A taxpayer with a terminal illness owes the IRS back taxes. Her medical bills are eating whatever money she has left. Her tax attorney files an offer to settle the tax debt for a nominal amount, and the IRS agent working the file agrees to recommend it. Then the process drags on for months.
That is not unusual. IRS offers routinely take a year or more to work through. But what happens if the taxpayer dies while the offer is still sitting on an IRS employee’s desk? And what if the IRS, not knowing about the death, goes ahead and sends out an acceptance letter anyway?
Most people would assume that an IRS acceptance letter is the end of the story. The deal is done. The estate can close out the tax debt and move on. Is that right?
The recent case of Estate of Farwell v. Commissioner, T.C. Memo. 2026-95, provides an opportunity to consider whether an IRS offer in compromise survives the death of the taxpayer who made it.
Facts & Procedural History
The taxpayer had owed back taxes for several years between 2008 and 2015. These were self-reported liabilities. She filed the returns but she did not pay the full balance due. The IRS eventually filed a notice of federal tax lien for about $119,000.
In 2018, the taxpayer was diagnosed with a terminal neurodegenerative illness. Her brother was given a durable power of attorney to help with her finances. Her tax attorney requested a collection due process hearing with the IRS Office of Appeals and asked that Appeals consider an offer in compromise. The offer was for $100. The cover letter explained that all of her remaining assets were needed to pay for her medical care.
The IRS appeals officer sent the offer to the IRS’s centralized offer unit for review and suspended the hearing in the meantime. In early 2020, the IRS offer examiner asked for updated financial information. The tax attorney sent it in.
The taxpayer died in March 2020. About a month later, the offer examiner left the tax attorney voicemails and sent a fax saying she was recommending the offer for acceptance based on “effective tax administration.” The tax attorney received these messages but did not respond. The IRS was apparently not told about the death.
In September 2020, six months after the taxpayer had died, the IRS mailed a letter accepting the offer. The case then went back to IRS Appeals to close out the hearing. That is when the Settlement Officer pulled up the IRS’s computer records and saw the date of death.
The IRS then reversed course. It sent a letter saying that it had terminated its consideration of the offer because the taxpayer was deceased. If the estate wanted the same or a different deal, it would have to file a new offer signed by the estate’s legal representative.
The estate pushed back. It argued that the offer had been accepted and that the regulations only let the IRS reopen an accepted offer in a few narrow situations. Appeals disagreed and issued a notice of determination sustaining the lien. The estate then petitioned the U.S. Tax Court to contest this determination. The IRS filed a motion for summary judgment.
What Is an Offer in Compromise?
Section 7122 of the tax code gives the IRS authority to compromise a tax debt. In plain terms, the IRS can agree to take less than the full amount owed and call it even.
There are three grounds for an offer. The first is “doubt as to liability,” where there is a real question about whether the tax is owed at all. The second is “doubt as to collectibility,” where the taxpayer simply cannot pay the full amount. The third is “effective tax administration,” where the taxpayer could technically pay, but collecting the full amount would cause economic hardship or would be unfair given the circumstances. A taxpayer with a terminal illness and large medical bills is a textbook example of the last one.
The offer process is formal. The taxpayer submits Form 656 along with detailed financial information. The IRS reviews the numbers, often asks for more documents, and then decides. This takes time. For many taxpayers, a year or more is not unusual. The tax code even has a backstop for slow processing. If the IRS does not reject an offer within 24 months of submission, it is deemed accepted.
Once an offer is accepted, it is meant to be final. That finality is the whole point. The taxpayer pays the agreed amount and the rest of the debt goes away.
When Is an Offer Actually Accepted?
So when is an offer actually accepted? This is where the details matter and the heart of the issue in this case.
An offer in compromise is a contract with the government, but it is not formed the way most contracts are. Courts have long held that Section 7122 and its regulations are the exclusive way to compromise a tax debt. A handshake deal with an IRS agent does not count. Neither does a phone call or a voicemail saying the offer is being recommended for approval.
The regulations spell out the trigger. An offer “has not been accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer’s representative.” So acceptance requires two things. There must be a written notice. And it must go to the taxpayer or to someone with authority to represent the taxpayer.
In the present case, the offer examiner’s April 2020 voicemails and fax were not an acceptance. They were a recommendation. The only written acceptance was the September 2020 letter. So the question was whether that letter did what the regulations require.
Can the IRS Accept an Offer From Someone Who Has Died?
So with that said, can the IRS accept an offer from someone who died?
The tax code and the regulations do not directly address what happens when a taxpayer dies before acceptance. The Internal Revenue Manual does. It says that consideration of an offer “must be terminated upon the death of a single proponent.” The manual is not law, and taxpayers cannot usually enforce it against the IRS.
When the taxpayer died, the IRS had not yet issued a written acceptance. Her death also ended her tax attorney’s authority to represent her. It ended her brother’s power of attorney too. This is a basic rule of agency law—an agent’s authority generally ends when the person they represent dies.
So by September 2020 there was nobody left to accept on behalf of. The taxpayer was gone. The tax attorney still received a copy of the acceptance letter, but he no longer represented her and the estate had not yet hired him. The court found that there was no living taxpayer and no authorized representative to whom the IRS could send a valid notice of acceptance.
The tax court found the provisions cited above consistent with the statute and regulations. And IRS Appeals does not abuse its discretion when it follows the manual. The court concluded that the IRS lost its authority to accept the offer on the date of death. The September 2020 letter did not create a binding settlement.
Does It Matter That the IRS Sent an Acceptance Letter?
The estate’s best argument was about finality. The regulations say that once an offer is accepted, neither side can reopen the case except in three situations. The first is false information or documents. The second is concealment of assets or ability to pay. The third is a mutual mistake of material fact.
None of those fit very well here. Nobody lied, and nobody hid assets. The IRS tried to call it a mutual mistake. Its theory was that the attorney’s failure to tell the offer examiner about the death led both sides to act on a false assumption. The estate had a good response. How can a mistake be mutual when one of the parties was already dead? The estate also pointed out that the IRS knew about her terminal illness while it was reviewing the offer.
The court sidestepped this fight. Because no valid compromise was ever formed, the reopening rules never came into play. You cannot reopen a deal that never existed. The estate also argued that the IRS had relied on mutual mistake at the hearing and could not switch to a new theory in court. The court rejected this too. It read the record and found that Appeals had relied on the death-of-the-taxpayer rule from the start. The mutual mistake discussion was, at most, a side point.
The estate held a letter on IRS letterhead saying “We have accepted the offer in compromise.” That letter turned out to be worthless. The IRS can send a letter in error, and the error does not bind it.
What Could the Estate Have Done Differently?
The court did not get into this, but the facts point to a few lessons.
The first is timing. The offer examiner called and faxed the tax attorney a month after the death. Had the tax attorney responded and told the IRS, the IRS would have terminated the offer then. That would not have helped much. But silence did not help either. It just delayed the problem until after the estate had a false sense that the debt was settled.
The second is the paperwork. When a taxpayer dies, the personal representative of the estate should file Form 56 to notify the IRS of the fiduciary relationship. The estate’s attorney needs a new Form 2848 signed by the personal representative. In the present case, both forms were filed, but not until early 2021—almost a year after the death.
The third is the path forward. The IRS told the estate it could file a new offer signed by the personal representative. That option still exists for many estates. But it means starting over with new financial disclosures, this time for the estate rather than the individual. The estate’s assets may look very different from the taxpayer’s assets before death. A life insurance payout, a house that is now part of the probate estate, or a retirement account can change the numbers. There is also the question of timing. Appeals told the estate it could not file a new offer within the hearing while probate was still open. So the estate was pushed outside the hearing process and into regular collection. We have written before about settling back taxes for a probate estate, and those rules now apply here.
There is also an argument the estate did not make. The 24-month deemed acceptance rule could, in theory, help a taxpayer whose offer sits too long. But the clock runs from submission, and the IRS terminated this offer before that mark. Even if it had not, there is a position that death ends the offer altogether, which would stop that clock too. That question remains open.
The Takeaway
An offer in compromise is one of the best tools for resolving unpaid tax debts. It is also a formal, paper-driven process. The deal is not done until the IRS sends written acceptance to the taxpayer or someone authorized to act for the taxpayer. This case shows that if the taxpayer dies before that letter goes out, the offer dies with them. A later acceptance letter, even on IRS letterhead, does not save it. If you have a pending offer and a family member is seriously ill, plan for this. Have the estate documents ready and notify the IRS promptly. Be prepared to resubmit a new offer on behalf of the estate.
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