To sum up, the statute provides that an Offer that is not rejected within 24 months of submission is “deemed accepted.” The IRS (through Notice 2006-68 and the relevant IRM) interprets this to mean that so long as a preliminary determination is made (to reject, return, or withdraw the Offer) within 24 months, it no longer matters how long it takes to reach a final resolution. I think that’s an unreasonable interpretation.

I also think that when you’re challenging a rule or interpretation as being “unreasonable,” it is important to have a ready answer for what a more reasonable replacement would be. I have no idea what the comments to Notice 2006-68 were. But had I been in practice at the time, here is what I would have submitted…

Protecting Both Taxpayer and IRS Interests: A Better Way Forward

I can understand where the IRS is coming from with Notice 2006-68. The IRS understandably doesn’t want a slew of Offers aging into acceptance just because people go to Appeals or insist on Collection Due Process (CDP) rights. Those things take time (though query whether two years should be enough in any case), and it might end up in bad Offers on $50 million dollar liabilities being erased on a foot-fault. This would be especially unfortunate in those instances where the IRS is truly carrying on negotiations with the taxpayer over those two years, but circumstances continually change.

But there are better ways to protect the IRS from being penalized on different layers of review -ways which would better ensure timely resolution of cases and are more defensible readings of the statute. Professor Camp recently wrote about the Brown case, and provides, I think, a clearer rationale for the outcome in Brown than what the Tax Court (or Notice 2006-68) provides. In a nutshell, Prof. Camp characterizes the role of IRS Appeals in CDP as “reviewing a rejection.” In that understanding the rejection does, in fact, happen with the original Offer unit, and Appeals (much like any other “Independent” adjudicatory function), just reviews that decision.

I wish I could go along with this. But as a practitioner, I cannot.

First, I cannot accept as true the proposition that IRS Appeals doesn’t “work” an Offer, and that it only reviews the rejection. As is particularly relevant to IRC § 7122(f), by the time the Offer actually gets to Appeals (usually many, many months later), circumstances have often changed. If too much time has passed, the IRS will ask for brand new bank statements, etc. Importantly, if the taxpayer raises new issues that have arisen since the original rejection Appeals will generally consider them on its own. See IRM 8.23.3.3.1.1 (08-18-2017). That, to me, seems like Appeals making their own determination by working the Offer on their own. The original rejection rationale may become, essentially, irrelevant.

Lastly, I cannot agree with the characterization as Appeals merely reviewing a rejection because that is not accurate as a matter of contract law. Note, very importantly, that IRS Appeals still has the power to accept the Offer. I will explain more about why that matters, but query whether Appeals is really reviewing a “rejection,” or only a “recommendation to reject.” Note the IRM heading on point: 8.22.7.10.4.5 (08-26-2020) “Collection Recommends Rejection” [emphasis added].

It is perhaps simplistic (though also perhaps accurate) to read IRC § 7122(f) as an analysis of just two dates: (1) when the offer was submitted and (2) when the offer was finally resolved. There is room in the statutory text, I believe, for accommodating some of the IRS’s concerns. But that room is found in contract law, and not in Appeals mission as an independent arm of the IRS.

Contract Law and Offer Analysis

The words “offer,” “rejection,” and “acceptance” are familiar to anyone that has taken a first year contract lectures or bar review. While an Offer in Compromise is a product of statute, it is “properly analyzed as a contract between parties” and “is governed by general principles of contract law.” Dutton v. CIR, 122 T.C. 133, 138 (2004).

Let’s apply some contract law principles to the transactions that I am most concerned about.

We know that when an Offer is “returned” as non-processible it is considered “rejected” for IRC § 7122(f) purposes. That is settled in the Tax Court (and 9^th Circuit) via the Brown v. CIR saga. The question I’ve posed is whether that continues to hold if the determination to “return” the Offer is not upheld by Appeals. In other words, is a “preliminary” determination to return an Offer a rejection?

The Restatement of Contracts would give some fodder to the argument that such a preliminary determination is not, in fact, a rejection. The Second Restatement of Contracts § 38 covers rejections, and provides:

(2) A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement.

The comment explains:

The rule of this Section is designed to give effect to the intentions of the parties, and a manifestation of intention on the part of either that the offeree’s power of acceptance is to continue is effective. Thus if the offeree states that he rejects the offer for the present but will reconsider it at a future time, there is no basis for a change of position by the offeror in reliance on a rejection, and under Subsection (2) there is no rejection. [emphasis added.]

What does a preliminary determination letter say? In my experience, when you are in CDP it says something to the effect of “we are recommending rejection/return of your Offer, but Appeals has the final say.” To me, that really seems to meet the “not a rejection” description in the Restatement. What is Appeals providing if not a “reconsideration” of the Offer?

Treating a preliminary determination as a final rejection is probably not tenable under contract law. Indeed, a precedential Ninth Circuit case would appear to agree with my analysis. Consider the case of U.S. v. McGee, 993 F.2d 184 (9^th Cir. 1993).

In McGee, the taxpayer was working with an IRS Revenue Officer on a potential Offer. After much negotiation, the Revenue Officer decided that the proposed Offer was not acceptable. The RO sent a letter indicating as much and providing that McGee “had 15 days to appeal the ruling.” McGee never did appeal. A little less than a month later, the IRS sent a final rejection letter.

The question before the Court was when was the Offer rejected: the initial letter giving 15 days to appeal, or the final letter?

Here’s where things get interesting. The 9^th Circuit found that the Offer was “rejected” only with the final letter, and not with the preliminary rejection granting appeal rights. The earlier letter was not a final rejection, the Court found, but “merely notice of a proposed rejection.” McGee at 186.

And here’s where things get even more interesting.

Recall that Brown was in the 9^th Circuit. Recall also that I criticized both the Tax Court and Court of Appeals for inappropriately looking at when Offer is considered “pending” for purposes of IRC § 7122(f) (which only looks at when an Offer is “submitted”).

In McGee (which predates IRC § 7122(f) by over a decade), the issue of when the taxpayers Offer was “pending” was very important, because while an Offer is pending the statute on collection tolls. This case was purely about the statute of limitations. The taxpayer wanted to argue that the Offer was not pending because it was rejected through the IRS’s preliminary determination to recommend rejection: this would have ended the statute of limitations a little earlier.

Apparently, this issue of Offers holding the collection statute open indefinitely through the failure of the IRS to conclusively reject them had come up enough that other circuits addressed it. The general sense was that the taxpayer was protected from an indefinitely open collection statute through their ability to withdraw the Offer (thus ending the tolling of the clock). See McGee at 186.

Lastly, consider whether under contract law principles the IRS Offer Unit even has the power to reject an Offer in a CDP case. When the case is in CDP, the final determination must be made with Appeals. The Offer unit can only “recommend” acceptance or rejection. A recommendation by someone that has not been delegated authority (i.e. agency) to make a final determination does not seem like a rejection to me. The Tax Court case of Hinerfield v. CIR, 139 TC 277 (2012) makes this point nicely.

In Hinerfield, the IRS came within a month of hitting the two-year deemed accepted date on the taxpayer’s Offer. Wary of triggering that statute, a rejection was sent at the last second. What was the hold up? Apparently, the Settlement Officer wanted to accept the Offer, but IRS Area Counsel (which reviews Offers covering liabilities over $50,000 per IRC § 7122(b)) recommended against accepting. Who gets the final say?

Appeals does. Only not in the form of the Settlement Officer. It needs to be the Appeals Team Manager. The IRM, policy delegations, and multiple blog posts from Keith illustrate the importance of that point.

Changing the facts, if the SO in Hinerfield had told the taxpayer that they accepted the Offer, the IRS would not be bound. It would be an ineffective acceptance. I would say the same of a rejection conveyed to the taxpayer where the person rejecting does not have the authority to do so… say, in a preliminary determination by the Offer Unit.

But if that’s the case, how can we get to a place where the IRS is protected against offers aging into acceptance just because of Appeals review? Again, a look to contract law…

The Proposal: Counteroffers as Restarting the Clock

Let me lay my cards on the table. As I have snarkily alluded to throughout my posts, I think 24 months should be more than enough time for the IRS to reach a final determination even if the Offer goes through Appeals. I also think that there is good reason to believe that Congress, in enacting IRC § 7122(f), was looking at the issue more from a taxpayer’s perspective than an IRS processing perspective: what taxpayers want is a final conclusion, not an initial determination followed by indefinite inaction. Yet IRS Notice 2006-68 says “initial determination with indefinite inaction thereafter is completely fine.”

That isn’t fine, and it isn’t justifiable.

To me, the question is “when should the IRS reasonably get more than 24 months to evaluate an Offer?” The main reason I can think of is when the delay isn’t the fault of the IRS.

One such scenario would be when the IRS is waiting on the court to make a determination on a year involved in the Offer. In that scenario, the IRS is protected by the language of IRC § 7122(f) and doesn’t need to promulgate any regulations: “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.”

Another scenario would be when the IRS has been engaged with the Offer, but the circumstances surrounding the Offer keep changing. For example, the taxpayer now owes for a new tax year or is now making more (or less) money. In those cases, what you are likely to be dealing with at the end of the day is a new Offer. Or, using contract law terminology, a “counter-offer.” Why does that matter?

Again, to the Restatement of Contracts, this time § 39 Counter-Offers:

(1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer.

(2) An offeree’s power of acceptance is terminated by his making of a counter-offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree.

The comments provide:

Counter-offer as rejection. It is often said that a counter-offer is a rejection, and it does have the same effect in terminating the offeree’s power of acceptance. But in other respects a counter-offer differs from a rejection. A counter-offer must be capable of being accepted; it carries negotiations on rather than breaking them off.

In my experience, the IRS makes counter-offers frequently, which usually culminate in sending the taxpayer amended Form 656 (i.e. contract) with the proposed terms. One could reasonably interpret such an IRS counter-offer as a “rejection” of the original Offer, which would thus stop the clock on IRC § 7122(f). But it would also be a submission of a new Offer, meaning that a new clock would start… thus precluding the IRS from delaying indefinitely all over again.

This, to me, appears to protect all the parties involved. Where the IRS is running up against the 24-month clock because the taxpayer’s circumstances are changing, it could easily require the taxpayer to submit an amended Form 656 to the offer examiner (or Appeals Officer) working the original case. While the IRC § 7122(f) clock would restart, I’m not sure taxpayers would be upset since they would continue to have someone at the IRS actually assigned to their Offer… and since up to this point virtually no one has succeeded on an IRC § 7122(f) claim anyway.

Conclusion: Bad Case Law, Bad Guidance, Bad Outcomes

If you can believe it, I have still more thoughts on IRC § 7122(f) that I may someday write about… but for now, this journey is at an end. When I originally read the Brown case, I saw it as the Tax Court reaching the right outcome for the wrong reasons.

After all the research I’ve put into these posts my thinking has changed. Now, I think both the outcome and the reasoning are wrong.

The taxpayer made, in my opinion, bad arguments.

First, he didn’t properly challenge Notice 2006-68. Indeed, according to the Tax Court opinion he appears to have conceded its authority, but instead argued that it is “inapplicable to CDP OICs.” Brown at 9. I don’t know why you’d concede challenging an IRS Notice (that appears to have some serious flaws) and instead draw focus to the implausible argument that the Notice doesn’t cover CDP offers. This was a tactical mistake.

Second, he tied the idea of an Offer “rejection” too closely to a Notice of Determination. Again, this seems like a flawed fixation on CDP. As the Tax Court characterizes the argument, the taxpayer considers the issuance of the Notice of Determination to be the “critical event” in IRC § 7122(f) analysis. That’s not a winning approach. The IRS can certainly reject an Offer (even in CDP) prior to issuing a Notice of Determination -it just has to be a conclusive, final rejection and not something “preliminary.” In other words, it has to be an effective rejection under contract law principles.

But from these flawed arguments the Tax Court also erred.

First, the Tax Court (and 9^th Circuit) seem to think that clock on deemed acceptance doesn’t start running until an Offer is officially “pending.” That’s nonsense. Even IRS Notice 2006-68 doesn’t peg its IRC § 7122(f) analysis to a pending date. The statute specifically uses the word “submitted” rather than pending. Pending status is irrelevant to IRC § 7122(f) analysis. I hope over the course of my posts you’ll agree with me on that now.

Second, the Tax Court (with an assist from the 9^th Circuit) uncritically treats a preliminary determination to return as being a rejection. Certainly, an actually returned Offer would be a rejected Offer. But if the Offer is never actually returned (or rejected), but only suggested that it will be… well, the Restatement of Contracts and the 9^th Circuit (in McGee) have correctly found that is not definite enough to be a rejection.

To me, the problem with Brown isn’t that the taxpayer lost: I withhold judgment on a +$50 million tax liability being erased, and the Tax Court had to rule on the arguments that were put before it. Rather, the tragedy is that Brown will make IRC § 7122(f) claims more difficult moving forwards for the taxpayers that deserve its protection -namely, the low-income taxpayers that do, in fact, have their Offers shelved for months and then years.

Brown arguably stands for the proposition that a preliminary determination (to return or reject) an Offer is all that the IRS needs to do within 24 months. Thereafter it can take an indefinite amount of time to conclude the matter. I’ve looked at legislative history and GAO Report leading to IRC § 7122(f)… I struggle to believe that’s the outcome Congress had in mind. But because Brown is a precedential decision, others in the tax community will now have more of an uphill battle than they otherwise would have in getting to the right outcome. Nonetheless, I hope these posts have inspired you to join me in this fight.

In the past few posts, I’ve written about the procedural difference between “returned” and “rejected” Offers. I discussed how the Tax Court may have muddied the water a bit in the recent Brown case, and how IRS guidance in the form of Notice 2006-68 may make things even worse. It is that Notice which I will put squarely at issue here. But before getting into the admin law issues, let’s reiterate fact pattern:

Your client submits an Offer, and wisely does so through a Collection Due Process (CDP) hearing. The Offer Unit incorrectly makes a preliminary determination to “return” the Offer as non-processible. Maybe the Offer Unit did this only a few days after submission, maybe it took them seven months. Doesn’t matter for now.

You challenge the non-processible determination in your CDP hearing and, lo-and-behold, Appeals agrees with you and kicks the Offer back to the Offer Unit for processing.

A couple years pass without hearing anything else.

One day you stumble across a statute that seems straightforward: IRC § 7122(f). That statute says that unless the IRS “rejects” your Offer within 24 months of submission, it is deemed accepted. Do you have good news for your client?

Not without fighting the IRS first. Take a look at the IRM:

“Note: Notice 2006-68 states that an offer will not be deemed accepted under section 7122(f) if the offer is rejected, returned, or voluntarily or involuntarily withdrawn within the 24-month period. Thus, if a case is reopened for any reason, including IRS error, after one of these events occurred (rejection, return, withdrawal), the IRS will have already acted on the offer within the 24 months, and the offer will not be deemed accepted if it is not worked within the 24 months.”

IRM 5.8.7.3.3.3 (06-23-2022) [emphasis added]. This provision explicitly provides that even if the IRS erroneously returns an Offer they are done with ever having to worry about getting things done if it goes back to the Offer unit. It no longer needs to be “worked” for the next 24 months.

I’m not sure that’s what Congress had in mind with IRC § 7122(f). Note that this IRM section was updated right after Brown… though it isn’t clear the actual update had anything to do with that decision. Let’s charitably say that it didn’t, and that this IRM section is strictly relying on the authority of Notice 2006-68. If you want to argue for deemed acceptance, you are going to have to argue against the authority of the Notice. Your only possible chance of success on this is in litigation.

(Side Note: this is yet again a reason why CDP is critical to tax administration. Without CDP you are stuck with what I am fairly convinced is an incorrect IRS Notice binding you, because there is no chance that Appeals or any other lower level of the IRS bureaucracy can or will go against it. But I digress.)

The Authority of Notice 2006-68

In Feigh v. Commissioner I represented a taxpayer directly challenging IRS Notice 2014-17. The IRS needed the Notice’s interpretation of IRC § 131 to hold some water for its position to prevail. The Tax Court found that the Notice was entitled to, at best, Skidmore deference on that question… which I would call “worthless” deference. We won the case.

Should we expect the same to a challenge of Notice 2006-68? Hard to say, but there are some serious vulnerabilities.

I want to avoid wading into the recent PT admin law exchange about “interpretative” and “legislative” rules, but I do think Notice 2006-68 can raise some practice points to consider. I side with Prof. Hickman on this question, but my focus in this post is from the practical orientation of someone litigating against the IRS on a regular basis rather than on purely academic merits.

Though last month’s Procedurally Taxing administrative law posts focused mostly on Treasury Regulations, and Notice 2006-68 is assuredly not that, the issue really is more about “rules.” As Prof. Hickman notes, you will have a hard time convincing a court that a Treasury Regulation is not a legislative rule -the real debate is what to call other sub-regulatory guidance. Guidance like IRS Notice 2006-68…

As a litigator, I am convinced that no matter what you call Notice 2006-68 (“interpretative,” “legislative,” a “banana”), in litigation the IRS would argue that it is entitled to a high degree of deference -something akin to Chevron deference. Under that framework, the IRS brief would read, “there is a gap in the statute, we’ve filled it, and what we’ve filled it with is good enough.” (Students: please don’t use this as your Chevron step-analysis on any administrative law tests.) Representing the taxpayer, even if I come up with a “better” interpretation of the statute (that is, an interpretation that the Court finds slightly more plausible), I can still lose to the IRS. That’s the value of deference to their litigating position. I have trouble imagining the IRS conceding it.

So where does “interpretative” and “legislative” come into play?

As I understand it, “interpretative” rules don’t need to go through notice and comment procedures. See 5 USC § 553(b). I am less clear on what happens thereafter (I don’t say that sarcastically). Do they still get some level of deference? Should they? If not, what value do they really have? If interpretative rules don’t get the same deference as legislative rules than, quite frankly, I think most practitioners would be happy to call any rule the Treasury wants to “interpretative.” The flashpoint for the practitioner is really just how much the court is going to defer (or consider itself bound by) the rule.

If the IRS (miraculously) conceded that Notice 2006-68 shouldn’t be given the force of law, or should only be given Skidmore deference, then really I’ve won my battle against without firing a shot. But since I don’t expect the IRS to roll over like that, and I fully expect the IRS to argue that taxpayers are bound by Notice 2006-68, we need to attack Notice 2006-68 head-on. This would entail both procedural and substantive attacks. And this is why, in practice, it would be important to characterize (I think correctly) Notice 2006-68 as “legislative” rather than “interpretative.” I lose my ability to really argue against the procedure if Notice 2006-68 is just interpretative.

Procedural Issues with Notice 2006-68

The first question to ask is whether Notice 2006-68 went through Notice and Comment. As far as I can tell, it looks as if Notice 2006-68 was the notice… but that there were never any final regulations promulgated thereafter. Indeed, the bottom of Notice 2006-68 solicits comments by October 9, 2006. In that respect, Notice 2006-68 is really more of a “proposed” regulation… which really isn’t entitled to much deference at all. See Tedori v. United States, 211 F.3d 488 (9^th Cir. 2000) and Laglia v. CIR, 88 T.C. No. 44 (1987) [sorry, no free link].

It is unclear what, if anything, the IRS actually did with any comments it received. If the IRS didn’t properly consider the comments it did receive then it is in trouble -this is the thrust of Altera. It’s hard to imagine that they did consider them, if they never really did anything after promulgating the request for comments itself.

This is where the IRS could, possibly, draw comfort from the “minority view” of determining legislative vs. interpretative rules. The IRS argument would be that no notice and comment was even required, because Notice 2006-68 derives from the “express authority” of the statute rather than the general authority of IRC § 7805. There certainly could be some room for the IRS on that position, given the language of IRC § 7122(d)(1) and (e) (broadly giving the Secretary the authority to prescribe procedures for Offer evaluation). This is an argument that I could see devolving bogging down over statutory language that, frankly, has little to do with the issue at play. Fortunately, it is an argument that can be avoided.

Under the majority view, the inquiry is whether the IRS intends to bind the taxpayer with the rule. And there can be little doubt that the IRS does in this case: likely, reliance on the Notice is the only thing that keeps the Offer from being “deemed accepted” in the first place.

I have much less issue with Notice 2006-68 carrying force of law or a high level of deference if it was finalized after non-government stakeholders were able to weigh in and be meaningfully heard -some sort of procedure whereby individuals were given “notice” of a rule and a chance to “comment” on it…

Had a final rule been issued after comments, perhaps it would have addressed some of the issues I am about to outline. In the absence of that, it’s hard for me to see why the extremely IRS-friendly interpretation in Notice 2006-68 of a taxpayer-friendly statute in IRC § 7122(f) should be given much weight.

Substantive Issues with Notice 2006-68

Putting to the side the procedural issues with Notice 2006-68, just how reasonable of an interpretation is it? Let’s start, as we always should, with the words of the statute. IRC § 7122(f) provides:

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.

Pretty simple, right? If after 24 months of submitting an Offer the IRS doesn’t reject the Offer it is deemed accepted. Apart from liabilities “in dispute in any judicial proceeding,” there are no statutory exceptions to the 24-month period.

And yet, here we are.

The reasonableness of Notice 2006-68 hinges on what it means to “reject” for purposes of IRC § 7122(f). The IRS interprets “reject” to include a range of preliminary actions (return, reject, withdraw) that don’t need to be final. So long as the IRS proposes one of those things within 24 months, even if it doesn’t resolve the Offer, the IRS never has to worry about timeliness again because it “rejected” the Offer within 24 months.

In that reading if my client sends an Offer that is immediately (and erroneously) determined “non-processible” IRC § 7122(f) no longer applies… even if the Offer is promptly returned to the Offer Unit to reverse their error and move forwards.

Maybe that’s what Congress intended with IRC § 7122(f). I am skeptical. I don’t think there is any “plain meaning” of IRC § 7122(f) that requires such an interpretation, so context may be helpful.

What Did Congress Intend with IRC § 7122(f)?

Admittedly, there is not much to work with legislative history. Judge Lauber characterizes the Congressional intent as the “expectation that the IRS would respond fairly promptly to OICs, rather than letting them sit in a pile for two years or more. See H.R. Rep. No. 109-455, at 234 (2006) (Conf. Rep.).” Brown at 7.

I looked over the legislative history a bit, hoping it would provide some illumination. Alas, there is no smoking gun. First off, the Conference Report cited to in Brown doesn’t really say anything useful about Congressional intent: go ahead and read it for yourself if you don’t believe me. It did, however, drop a footnote to the case Olsen v. United States, 326 F. Supp. 2d 184 (D. Mass. 2004) for the proposition that it can take the IRS “12 – 18 months to evaluate an offer.”

Let’s assume Congress didn’t like that it takes the IRS 12 – 18 months to evaluate an offer and didn’t like what came out of Olsen. Though the footnote is to the district court decision, Olsen did result in a precedential First Circuit opinion (Olsen v. United States, 414 F.3d 144 (1st Cir. 2005)), so there is a chance that Congress (or Congressional staffers) had the issue on their radar.

Strangely, Olsen isn’t a case that shows bad or even significantly dilatory IRS behavior in reviewing an Offer (I’d fault the taxpayer on that point). Rather, the issue was in how long it took the IRS to give the CDP hearing… in this instance, 16 months after it was requested (apparently because the IRS Appeals Officer originally assigned left).

After the CDP hearing was finally held and an Offer was submitted things moved comparatively quickly. The taxpayer submitted an Offer in July 2002. In November 2002 the (new) Appeals officer started looking over the Offer, and had some processibility concerns -namely, unfiled tax returns. The Appeals Officer sent pretty specific requests to the taxpayer and taxpayer’s counsel but didn’t get the response he was looking for. By May 2003, Appeals had waited long enough and decided to deny the Offer.

From cradle-to-grave, the Offer was rejected in less than a year after submission. However, if we add in the time where the case sat on the shelf without being assigned to an Appeals Officer (which is before an Offer was submitted), it took well over two years. At best, Olsen is a case that shows how painfully long things can drag on with the IRS when Collection Due Process is invoked before any sort of “final” IRS decision comes.

But here is where the pay-off comes: IRS Notice 2006-68 interprets IRC § 7122(f) in a way that only reaffirms the problems of Olsen. Under IRS Notice 2006-68, the IRS can take as long as it wants to reach a determination on an Offer in CDP, so long as a preliminary (non-binding) determination is made before then. If Congress didn’t like what happened in Olsen, resulting in IRC § 7122(f), the IRS Notice 2006-68 seems to say, “we don’t care.”

I know this is giving Olsen too much due -it was merely a footnote on a Conference Report, after all. But breadcrumbs are really all we have to work with. Another crumb in the legislative record is a GAO report relied on (GAO 06-525).

That report indicates how concerned Congress was with the timeliness of Offer resolution. Note, however, that in the report the average time for evaluating Offers was a remarkably prompt 5 months for “first time Offers” and a remarkably slow 22 months for “repeat Offers.” It isn’t immediately clear to me if “repeat Offers” are brand new Offers sent by the taxpayer after a full rejection, or if they would include Offers that are winding through Appeals.

Either way, and importantly, the GAO report specifically notes that one problem is how the IRS does not measure timeliness “from the perspective of the taxpayer” which is “the overall time to resolve the taxpayer’s liability.” GAO Report at 2. Rather, the IRS just measures the time it takes to reach a (preliminary) determination. That is not what the GAO wants.

It seems like the problem Congress was aware of, via both Olsen and the GAO Report, was the very long cradle-to-grave Offer submission to Offer conclusion time-frame. Yet Notice 2006-68 effectively shields the IRS from this concern in toto: just make a first move and you’re done.

If the end-goal of Congress in IRC § 7122(f) was just to ensure that the IRS take any initial action within 24 months, then erroneous processability determinations certainly fit the bill. Yes, those unresolved offers may sit on the shelves (go “unworked”) for years, but at least over two years ago the IRS made an incorrect (and preliminary) determination!

That seems crazy. But it reflects the current IRS interpretation of IRC § 7122(f).

It doesn’t need to be this way. I’ll go into more detail on how to get there in my next post.

To recap the statute at play, in a nutshell IRC § 7122(f) provides that any Offer that isn’t rejected within 24 months of submission is deemed accepted. The only exception is for tax liabilities in an Offer that are “in dispute in a judicial proceeding.” This seems straightforward: hooray for easy statutes!

Of course, lawyers can always make things more difficult if we choose to. And by writing this post (and others to come) I have clearly chosen to make this statute tricky.

But, I believe, with good reason. Bear with me.

It isn’t hard to imagine how things can get complicated with IRC § 7122(f). A slight twist on the facts of Brown illustrates how this could happen. To quickly recap:

In Brown, the petitioner submitted an Offer that was returned as non-processible in six or seven months. Brown submitted the Offer as part of a Collection Due Process (CDP) hearing, so he was able to effectively appeal the “non-processible” determination. The Offer was held “open” pending the CDP determination on that issue. Much later (well over a year) the Appeals Settlement Officer upholds the preliminary determination to return the Offer.

Here is where I’d like to add a twist to the facts: what if the CDP determination was that the Offer was processible, and kicked back to the Offer Unit? In that case, how would we calculate the remaining time left for the IRS Offer Unit to reject the Offer under IRC § 7122(f)?

Post-Brown, there are at least three different answers to this question that I can see.

First, one could argue that the IRS Offer Unit has unlimited time remaining to reject the Offer under IRC § 7122(f). This is because they already rejected the Offer within 24 months via the preliminary determination to return the Offer, so IRC § 7122(f) has already been met.

This seems wrong. But in fact it is the IRS’s current position and arguably consistent with the Brown opinion. Let’s hold that thought for now.

A second answer is that the IRS Offer Unit has 24 months from the date of the Settlement Officer reversing the “non-processible” determination. This is because the Offer Unit did, in fact, reject the Offer by returning it, but the clock is re-starting now that they need to make a new determination.

This seems a little less wrong… but I still don’t like it. Let’s look at one more option.

A third answer is that the IRS Offer Unit has 17 or 18 months left from the date of the Settlement Officer reversing the “non-processible” determination. This is because the IRS Offer Unit already ate up six or seven months of the clock before reaching their (incorrect) preliminary determination to return the Offer.

This is the only option that really allows for tolling. But I’d actually say the best answer is one that may be foreclosed by Brown: the IRS Offer Unit only has however much time is left from the original submission date, including the time that elapsed during Appeals review.

But am I being just too taxpayer friendly? Let’s look at the authorities…

The Law After Brown and Tax Court Confusion

The “deemed acceptance” statute has precious little case law outside the Brown progeny. From the multiple Brown decisions, however, we can glean the following:

First, a “returned” Offer is a “rejected” Offer for IRC § 7122(f).

I think that is generally defensible, with a caveat: if the preliminary determination to return an Offer is overturned by Appeals, the Offer has not been (and never was) rejected. The Courts have not directly addressed that issue since it did not come up in Brown.

Second, Appeals can take as long as they want to reach a determination on an Offer so long as there was a preliminary determination made by the Offer unit within 24 months.

I don’t think that is correct, but that’s the lesson of the most recent Brown case, since it took Appeals over 24 months to uphold the original decision to return the Offer. I think facts and arguments exist that would likely lead a Circuit Court to finding otherwise, depending on how much that Circuit Court defers to IRS/Treasury guidance.

Treasury Regulations and IRC § 7122(f)

Allow me say something that shouldn’t be controversial: there really aren’t any Treasury Regulations (or at least no final Treasury Regulations) on point for IRC § 7122(f). The Brown court cited to Treas. Reg. § 301.7122-1, but it is mostly irrelevant to IRC § 7122(f). It was finalized 4 years before IRC § 7122(f) even existed and has not been updated since. It provides little if any real guidance on the later-enacted statute at play (this is also true of Rev. Proc. 2003-71, for the same reasons).

In fact, importing Treas. Reg. § 301.7122-1 and Rev. Proc. 2003-71 to the IRC § 7122(f) analysis just muddies the water. To the extent they deal with when (or whether) an Offer is rejected or returned, they do so only in determining if there is a right to administrative appeal or if the Offer is “pending.” Again, these are both non-issues to the statutory language of IRC § 7122(f) which only cares about the date the Offer is “submitted” and whether it is subject to a “judicial proceeding.”

The Tax Court appears to have been confused on this point, with the confusion culminating in the phrase, “for the purpose of IRC § 7122(f) an Offer is pending if…” As I have stated before, there simply is no “pending” for the “purpose of IRC § 7122(f).” There are two questions for IRC § 7122(f): when the Offer was “submitted” and when it was “rejected.” If I mail an Offer to the IRS and someone in Brookhaven locks it away in a dusty trailer my Offer will never be “pending.” But two years later you better believe my Offer is accepted under IRC § 7122(f).

“Clarity” From Notice 2006-68

Instead of Treas. Reg. § 301.7122-1, however, we do have Notice 2006-68, which is directly on point. Notice 2006-68 provides 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 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.”

How to make sense of this…

One way to read this is that it supports our least satisfactory interpretation of IRC § 7122(f): once the IRS Offer Unit decides to return or reject an Offer the 24-month cap goes out the window never to return “because the offer was rejected by the Service within the meaning of 7122(f) prior to consideration of the Offer by the Office of Appeals.” All the IRC § 7122(f) requires is that the IRS make some sort of preliminary determination on the offer within 24 months, and the Offer unit did exactly that. Case closed.

Again, this was the least satisfying answer to the hypothetical. I am also convinced that it is wrong, though it appears to be the position of the IRS in the IRM. See IRM 8.22.7.10.1.3(5) (08-26-2020) (specifically providing that a decision to “return” by the Offer Unit will end the 24-month clock even if Appeals determines that the decision was “erroneously made.”)

You could also read Notice 2006-68 as supporting the second or third answer to our hypothetical: the clock stops only for “the period during which the IRS Office of Appeals” considers the Offer. If the IRS Office of Appeals kicks the Offer back to the Offer Unit, the clock either starts anew (our second answer) or picks back up from where it left off (our third answer).

Again, I think that the correct answer is that the clock never stopped with the preliminary determination. But failing that, and particularly if IRS Notice 2006-68 is given the force of law (more on why that’s wrong in my next post), I’d say tolling is the least-bad alternative. Using all the traumatic wisdom gained through the submission of hundreds of Offers, here is why:

IRS Appeals does not send “rejected” Offers back to the Offer Unit: the decision ends with Appeals. See IRM 8.22.7.10.1.1 (08-26-2020). However, IRS Appeals does send “returned” Offers back to the Offer Unit if the processing determination was incorrect. See IRM 8.22.7.10.4.1 (08-26-2020).

In other words, if the Offer is “rejected” the Offer Unit’s work is done forever and ever amen, even if Appeals ends up reversing that determination. But if the Offer is “returned” it might go back to the Offer Unit if they were wrong. Tolling can only even present itself as an issue (with the Offer Unit) if it is an erroneously “returned” Offer in a CDP hearing, because you normally don’t get Appeal rights unless it is actually “rejected.” See Treas. Reg. § 301.7122-1(f)(5)(ii).

It doesn’t make sense to me that the IRS Offer Unit can quickly make an incorrect decision (“non-processible Offer”), which usually takes place well before reviewing the substance of the Offer itself, and then can take as long as it wants to review the Offer after that error is reversed. The statute certainly doesn’t seem to require that reading.

A Better Understanding of Returned Vs. Rejected Offers

It may be problematic to always equate “returned” Offers with “rejected” Offers. The IRS doesn’t even treat them as the same thing. The issue is that “rejecting” was a term-of-art in Offer parlance prior to IRC § 7122(f) being enacted. A rejected Offer was one that allowed for Appeal rights, had tolled the statute of limitations on collection, and had been determined to be processible. Not all Offers that the IRS didn’t agree to were “rejected” as a term of art.

In contrast, “returning” an Offer is just one way of many that the IRS can decide not to agree to an Offer. Indeed, Notice 2006-68 lists out the myriad ways an Offer can find an ending without acceptance, including if it is:

“rejected by the Service, returned by the Service to the taxpayer as nonprocessable or no longer processable, withdrawn by the taxpayer, or deemed withdrawn under section 7122(c)(1)(B)(ii) because of the taxpayer’s failure to make the second or later installment due on a periodic payment offer.”

What Notice 2006-68 does, I think quite sensibly, is to say that each of these means of resolutions is a “rejection” under IRC § 7122(f). Thus, Notice 2006-68 defines “rejection” in IRC § 7122(f) as it would be used in common parlance or contract law as an umbrella term for failing to accept an Offer, rather than solely the IRS term-of-art that generally gives appeal rights.

Ultimately, however, the bigger issue is the question of finality. Brown sees no distinction between a preliminary determination to return or to reject and a final decision. Perhaps this is an example of bad facts making bad law: $50 million at issue for an Offer of a few hundred thousand just doesn’t look good, especially for a repeat player. It would have been far more defensible for the Tax Court to say that the 24-month period tolled, rather than finding that the Offer was conclusively “rejected” when the Offer unit made the preliminary determination to return the Offer.

But to understand why we will need to dive into administrative and even contract law… Which will require at least one more post on this deceptively simple statute.

As I stated earlier, I have multiple Offers that are over a year old. I think that the issue of aging Offers is only likely tobecome more common soon. Offers can only be sent on paper. Whether the IRS is on top of processing paper (albeit in the form of tax returns) is all the rage: Commissioner Rettig says “yes” and NTA Collins says “no.” The pandemic certainly has not helped, and who knows what direction that will take in the future.

Under IRC § 7122(f) the IRS has 24 months to “reject” an Offer or it will be deemed accepted… two years may seem like a long time in most contexts. But with matters of geology or tax, it sometimes can feel like the blink of an eye.

Nonetheless, there are presently very few cases that even reference IRC § 7122(f). My Westlaw search brings up only 14, of which most are irrelevant and three are for the same taxpayer (Brown). A brief recap of most recent Brown decision is in order:

The taxpayer submitted an Offer in April or May of 2018. The Offer was preliminarily “returned” as non-processible in November. 2018. However, since it was submitted as part of a Collection Due Process (CDP) hearing, Brown was able to raise the argument that it actually should be considered processible. The Settlement Officer didn’t immediately reach a decision on that issue but agreed to keep the case open.

A lot of time passed between the IRS Offer Unit “returning” the Offer as non-processible and the Settlement Officer doing anything. In fact, more than two years passed. So, after patiently biding his time, Brown does what anyone with +$50 million in tax owed would do: he tells the Settlement Officer that the IRS has accepted the Offer by default since they didn’t reject it within 24 months.

The prospect of having +$50 million written off appears to get the Settlement Officer in motion: he determines that the Offer unit was right to return the Offer and issues a Notice of Determination upholding the lien since Brown provided no other collection alternative. Brown petitions the Tax Court, and among many other things, this post ensues.

There are at least three questions that need to be answered in applying IRC § 7122(f): (1) what starts the clock, (2) what (if anything) tolls the clock, and (3) what stops the clock. 

The main issue in Brown was a question of what stops the clock.Specifically, whether an initial determination by the Offer Unit to “return” the Offer was sufficient, or if it was not until the Notice of Determination upholding that decision. The taxpayer wanted to argue that the return was not a rejection until the Notice of Determination was issued… which was more than 24 months after the Offer was submitted.

The Tax Court says “no” to this argument, I think for the wrong reasons. But I’ll get to that later. For this post, I want to focus on what appears to be the easiest question: when the clock starts. It is, nonetheless, an inquiry with some pitfalls that I think the Tax Court opinion illustrates.

Starting the Clock: “Submitted” vs. “Pending” Offers

There are two main reasons why you want to lock in an “early” date for your Offer. As suggested, the first reason is to get the clock ticking for aging into “deemed acceptance” under IRC § 7122(f). The second reason is to stop the IRS from initiating a levy on you under IRC § 6331(k)(1). Because I know of exactly zero people that have had an Offer “deemed accepted,” but a lot of clients that have relied on the levy restriction, it may be easy for practitioners to assume that the “deemed accepted” clock starts at the same time as the levy restrictions clock since that is the clock they are most familiar with. But as it turns out, they aren’t the same.

The statutory language is different for IRC § 6331(k)(1) levy restriction than it is for IRC § 7122(f) deemed acceptance. Notably, the levy restriction is triggered “during the period that an offer-in-compromise […] is pending with the Secretary[.]”IRC § 6331(k)(1)(A) [emphasis added]. However, an Offer is deemed accepted if “any offer-in-compromise submitted […] is not rejected by the Secretary within 24 months after the date of submission of such offer.” IRC § 7122(f) [emphasis added].

An Offer is “pending” when it is “accepted for processing.” Treas. Reg. § 301.7122-1(d)(2). That only happens after the IRS makes a processibility determination, which can take some time since it requires background research. Among other things, to determine if an Offer is processible an IRS employee needs to check if the taxpayer is in bankruptcy, included the filing fee or is eligible for a fee waiver, and has filed all required tax returns and current year payments. The pending date is the date that the delegated IRS employee signs the Form 656. See Rev. Proc. 2003-71.

Because processability is a fairly substantive inquiry a lot of time can pass from the date you mailed the Offer to the date it is “pending.” And because the levy restriction also pauses the collection statute in some cases you may want to double-check that pending date to determine if it actually should be later. See IRC § 6331(k)(3)(B). But whether an Offer is pending (or even considered processible) is not what we’re concerned with when looking to “age” an Offer into acceptance.

In fact, I’d venture to say that when an Offer is “pending” is completely irrelevant for determining if an Offer ages into acceptance under IRC § 7122(f). Both the Tax Court and 9thCircuit appear to be confused on this point. 

The Tax Court in Brown states “For the purposes of section 7122(f), petitioner’s Offer was deemed pending […]” only for the period of time between when the Offer was accepted for processing and when it was returned. Brown at 8. 

Similarly, the 9th Circuit (in a non-precedential opinion) states that the Brown’s “offer was not accepted by operation of law under 26 U.S.C. § 7122(f).” and references that “An offer returned … is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer.” Brown v. CIR, 826 Fed. Appx. 673 (9th Cir., 2020) (sorry, couldn’t find a free link).

The problem is that there is no “pending” status “for the purposes of section 7122(f).” Pending doesn’t exist for the purposes of section 7122(f): it doesn’t start the clock, toll the clock, or stop the clock. What matters is when the Offer was “submitted,” and that is quite a different inquiry. The Tax Court and 9th Circuit would appear to have “pending” status play some role where it clearly shouldn’t.

When Is an Offer Considered “Submitted?”

There is a simple answer to this question: an Offer is submitted when it is received by the IRS. That is what IRS Notice 2006-68says, and in this instance I’d agree with it. As that Notice further details, the date on the envelope (i.e. the date the Offer was mailed) is “irrelevant” for determining when the Offer was submitted. What matters is when the IRS actually received it.

Some people (also known as tax geeks) might immediately think to themselves “what about the statutory mailbox rule at IRC § 7502? Doesn’t that mean that we should look at the day the Offer was mailed, not received?” Unfortunately, that rule doesn’t apply here.

IRC § 7502 only applies when you mail (certain) documents before a deadline prescribed by law and the document is received after that deadline. In those instances, IRC § 7502 provides that the mailing is “timely” and treats the effective date as the mailing date. The problem here is that there is no deadline “prescribed by law” for filing an Offer that comes into play. Yes, there is a deadline prescribed by law that the IRS must accept or reject the Offer within 24 months… but that isn’t a deadline prescribed by law to for you to “file” an Offer, it is a deadline for the IRS to act. 

So, no statutory mailbox rule. The submission date is the date received by the IRS. Nonetheless, filing by certified mail would be strongly encouraged as a way to prove receipt. Indeed, I have submitted Offers that take three to four months before they are looked at by the IRS, and then another two to three months before they are determined “processible” and thus “pending.” But because “pending” status really doesn’t matter to the inquiry of IRC § 7122(f), the date that matters to me isn’t the date the IRS employee signs the Form 656, but the date my return receipt says the Offer was delivered. That can be a pretty big difference.Another reason I wish the Tax Court would have ignored the word “pending” in its Brown opinion.

Back to Brown: Questions to Come

The Tax Court didn’t spend much time determining when the Offer was submitted: April or May 2018 would work, since the critical event Brown is arguing for took place in August 2020 (Notice of Determination). Understandably, Judge Lauber spends most of the opinion analyzing whether the clock stopped with the initial Offer unit determination to return the Offer -which was two years later upheld by the Settlement Officer.However, under facts very similar to Brown I can easily see the submission date becoming a point of contention.

And that is where there some questions come up that I think may need to be wrestled with in future cases. To me, the biggest question is whether a preliminary IRS determination stops the clock “forever.” The Brown opinion (and particularly the 9thCircuit opinion) makes it seem as if it does.

I will get into more on why I think that is incorrect in a later post, but for now I would just invite you to consider this hypothetical: Imagine the IRS Settlement Officer determines that the Offer should be processed, and it gets kicked back to the Offer unit. How much longer should Brown have to wait before the 24 month “deemed acceptance” period hits? Is it 24 months from that determination? Is it impossible to age into acceptance if any preliminary rejection (even one that isn’t upheld) is issued within 24 months? 

These are tough questions. They aren’t ones that the Tax Court had to address in Brown, but the scenarios track close enough to some of my actual cases so that I don’t feel as if I’m being an academic or frustrating 1L in raising them. I will get into more detail on them in my next posts.