I’ve been spending a lot of time and spilling a lot of virtual ink on how and when an Offer in Compromise may be “deemed” accepted by the service. This happens when the IRS fails to reject an Offer within 24 months after submission. It is, as far as I can tell, an extremely rare occurrence -possibly it has never happened. It may well seem like I am tilting at windmills. (Disclosure: I only finished about a quarter of Don Quixote so I’m not sure that metaphor holds.)
And yet, I persist.
And that is because I see it as my chivalric duty to right a wrong in tax administration… or because I have numerous clients facing extremely long Offer wait times. I also think that this particular issue gives a chance to see how the (sometimes academic) debate on the APA and tax rules can play out in real time on issues that affect low-income taxpayers. More on that under the fold…“read
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will not be deemed accepted under section 7122(f) if the offer is rejected, returned, or voluntarily or involuntarily withdrawn within the 24-month period.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 126.96.36.199.3.3 (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 (9th 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.