IRC 7122(f) | Caraker Law Firm, P.C.

IRC 7122(f)

Bauche v. Comm’r, filed May 20, 2025 at T.C. Memo 2025-48 allows the Court to explore the possibility that the IRS has waited too long to review an Offer in Compromise, and thus under the statute, it is deemed accepted. The rule in IRC 7122(f) states in part: “[a]ny Offer in Compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of submission of such offer.” The taxpayer landed in a Collection Due Process hearing after issuance of a lien notice. During that proceeding, it was determined that filing an Offer in Compromise made sense. The taxpayer argued that the IRS did not reject its Offer in Compromise until the Settlement Officer issued its Notice of Determination, which was more than 24 months later. The IRS argued that the Offer had been rejected when Appeals mailed the taxpayer a letter saying the IRS was rejecting the Offer, in spite of the fact that a final Notice of Determination associated with the conclusion of the Collection Due Process hearing had not been sent out. The Court indicated that if it agreed with the taxpayer, it would have created a dilemma for Appeals because they may not have resolved all issues associated with the Collection Due Process hearing, but could be forced to issue a Notice of Determination to meet the 24 month deadline. The Court felt that the letter issued by the IRS through Appeals regarding its rejection of the Offer, even though the Appeals hearing was not fully resolved, clearly indicated to the taxpayer that the Offer was rejected. This illustrates the premise that part of the Collection Due Process hearing process is to entertain collection alternatives, but that is not the entire purpose.

IRC Section 7122(f) Deemed Acceptance review

The United States Tax Court in Michael D. Brown v. Comm’r of Internal Revenue, at 158 T.C. No. 9, filed on June 23, 2022 ruled that the time during which the IRS Appeals Office reviews the return of an Offer in Compromise is not included as part of the 24-month “deemed acceptance” period of IRC 7122(f). The rule at issue states that “[a]ny offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of the offer.” See IRC section 7122(f). In this case, taxpayer filed for a Collection Due Process (CDP) hearing after the filing of a tax lien. Right away, the taxpayer filed for an Offer through IRS Appeals. The collection specialist that reviewed his file returned the Offer because other investigations of the taxpayer were pending. He owed about $50 million in taxes. During the actual CDP hearing, the taxpayer urged the Settlement Officer to override this decision. The Settlement Officer would not do it and proceeded to close the CDP case. It was approximately 28 months from the time the CDP hearing was filed until the IRS issued a notice of determination. Taxpayer argued that the IRS exceeded the rule for deemed acceptance and the Offer should be accepted. The Court analyzed the statute and regulations associated with it. In part, the taxpayer tried to argue that even though the Offer unit “returned,” the Offer, it was only Appeals that can make the determination to return the Offer. As such, it should be deemed accepted. The Court didn’t buy it. Rather, they point out that the relevant procedures explaining the deemed accepted provision specifically state that the “period during which the IRS Office of Appeals considers a rejected offer-in-compromise is not included as part of the 24-month period.” The Court explained that this would be true even outside of the CDP setting. In other words, if an Offer is rejected and a taxpayer Appeals that rejection, nothing about the Appeal extends the 24-month period in the rule.