Does An Offer In Compromise Survive A Taxpayer’s Death?

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)

Termination of Consideration

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.

A Cannabis Business Offer In Compromise

 

Let’s talk reasonable collection potential (RCP).

If the conversation turns to RCP, chances are good that you owe the IRS and are hoping to settle for less than the full amount. A couple of programs come immediately to mind:

• Offer in Compromise

• Partial Payment Installment Agreement

 As you might guess, the IRS requires paperwork before agreeing to this. The IRS wants to look at your:

• Income

• Expenses

• Assets

• Liabilities

• Future Income Potential

Yes, the process is intrusive. I have had clients balk at the amount of disclosure involved, but in truth it is not much different from what a bank would request. I rarely work with OICs or partial pays these days. Some of it is the client base, but some also reflects past frustration. I have started this process too many times with a client and the first wave of documentation comes in quickly enough; the second wave takes longer. The last wave may take long enough that we must start the first wave over again, and sometimes we never even receive the last wave. It has happened enough that I am now reluctant to get involved, unless it is a client I have known for a while and am confident will follow instructions. The IRS is going reject a partially completed application anyway, so there is no upside to submitting one.

COMMENT: This is a repetitive tactic of the reduce-your-tax-debt mills. They will assemble and file whatever, knowing (or at least should know) that the application will be rejected. That does not matter to them, as they are paid in advance.

The IRS is trying to pin down how much you can pay: the RCP.

And it is not what you may think.

Assets are relatively easy: you must list and value all your assets. You may not want to disclose that restored Corvette or gun collection, but you really should.

Liabilities are tricky. You will submit all your liabilities, but the IRS may not allow them. Credit card debt comes to mind. Let’s just say that the IRS is not overly concerned whether you fail to repay your credit card balances.

Income again is easy, unless you have unusual sources of income. In practice, I have found that the IRS also has difficulty with erratic (think gig) income, sometimes to the point that one cannot get a plan in place.

Expenses can break your heart. Just because you have an expense does not mean that the IRS will allow it. Examples? Think an expensive car lease, private school tuition, even veterinary expenses for an aging dog. For some expense categories, the IRS will look to tables listing normalized allowances for your region of the country. You supposedly can persuade the IRS that your situation is different and requires a larger number than the table. I wish you the best of luck with that.

Future income potential has disqualified many. Let me give an example:

·      A retiree has substantial health issues. It is unlikely that the retiree will (or can) return to work, meaning that current income (sources and amount) is likely all there is into the foreseeable future.

·      A young(er) nurse practitioner is bending under the weight of credit cards, car loan, day care, and aging parents.

The IRS is not going to view the retiree and nurse practitioner the same. One’s earning power is behind him/her, whereas the other likely has many years of above-average earning power remaining. Granted, both may be in difficult straits and both may receive relief, but it is unlikely that the relief will be the same. The retiree may receive an OIC, for example, whereas the nurse practitioner may receive a temporary partial-pay with a two-year revisit. Even then, I anticipate that getting a partial pay for the nurse practitioner is going to be … challenging.

Let’s talk about a recent RCP situation that irritates me. It involves a business.

Mission Organic Center (Mission) is a state legal marijuana dispensary in California.

COMMENT: Two things come into play here. The first is the federal Controlled Substances Act, which classifies cannabis as a Schedule 1 substance. The second is a Code section (Sec 280E) that prohibits businesses from deducting ordinary business expenses from their gross income if the business consists of trafficking in controlled substances. This gives us the odd result of a state-legal business that cannot deduct all its expenses on its federal tax return. Perhaps the state will allow those expenses on its return, but there is no federal equivalent. An accounting firm can deduct its payroll, rent and utilities, by contrast, but a cannabis business cannot (there is an exception for cost of goods sold, but let’s skip that for now).

This raises the question: what is the reasonable collection potential of that cannabis business?

Did you know that there are different accounting methods for different purposes?

Let’s say that you are auditing a Fortune 500 company.  You probably want to keep the accounting on the pavement, something the accounting profession refers to as “generally accepted accounting principles.” Leave the pavement too long or too far and you might have liability issues.

Switch this to the tax return for the Fortune 500, and it is a different matter. The IRS is likely telling you which bad debt – or inventory, or asset capitalization, or depreciation, or deferred compensation, or (on and on) - accounting method to use. The profession calls it “tax accounting,” and that is what I do. I am a tax CPA.

Here is the Supreme Court in Thor Power Tool distinguishing generally accepted accounting income from taxable income:

The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, and others properly interested; the major responsibility of the accountant is to protect these parties from being misled. The primary goal of the income tax system, in contrast, is the equitable collection of revenue; the major responsibility of the Internal Revenue Service is to protect the public fisc. Consistently with its goals and responsibilities, financial accounting has as its foundation the principle of conservatism, with its corollary that "possible errors in measurement [should] be in the direction of understatement rather than overstatement of net income and net assets." In view of the Treasury's markedly different goals and responsibilities understatement of income is not destined to be its guiding light. Given this diversity, even contrariety, of objectives, any presumptive equivalency between tax and financial accounting would be unacceptable.”

Got it: financial accounting provides useful information to stakeholders and tax accounting funds the fisc. Both use the word “accounting,” but they are not the same thing.

Question: what does a business pay bills with?

With cash. Unless somebody is throwing in equity or loaning money, profit is the sole remaining source of cash.

Mission owed a lot of taxes. It submitted an OIC. An IRS Settlement Officer reviewed the OIC and disallowed the Section 280E expenses. The reasoning? The IRS has a policy of disregarding for RCP purposes those business expenses nondeductible under Code Sec. 280E.

I do not see this is an issue of discretion. I see it as a matter of economic reality. Mission needed cash to pay the IRS, and merely making something nondeductible does not create cash. The IRS missed a step here by conflating RCP (an economic measurement of cash) with taxable income (which might mirror cash by luck or accident but then only rarely).

Mission however had a history of filing tax returns without paying. We are not making friends and influencing people here, Mission.

The Tax Court looked at this and decided that the policy was within IRS discretion, and the Settlement Officer did not abuse her discretion by following that policy.

I disagree.

We now have a precedential case that Congressional tax-writing caprice will override an economic evaluation of a business’ ability to generate and retain the cash necessary to pay its tax obligations to the IRS. Let me restate this: Congress - via tax law - can bankrupt you.

Bad facts.

Bad law.

Our case this time was Mission Organic Center v Commissioner, 165 T.C. 13 (2025).