Today we will discuss offers in compromise:
§ 301.7122-1 Compromises.
(e) Acceptance of an offer to compromise a tax liability.
(1) An offer to compromise has not been accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative.
Let’s talk about Jacqueline Farwell.
She had gotten herself into a tax mess for years 2008 through 2011, 2013 and 2015. The IRS had recorded a lien for almost $120 grand.
She was deep into medical care and quickly burning thorough cash. She requested a CDP hearing and proposed an offer in compromise for $100.
COMMENT: We are so accustomed to the pennies-on-the dollar nonsense on radio and late-night television that we forget that real offers exist. Take an elderly person with diminishing assets, severe expenses, minimal or no likelihood to earn again and the IRS might accept $100. What the IRS won’t accept is a 40-something skipjack with plenty of earning power but an impaired sense of personal responsibility.
In February 2020 the IRS examiner requested updated financial information.
Farwell died in March 2020.
Nobody said anything.
In April 2020 the examiner told Farwell’s attorney that she advised accepting the offer.
Nobody said anything.
In September 2020 the IRS sent a letter that it had accepted the offer.
Nobody said anything.
Mind you, the IRS did not realize that Farwell was dead.
COMMENT: There may be reasons why the estate stalled - perhaps disagreement among the heirs, a delay in hiring lawyers, deciding who would have tax power of attorney. Still, it is … odd. I can see the IRS feeling manipulated.
In November 2020 the IRS realized her death and pulled the offer.
The estate asked Appeals to reinstate the offer. The IRS refused, arguing that mutual mistakes – not telling the IRS, for example - were made.
Off to Tax Court they went.
Our question is: does an offer in compromise survive the death of the taxpayer who requested it?
The estate argued that Regulations prevented the IRS from reopening the matter unless there was false information, concealment, or mutual mistake. The estate had that September letter and had no intention of giving it back.
COMMENT: Partially true. The IRS was prevented from reopening in the event there had been offer and acceptance.
The Code is not clear what happens when the taxpayer dies before acceptance. The Internal Revenue Manual however is.
5.8.7.5 (04-24-2025)
1. Consideration of an offer must be terminated upon the death of a single proponent. See IRM 5.8.10.4, Deceased Taxpayers and Estates. The date of termination is the taxpayer's date of death and the date used for the TC 482. If the taxpayer’s date of death is prior to the offer submission, refer to IRM 5.8.10.4.1, Death of a Taxpayer. Offers that are terminated do not receive appeal rights. See IRM 5.8.10.4.1, Death of a Taxpayer, for instructions on actions to take when advised that one party to a joint offer has died.
The estate was not impressed. The Internal Revenue Manual does not have the force of law, it hissed.
True, noted the Court, but it was in line with the statute and Regulations.
But we have a letter from the IRS accepting the compromise, the attorney whinged.
The letter was sent in error - one the estate contributed to - and the IRS was not bound by the error.
The attorney returned to the mutual mistake exception, arguing that mutual mistake was impossible as one of the parties was deceased.
The IRS repeated: look at Section 7122. An offer has to be accepted. Any extant powers expired when Farwell died, and there was a period after the death before an attorney was hired and a new power filed. A dead person cannot accept.
The IRS knew about Farwell’s terminal illness. You are accomplice to this, the attorney shrilled.
Methinks the attorney was losing it.
The IRS pointed out the obvious: have the estate submit its own offer in compromise. Farwell’s individual offer would wrap up, and the two sides could move to the estate’s offer. There is a whiff of common sense here ….
NO!! bayed the attorney.
Why? I presume that assets remained in the estate. Enough assets that the estate did not want to part with them.
Let’s return to Section 7122 at the top of this blog.
Requirement one: was there a written notice?
Maybe, possibly, perhaps that September letter, although one would be hard-pressed to argue that it had been sent to taxpayer’s representative.
Requirement two: was there acceptance of said notice?
No. Farwell had passed away. The estate had not yet named a new power. There was no one who could represent the estate at that instance.
The IRS won.
Our case this time was Estate of Jacqueline R. Farwell, U.S. Tax Court, No. 11555-22L, T.C. Memo 2026-95.
