In
Shafmaster v. United States, 707 F.3d 130 (1st Cir. 2013),
here, the taxpayers urged, inter alia, that the the IRS was estopped from collecting the failure to pay penalty the IRS asserted under § 6651(a)(3). The Shafmasters claimed that the IRS, in its various dealings with them and various documents, had agreed not to assert the penalty. The problem was that there was certainly not a closing agreement that said that. Nor was there even a Form 870-AD that said that. Nor did the other dealings really establish the claim. The Court disposed of the argument as follows and expressed skepticism, but declined to hold, that estoppel could apply against the IRS. The key part of the holding is as follows (footnote omitted):
The Shafmasters argue that the IRS was equitably estopped from assessing the failure-to-pay penalty because the agency had, through Hamilton and through the various documents that the Shafmasters signed, agreed not to assess such a penalty, and the Shafmasters had relied on that promise. The argument fails, for a number of reasons. We need not reach the question of whether equitable estoppel can ever bind the IRS in informal settlements reached apart from the §§ 7121-7122 procedures.
In Botany Worsted Mills v. United States, 278 U.S. 282 (1929), the Supreme Court interpreted the predecessor of 26 U.S.C. §§ 7121-7122 as providing the "exclusive method" for compromising tax liability, holding that Congress "did not intend to in trust the final settlement of such matters to the informal action of subordinate officials in the [IRS]." Id. at 288-89. As a result, the Court concluded, informal settlements are not binding on either the taxpayer or the government. Id. at 288. However, the Court went on to note that it was not "determining whether such an agreement, though not binding in itself, may when executed become, under some circumstances, binding on the parties by estoppel." Id. at 289. The Court thus left the door open for the argument that some informal agreements between taxpayers and the IRS might give rise to claims of estoppel -- at least when, as in Botany Worsted, the government asserts estoppel against a taxpayer.
