appeals before filing your petition, docketed Appeals is effectively a second round. The difference is that both sides now face real litigation pressure—your case has a docket number, a trial calendar is coming, and the hazards of litigation are more concrete.

How To Evaluate a Settlement Offer

This is the most important part of the settlement process. A settlement offer isn't a single number to accept or reject. It's a set of proposed resolutions on individual issues, and you should evaluate each one separately.

Look at Each Issue Individually

The IRS doesn't settle cases as a lump sum. It adjusts specific items—unreported income, disallowed deductions, penalties. The ATE analyzes the hazards of litigation for each issue independently. You should do the same.

For each disputed item, ask yourself:

  • What evidence do I have? Receipts, bank statements, contracts, transcripts—documentation wins cases.
  • What does the IRS have? Third-party records, information returns, audit workpapers.
  • Who has the burden of proof? At trial, the burden is generally on you. The IRS's determination is presumed correct unless you can show otherwise.
  • What would a judge likely decide? Be honest. If your only evidence is your testimony, that's usually not enough on its own.

Use Pro Se Trial Rates as a Reality Check

Pro se petitioners who go to trial prevail in full or in part about 12% of the time. Represented petitioners prevail about 23% of the time. These numbers don't mean you'll lose—but they should inform how you weigh the risk of trial against a reasonable settlement offer.

Watch for Penalty Concessions

Accuracy-related penalties under IRC § 6662 are often the first item the IRS concedes in settlement. Penalties require the IRS to prove specific elements—including written supervisory approval under IRC § 6751(b)—and the litigation hazards on penalties are frequently higher than on the underlying tax adjustments. If the settlement offer doesn't concede penalties where the IRS's position is weak, push back. For background on penalty arguments, see How To Request IRS Penalty Abatement.

Factor In Interest

Interest accrues on underpayments from the original due date of the return until the date you pay, under IRC § 6601. Filing a Tax Court petition stops the IRS from collecting, but it doesn't stop interest from running. Every month the case stays open adds to the total bill. A settlement that closes the case sooner saves you interest—even if the tax amount itself doesn't change.

What You're Signing: Settlement Documents Explained

When you settle a Tax Court case, you sign specific legal documents. Here's what each one means.

Stipulated Decision

This is the primary settlement document. After you and the IRS agree on the terms, the IRS prepares a stipulated decision document. It specifies the deficiency amount (or overpayment) for each tax year and any penalties.

Both you and the IRS attorney sign it. The signed document is filed with the Tax Court, and the judge enters it as the decision of the Court. The effective date is the date of entry by the Court, not the date you signed. You don't draft this document—the IRS prepares it and sends it to you for review and signature.

Read it carefully before you sign. Make sure the amounts match what you agreed to. Once the Court enters it, the stipulated decision becomes the judgment in your case.

Stipulation of Settled Issues

If you settle some issues but not others, the parties file a Stipulation of Settled Issues under Tax Court Rule 91. This resolves the agreed issues and leaves the remaining disputes for trial. The stipulation is binding—once filed, it's treated as a conclusive admission on the settled issues. For the mechanics of negotiating stipulations generally, see How To Handle Discovery and Pretrial Preparation.

Partial settlement is common and often strategic. You might settle issues where your evidence is weak and focus your trial preparation on issues where you have strong documentation.

Rule 155 Computation

Rule 155 applies after the Court issues an opinion or order—not during settlement. Once the Court decides the legal issues, the parties have 90 days to compute the exact dollar amounts (tax, penalties, interest) consistent with the Court's findings.

If both sides agree on the math, either party files the computation and the Court enters its decision. If they disagree, each side files its own computation and the Court resolves the dispute.

Form 870-AD

Form 870-AD is used by Appeals in some settlements. It's a waiver of restrictions on assessment that includes a pledge of no reopening—meaning the IRS commits not to reopen the settled issues. This is a stronger form of finality than a standard Form 870.

In Tax Court cases, the stipulated decision is the document the Court enters as its judgment. Form 870-AD may be used alongside a stipulated decision in certain circumstances, but the stipulated decision is what most pro se petitioners will encounter.

The Settlement Conference

When the ATE contacts you to discuss settlement, come prepared.

What To Bring

  • Documentation organized by issue—receipts, bank statements, IRS transcripts, contracts, and any third-party records supporting your position
  • Your own hazards analysis—a realistic assessment of where your case is strong and where it is weak
  • A clear understanding of each adjustment the IRS made and why you disagree

How It Works

The ATE walks through the issues one by one. For each issue, the ATE explains the IRS's position, asks about yours, and evaluates the litigation hazards. This is a negotiation, not a hearing.

You can make counteroffers. If the ATE proposes conceding 50% of a deduction, you can explain why you believe the evidence supports a larger concession.

You don't have to decide on the spot. You can ask for time to review the offer, consult with someone, or gather additional documentation. If you want representation, a Low Income Taxpayer Clinic can help if you qualify (income below 250% of the poverty line, dispute of $50,000 or less).

Calendar Call Settlement

Many cases settle at the courthouse on the day of calendar call—sometimes in the corridor right before the judge takes the bench. Tax clinics and volunteer attorneys provide free assistance to pro se petitioners at trial sessions, including help navigating last-minute negotiations. If you haven't settled before your trial date, don't panic. Settlement discussions often continue right up to and through the trial session.

When To Say No

Sometimes the right move is to reject a settlement offer. Consider saying no if:

  • The offer doesn't concede items where the IRS's evidence is weak. If the IRS can't meet its burden on a penalty or lacks documentation to support an adjustment, the offer should reflect that.
  • You have strong documentation the ATE hasn't seen. Present it first—the offer may change once the ATE reviews new evidence.
  • The offer requires conceding issues where the law is clearly on your side. If published case law supports your position, a settlement giving that issue away isn't a good deal.

But be realistic. Pro se petitioners who go to trial prevail about 12% of the time. The burden of proof is on you for most issues. Going to trial means additional time, additional interest accrual, and additional stress—with no guarantee of a better outcome. If you do decide to go to trial, see How To Prepare Your Evidence for Tax Court and What To Expect at Your Tax Court Trial.

Rejecting a settlement offer doesn't end your case. It means the case proceeds to trial preparation. You can still settle later—many cases settle after an initial offer is rejected, and some settle on the morning of trial.

What Happens After You Settle

Once both sides sign the stipulated decision and file it with the Court, the judge enters the decision. What happens next depends on your case type.

Regular cases: The decision becomes final 90 days after entry—the period for filing an appeal under IRC § 7483—if no appeal is filed. Either party can appeal during those 90 days, though appealing a settlement you agreed to is extremely rare.

Small cases: The decision is final immediately upon entry. Small case decisions cannot be appealed under IRC § 7463(b).

After the decision becomes final, the IRS adjusts your account and issues a notice and demand for payment. Interest continues to accrue until you pay—settlement doesn't stop the interest clock. If you owe a balance, your options include full payment, an installment agreement, or an offer in compromise. For a detailed guide to these options, see How To Resolve Your IRS Tax Debt.

For a broader walkthrough of the post-filing timeline, see What Happens After You File Your Tax Court Petition.

Common Mistakes

Treating settlement as all-or-nothing. You don't have to settle every issue or none. Partial settlements are common and can be the smartest approach.

Accepting the first offer without negotiating. Settlement is a negotiation. The first offer is a starting point, not a final position.

Rejecting a reasonable offer out of anger. Tax disputes are stressful. But decisions driven by frustration rather than evidence tend to produce worse outcomes.

Not reading the stipulated decision before signing. Verify every number. Once the Court enters it, you're bound by it.

Ignoring contacts from Appeals or Counsel. If you don't respond to the ATE or IRS attorney, the case returns to Chief Counsel for trial preparation. You lose the opportunity to negotiate—and still have to show up for trial or face dismissal. For more on what happens when negotiations break down, see What Happens After IRS Appeals Denies Your Case.

Resources

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax professional or attorney.

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