Rev. Rul. 72-487

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in G.C.M. 6894, C.B. IX-1, 169 (1930).

The question presented is whether, after the execution of a closing agreement, the Internal Revenue Service may make an additional inspection of a taxpayer's books and records for the same taxable period for which the closing agreement was executed and approved.

Subsequently, an investigation provided reasonable grounds to believe that fraud or malfeasance, or misrepresentation of a material fact existed in connection with the execution of the closing agreement. Thus, the Service wishes to inspect the taxpayer's books and records to develop the true facts.

Under the provisions of section 7121(b) of the Internal Revenue Code of 1954 and the applicable regulations, if a closing agreement is approved by the Service, it shall be final and conclusive and shall not be reopened as to matters agreed upon or the agreement modified except upon a showing of fraud or malfeasance, or misrepresentation of a material fact.

Section 7605(b) of the Code provides that only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary of the Treasury or his delegate, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.

The right to inspect the taxpayer's books and records is not affected by the execution and approval of a closing agreement. It may be that the inspection of the taxpayer's books and records will not furnish evidence sufficient to entitle the Service to set aside the closing agreement, but the execution of such agreement does not preclude the Service from making an inspection to determine whether the case may be reopened. The inspection may disclose that errors were made in the computation of the tax liability and it may appear that the taxpayer should have paid a greater tax, but the agreement may not be set aside by the Service or by the courts unless there is a showing of fraud or malfeasance, or misrepresentation of a material fact.

Where an inspection is made and there is an absence of fraud or malfeasance, or misrepresentation of a material fact, the case may not be reopened as to the matters agreed upon or the agreement modified. This does not mean, however, that the Service may not make an inspection in any case in order to develop the true facts. An inspection does not amount to a reopening. Whether the case may be reopened depends upon the results of the inspection.

Accordingly, it is held that an additional inspection of the taxpayer's books and records may be made by the Service at any time upon compliance with section 7605(b) of the Code to determine whether there is any fraud or malfeasance, or misrepresentation of a material fact in connection with the execution of a closing agreement.

G.C.M. 6894 is hereby superseded, since the position set forth therein is restated under the current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.