As Keith posted, the Tax Court recently issued a precedential opinion discussing when an Offer in Compromise might “age” into default acceptance under IRC § 7122(f). As someone with numerous Offers that are nearing the two-year default mark, I read the opinion (Brown v. C.I.R., 158 T.C. No. 9 (2022)) closely.
And from those 13 pages, though there is essentially never any doubt that the taxpayer would lose, I have found a wellspring of interest in “deemed acceptance” Offers. My goal over the course of several following posts is to inspire your interest as well, even if you don’t much care about Offers. There is something for everyone: as but a taste of what’s to come, we have (I believe) Tax Court and 9th Circuit errors, contract law, and regulatory challenges -I will even dip my toe ever so daintily into the Procedurally Taxing “interpretative vs. legislative” rule debate.
“readAs 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.