Offer in Compromise—Deemed Acceptance

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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. 

Collections Statute 

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IRC 6502


The United States District Court for the Northern District of Ohio held in United States of America v. Sherri Tenpenny, Case NO. 1:24-cv-00838, entered August 9, 2024, that the statute of limitations on debt collection had not run due to the multiple Offers in Compromise filed by the taxpayer. This practitioner believes that it is critically important to know and understand the statute of limitations on collections when dealing with outstanding balances at the IRS. It should guide the decision-making process when looking at collection alternatives. In the instant case, the taxpayer owed the IRS for outstanding balances for form 1040’s from long-ago assessments. Some were assessed 15 years ago. The general rule, as set forth in IRC 6502(a) is that the IRS has ten years after an assessment to collect a tax debt. However, there are actions that will toll the statute and effectively extend it. One such action is the filing of an Offer in Compromise. The limitations for collections is tolled for the time period that the Offer is pending, plus 30 days. In this case, the taxpayer had filed four separate Offers in Compromise over the years, tolling the collection statute many times. Despite her motion to dismiss the IRS collection action based on the running of the statute, the Court allowed the IRS to pursue the debt. In any analysis of IRS debt, it is important to know whether the collection statute is currently running and what the Collection Statute Expiration Date (CSED) is for each year. When tax periods only have a few years remaining on the CSED, it many times makes more sense to either substantiate Currently Not Collectible, or set up a Partial Payment Installment Agreement. Once these collection alternatives are established, the statute continues to run and frequently that results in debt being written off by the IRS as the CSED runs. An Offer in Compromise may be the right proposal, but it should only be made in the context of the above analysis. 

Offer in Compromise

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IRC 7122


The Tax Court held in Estate of Ralph W. Baumgardner, Jr v. Comm’r of Internal Revenue, Docket No. 11343-19L, filed August 22, 2024, that the IRS Office of Appeals had not abused its discretion by rejecting an Offer in Compromise submitted by the taxpayer given the Reasonable Collection Potential (RCP) exceeded their tax debt. Taxpayers owed approximately $114,504 in tax debt. Collection efforts from the IRS resulted in the taxpayers filing an Offer in Compromise based on Effective Tax Administration (ETA). Taxpayers offered $1,825 to settle the debt. Through much procedure, the IRS adjusted its calculation of equity downwards, but continued to believe that taxpayers RCP was higher than the debt. Frankly, the taxpayers were asking for too much. This case is heavy on detail, but the primary issue relates to a couple of rental houses the taxpayers owned. In this instance, an income production issue becomes relevant as it relates to equity in the houses. In other words, should the taxpayer be expected to liquidate or otherwise account for the equity in an asset that produces income, or simply calculate the income into the financial analysis? In argument, counsel for taxpayers attempted to support their argument for negating the RCP by proposing that they would have foreseeable economic consequences relating to their future increased out of pocket health care expenses, vehicle replacement expenses and real estate considerations…including property maintenance items for their rentals that encompassed everything from plumbing and boiler repairs and maintenance to storm door replacement, vinyl siding and trim replacement, and downspout repairs.  The taxpayers’ counsel made good progress with the IRS on health care expenses, as the IRS is generally sympathetic to provable expenditures. The IRS even gave up some ground on the transportation expenses. As for future expenditures associated with the rentals, the IRS deemed them too speculative and the Tax Court agreed. This was a fairly predictable outcome.

Offer in Compromise 

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IRC 7122

The Tax Court ruled in Duane Whittaker and Candace Whittaker v. Comm’r of Internal Revenue, T.C. Memo 2023-59, filed May 15, 2023 that an IRS Settlement Officer had abused her discretion when calculating the Reasonable Collection Potential (RCP) of the taxpayers while reviewing an Offer in Compromise as a collection alternative in the context of a Collection Due Process hearing. The Court remanded the matter to the Appeals Office to consider updated financials and other directives of the Court in resolution of the matter. Taxpayers owed approximately $50,000 at submission of the Offer in Compromise.  The issue before the Court was whether the IRS abused its discretion by failing to adequately consider: 1) the taxpayers’ reliance on their retirement account for income, 2) the special circumstances that they raised – specifically that they were near retirement and unable to borrow against their home, and 3) the change in their financial situation due to the pandemic.  In regards to the retirement income, the taxpayers argued that under the Internal Revenue Manual (IRM) and under Treasury Regulation section 301.7122-1(c)(3)(iii)(example 2), that the IRS may characterize retirement funds as income, rather than equity, when the taxpayer is within one year of retirement and they need the funds for necessary living expenses.  The Court indicated that even though the Settlement Officer made reference to this issue in the administrative record, the analysis did not make it into the determination notice from the Settlement Officer.  On the issue of home equity, the taxpayers indicated they would have problems borrowing because the assessed value was not reflective of the appraised value based on the condition of the home. They offered to obtain more information for the Settlement Officer,  but instead of asking for that information, the Settlement Officer merely indicated that she would not remove the equity in the home from the calculation of RCP. The Court concluded that the Settlement Officer’s conclusion that the taxpayers could tap the equity of the home was erroneous as their evidence was not, in fact, reviewed. And therefore, the Settlement Officer’s reliance on the equity to calculate the Reasonable Collection Potential was an abuse of discretion. Though the Court did not necessarily indicate that the taxpayers had sound positions on the issues they raised, this opinion should have a beneficial effect on how closely Settlement Officers address Reasonable Collection Potential in that it would be detrimental to the IRS to not inquire further about issues like these and document the provision, or lack of provision, of further evidence by the taxpayer.  

Offer in Compromise

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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. 

Offer in Compromise

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IRC Section 7122 

The United States Court of Appeals for the Third Circuit in Estate of Kwang Lee, Deceased, Anthony J. Frese, Executor v. Comm’r of Internal Revenue, Case No. 21-2921 handed down an opinion on August 23, 2022 in which the Court ruled that the denial of an Offer in Compromise for estate taxes by the IRS was appropriate and that the Executor could be held personally liable for non-payment of the Estate taxes.  The decedent in this matter passed away many years ago – in 2001.  The Executor, Anthony J. Frese miscalculated the estate tax on the estate and ultimately received a notice of deficiency in 2006 and a formal deficiency from the IRS in 2010.  However, between 2004 and 2010, the Executor distributed over $1 million in assets to the beneficiaries, including $640,000 after receiving the notice of deficiency.  The Estate filed an Offer in Compromise and tried to settle for the remaining assets of the estate.  The IRS rejected the Offer, arguing that their reasonable collection potential was higher than what was offered, in part because IRC section 3713(b) allows the government to hold the executor personally liable when the executor transfers property before satisfying a known estate tax. As such, the argument by the estate that the IRS Office of Appeals had abused its discretion in denying the Offer based on payment of the remaining assets of the estate, fails. 

Offer in Compromise

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IRC 6320 Hearing

The United States Court of Appeals for the Seventh Circuit in Craig L. Galloway v. Comm’r of Internal Revenue, No. 21-2269 decided February 9, 2022 that because the issue at hand was outside of the authority of the Tax Court to decide, then the issue also fell outside of the authority of this Court to review.  

The Taxpayer in this case had an unpaid income tax liability of $64,315.43.  Taxpayer submitted an Offer in Compromise which was rejected by the IRS because they believed the taxpayer could pay the liability based on the reasonable collection potential.  Rather than appeal this decision, taxpayer filed another Offer in Compromise. It was rejected for the same reason.  He appealed, but the decision of the Offer unit was sustained.  After the appeal, the IRS issued a Notice of Federal Tax Lien Filing with rights to a Collection Due Process hearing under IRC 6320. Taxpayer requested a hearing and during that hearing the Officer advised that he could submit a new Offer directly to the Offer Unit, but that if it was the same Offer, it would be rejected.  No Offer was filed and the Tax Lien was sustained.  Taxpayer then appealed the decision to sustain the filing of the Notice of Federal Tax Lien to the Tax Court.  The IRS won in Tax Court by correctly arguing the taxpayer was prohibited from raising a challenge to the Offer in that setting – which he was trying to do.  Taxpayer then appealed to this Court.  This Court indicated that their review would be based on whether there was an abuse of discretion by the settlement officer in sustaining the federal tax lien – not a review of the underlying rejection of the Offer. This was because the taxpayer had participated meaningfully in his appeal of the Offer rejection.  Because the Tax Court was limited in reviewing the underlying debt, so too is this Court of Appeals.

Offer in Compromise

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I.R.C. Section 7122

The United States Tax Court in Swanberg v. Comm’r of Internal Revenue handed down an opinion on August 25, 2020, as docket No. 10266-19L, in which it ruled that the IRS had properly included taxpayer’s Veterans Affairs benefit and excluded his life insurance premium in calculating an ability to pay for Offer in Compromise purposes. This matter was started in a Collection Due Process hearing filed as a result of the issuance of a Final Notice of Intent to Levy. The taxpayer submitted a collection information statement reflecting monthly income of $6,352 and expenses of $6,854. On review, the Settlement Officer noted that the taxpayer’s bank statements reflected a disability benefit from the VA. The Officer increased his income by the amount of this benefit. Further, she disallowed a $600 per month expense for whole life insurance. The Taxpayer argued that his VA benefit should not be included since it was not taxable. The Court ruled that the Settlement Officer had abided by the provisions of the Internal Revenue Manual (IRM) regarding these issues. The IRM provides that all household income will be used to determine taxpayer’s ability to pay. Income is included even if not subjected to taxation. Furthermore, the IRM supports disallowance of the whole life insurance expense. No abuse of discretion was found by the Court. 

Dissipation of Assets

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Offer in Compromise

In John F. Campbell v. Comm’r, T.C. Memo 2019-4, Filed February 4, 2019, the Tax Court ruled that an IRS Appeals officer, in the context of reviewing an Offer in Compromise during a Collection Due Process hearing, abused his discretion when including certain dissipated assets in the calculate of Reasonable Collection Potential (RCP). The Court explained that the Internal Revenue Manual (IRM) sets forth when dissipated assets should be included in RCP.  Per IRM 5.8.5.18(1), dissipated assets are only included in RCP where “it can be shown that the taxpayer has sold, transferred, encumbered or otherwise disposed of assets in an attempt to avoid the payment of the tax liability,” or otherwise used the assets “for other than the payment of items necessary for the production of income or the health and welfare of the taxpayer or their family, after the tax has been assessed or during a period up to six months prior to or after the tax assessment.”  The IRM instructs that the Appeals officers should use a three-year look-back period, from the date the offer is made, to determine whether it is appropriate to include dissipated assets in the RCP calculation.  The officer may look beyond this period if there is a transfer of assets within six months before or after the assessment of the tax liability.  The Court deemed it an abuse by the Appeals officer to include assets transferred 6 years before the assessment and 10 years before the Offer was submitted.  The Court was further disturbed by additional IRS allegations that the taxpayer sought to “waste his wealth,” rather than pay his tax liabilities. There was no evidence on the record, or otherwise, supporting this contention.   

How do you decide if an Offer In Compromise is a good way to resolve your IRS debt?

Posted on by katemley

In the past couple of years, the IRS has dramatically changed its formula for calculating the amount a taxpayer must pay to settle a tax debt.  Fundamentally, the changes were favorable for the taxpayer and the IRS appears to better understand that acceptance of an Offer in Compromise likely results in collection of more tax dollars than simply continuing to enforce collection efforts through levies and lien filings.  However, the movement towards a more favorable calculation by the IRS of the taxpayer’s ability to pay, and thus the taxpayer’s reasonable collection potential, has actually been further adjusted in a manner that removes some of the initial excitement about formula changes to Offer calculations.

The basis of acceptance of most Offers in Compromise is doubt as to collectability.  Basically, the IRS performs an analysis of a taxpayer’s financial situation and if the taxpayer’s ability to pay is less than the amount they owe, then the taxpayer could theoretically qualify for an Offer in Compromise settlement.  The ability to pay analysis consists of the calculation of both a taxpayer’s equity in assets and “future income potential.”

A taxpayer’s future income potential for a settlement is typically calculated by performing a monthly financial analysis in which the IRS compares gross earnings to allowable expenses to determine if there is any excess monthly income remaining from which the taxpayer could pay the IRS.  If so, this excess income was historically multiplied by a factor – either 48 or 60, to determine the future income potential portion of a settlement Offer.  The taxpayer would be allowed to multiply the excess monthly income by 48 if the Offer was for a lump sum settlement, and 60 if the payments were to be made over a couple of years.

Recently, a favorable adjustment was made to the multiplier.  Rather than asking the taxpayer to multiply excess income over expenses by 48 for a lump sum Offer, the IRS dramatically adjusted this number down to 12!  And, rather than multiplying by 60 for a short term payment Offer over up to a couple of years, the multiplier was altered to 24! 

This seemed almost too good to be true. And in part, it was. The IRS clarified, through the adoption of guidance in its Internal Revenue Manual, that even if a taxpayer calculates that he or she qualifies under the new formula, the taxpayer will not qualify for a settlement Offer if the IRS could collect the entire debt through establishment of an Installment Agreement over the statutory period of collections, unless there are special circumstances.

What this means is that at the time of analyzing a taxpayer’s situation, it is important to be aware that even though the formula indicates a taxpayer would qualify for a settlement, if the monthly excess income over expenses would retire the debt under the statute of limitations, then the taxpayer is wasting time submitting an Offer.  Furthermore, the taxpayer will be putting the statute of limitations for collection on hold while the defective Offer is under review, and for a period of time after rejection.

Here’s a simple example of how this would work.  Assume a taxpayer owes $50,000 in tax debt.  If the taxpayer just filed the return, the IRS will have 10 years, or 120 months to collect the debt, with exceptions for extensions of time – such as when an Offer is filed. If the taxpayer has no equity in assets, but a financial analysis shows an ability to pay $1,000 a month, the taxpayer might think a lump sum Offer would be a good way to put the debt to rest forever.  Under the lump sum analysis, the future income potential would be $1,000 x 12 or $12,000.  With no equity in assets, this is less than the tax debt and would make this look viable.  Even the short term Offer looks good as the future income potential would be $1,000 x 24 or $24,000.  The settlement would be paid over 24 months, or $1,000 per month.

The reality in the above example is that the Offer will be rejected, absent special circumstances, because the monthly future income potential of $1,000 multiplied by the life of the collection statute exceeds the tax debt as follows: $1,000 x 120 months (or 10 years as the return was just filed) = $120,000.  The exception to this is if special circumstances exist as disclosed on submission of the Offer.  Generally, special circumstances would include creation of economic hardship, or alternatively, compelling public policy or equity factors, such as health concerns or age, could tip the analysis in favor of settlement, in spite of the above.

Fundamentally, and especially because of the fact that the statute of limitations is placed on hold during a lengthy analysis period (several months), a taxpayer has to be careful to review their particular situation so that submission of an Offer in Compromise doesn’t do more harm than good.  If you would like assistance with your tax matter, or the tax situation of a client, please don’t hesitate to contact us.