The IRS may compromise tax liability outside of litigation when there is doubt as to collectability, collecting the amount would create an undue hardship, or there is doubt as to liability. Requests are processed through the IRS’s Offer in Compromise (OIC) program. It is a rigorous process with most applications denied. One such OIC dated May 9, 2019, offered $100 to settle the tax debt of $119,386. Every dollar was needed for the taxpayer’s medical bills. She beat the odds, and the IRS accepted on September 22, 2020. The IRS then rescinded the acceptance on January 21, 2021, because the taxpayer died on March 12, 2020. Estate of Farwell v. Commissioner resulted, and the Tax Court upheld the IRS’s decision.[1]
The taxpayer suffered from a neurodegenerative terminal illness. In her last days, the taxpayer’s brother had durable power of attorney for her affairs, and she was represented by legal counsel. Her death terminated both relationships, according to the court. The attorney was not retained by her estate until February 23, 2021. Therefore, the acceptance notification did not reach a legal representative of the estate until after it was revoked. Citing Treas. Reg. § 301.7122-1(e)(1), the Tax Court ruled that “[a]n OIC is not considered accepted until, and unless, the taxpayer or their representative is notified, in writing, of the acceptance.”[2] That leaves the question of whether the IRS can recant its acceptance simply because the taxpayer died. The relevant Internal Revenue Code “Section 7122 and its accompanying regulations do not expressly address the administrative treatment of an OIC when the taxpayer dies before written acceptance.”[3] Instead, the Internal Revenue Manual (IRM) mandates the IRS’s decision. “Although the IRM does not have the force of law, this provision is consistent with and complements section 7122 and its accompanying regulations by prescribing administrative procedures for circumstances like those presented here.”[4] Unfortunately, the court did not elaborate on this point. Rather, it concluded that the IRS “does not abuse its discretion when it adheres to applicable IRM guidelines in evaluating a collection alternative. See Thompson v. Commissioner, 140 T.C. 173, 189 (2013).”[5] Yet far from declaring such an uncompromising rule, Thompson v. Commissioner merely noted that the settlement officer followed the “guidelines in the Internal Revenue Manual” and that she “did not abuse her discretion” by declining to use more lenient terms in a taxpayer’s installment agreement.[6]
The disputed IRM provision in Estate of Farwell was followed expressly out of the belief by the IRS officials in question that “the IRS does not have authority to consider an OIC once a taxpayer dies.”[7] The Tax Court did not opine on that belief. Nevertheless, it appears to be erroneous: “The [Treasury] Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.”[8] The OIC program exists to prevent situations where “collection of the full amount of tax liability would undermine public confidence in the fairness of tax administration.”[9] The court declined to decide whether the circumstances here qualified under this metric.
Estate of Farwell v. Commissioner’s result could have been avoided had the estate promptly engaged the attorney after the taxpayer’s death. Unfortunately, disputes with the IRS are usually lengthy affairs. If the taxpayer passes before their conclusion, the estate proceeds without formalizing its representation with the IRS at its peril.
[1] Estate of Farwell v. Commissioner (T.C. Memo. 2026-95).
[2] Id. at *10.
[3] Id.
[4] Id. at *10-11.
[5] Id. at *11.
[6] Thompson v. Commissioner, 140 T.C. 173, 189 (2013).
[7] Estate of Farwell v. Commissioner (T.C. Memo. 2026-95), *5.
[8] I.R.C. § 7122(a).
[9] Keller v. Commissioner, 568 F.3d 710, 716 (9th Cir. 2009); 26 C.F.R. § 301.7122-1(b).