IRS Offer In Compromise: The Deemed Acceptance Rules

Published Categorized as IRS Debts, Offer in Compromise, Tax Procedure
IRS deemed accepted offer, Houston Tax Attorney

The IRS has missed just about every deadline in the past few years. Most of the IRS’s employees have basically been on paid vacation for the past few years.

When Covid-19 first emerged, IRS employees were sent home. They were paid not to work. While private-sector employees scrambled to find ways to work, many IRS employees picked up hobbies, enjoyed family time, and found other ways to enjoy work-free life.

But taxes have not stopped. Most of the negative consequences for the awol-IRS fall squarely on taxpayers. This includes late refunds, the accrual penalties and interest owed on balances, tax returns that are not processed, IRS audits closed for statute limitations as auditors failed to work the audits timely, appeals cases closed as the appeals officers cannot receive records sent by mail, etc. The list is long. The consequences have been very serious for many taxpayers. Taxpayer hardships abound.

But not all of the consequences are negative for taxpayers. There are a few, very few, instances where the awol-IRS may benefit taxpayers. Time will tell, but the IRS’s deemed-accepted rules for tax settlements may be an example of a taxpayer-favorable consequence. The deemed-accepted rules only give the IRS two years to reject a settlement offer before it is deemed to be accepted by the IRS. The Brown v. Commissioner, 11519-20L (2022) case provides an opportunity to consider these rules.

Facts & Procedural History

The taxpayer owed back taxes–and the amount was sizeable. He owed more than $50 million according to the facts in the case.

One would think that just about anyone with this large of a tax balance could be eligible for a “fresh start.” This is what the IRS’s offer in compromise program is for. It is intended to allow taxpayers to catch up with their tax balances and start over with the IRS.

The taxpayer submitted an offer in compromise during his collection appeal. The IRS settlement officer referred the offer to the IRS collection function. The IRS collection function returned the offer to the taxpayer seven months later. The IRS settlement officer issued a Notice of Determination in the appeal more than two years after the offer was submitted. The Notice of Determination noted that the offer was rejected.

The taxpayer filed a petition in the U.S. Tax Court. The question was whether the IRS automatically accepted the offer by not rejecting it within two years.

About the IRS’s Offer in Compromise Program

The offer in compromise program has been around for a long time. We have covered various aspects of this program on this website.

You can read about the offer in compromise here.

You can read several of our other articles about OICs here:

This should give you a good overview of the offer in compromise program and the nuances of how the IRS evaluates offers.

The Deemed-Acceptance Rules

Another nuance is the deemed-acceptance rules. These rules are found in Section 7122(f).

Congress added subsection (f) to Section 7122 as part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). You can read about this change in our post about it from 2007.

The language that was added reads as follows:

Any 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 such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.

In our article from 2007 we noted that:

… the new law does not provide any mechanism for establishing that the offer was accepted or that the terms were complied with. 

And we asked whether this type of case would play out:

administratively, in court using the collection due process hearing procedures, or by suing the IRS in district court?

Fifteen years after we first wrote about the deemed-acceptance language, there haven’t been all that many cases that address these rules.

This Brown court case did come up in the collection due process review in the U.S. Tax Court. That at least answers the question as to the remedy. The U.S. Tax Court is willing to rule on these issues.

Does Time in Appeals Count?

The court in Brown also addressed whether time in appeals counts for purposes of the two-year time period.

The taxpayer argued that the offer was not finally rejected until IRS Appeals issued the Notice of Determination in the appeals process. The taxpayer submitted the offer to IRS Appeals. One would think that the time period runs from that time until the time IRS Appeals rejects the offer.

The IRS argued that the offer was rejected when it was returned to the taxpayer by the IRS Collection function. Because the IRS Appeals Office sent the case to the IRS Collection Office, the IRS’s logic is that the offer was rejected when the IRS Collection function returned the offer. The problem with this argument is that the IRS Collection function did not have jurisdiction over the case at the time. The IRS Appeals Office did.

The court sided with the IRS:

 it is the initial rejection, not the final determination by Appeals, that is relevant for purposes of section 7122(f). The initial rejection terminates the 24-month period “because the offer was rejected by the Service within the meaning of section 7122(f) prior to consideration of the offer by the Office of Appeals.” Notice 2006-68, § 1.07, 2006-2 C.B. at 106. In other words, “[t]he period during which the IRS Office of Appeals considers a rejected offer in compromise is not included as part of the 24-month period.” Ibid.

So we now know that offers submitted as part of collection due process hearings can be rejected by the IRS Collection function, even if the IRS Appeals Office continues to consider the appeal. Presumably, the IRS Appeals Office could reject the determination by IRS Collections during this time and this time would still not count for the two-year deemed acceptace rules.

The Takeaway

Taxpayers should focus on the date the offer was submitted to IRS Appeals and then the date the offer was returned by IRS Collections in applying the deemed-accepted rules.

The court went with the practical answer in this case. The IRS Collections function is set up to track when offers are received and rejected. The IRS Office of Appeals is not. This highlights one of the numerous processing problems the IRS faces with the deemed-accepted rules.

A taxpayer could submit an offer directly to IRS Collections before filing for the collection due process hearing. He could then submit a separate offer during the appeals process. The IRS would have both offers, but it may not have a way of knowing that it needs to reject both of the offers separately. There is no limit on the number of separate offers the taxpayer can submit….

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