It is pretty much a rite of passage for my students to file at least one Offer in Compromise for their clients. A lot of those Offers are presently accumulating dust in Brookhaven, New York. The length of inaction, as well as the precedential Tax Court case Brown v. Commissioner, has had me thinking more about operation of IRC § 7122(f) “deemed acceptance of offer not rejected within certain period.”
In my last post I discussed when the clock “starts” for IRC § 7122(f) and noted that the other two pressing questions are when (or if) the clock “tolls” and when the clock “stops.” I think there are some open questions as to when or if the clock could ever toll, but I’ll leave them tantalizingly unsaid for now. Instead, I will discuss when the clock “stops” in IRC § 7122(f). The answer to this question, I believe, is the key to whether we will see an influx of “deemed accepted” Offers in this pandemic-backlogged world of tax administration.“read
To recap the statute at play, in a nutshell IRC § 7122(f) provides that any Offer that isn’t rejected within 24 months of submission is deemed accepted. The only exception is for tax liabilities in an Offer that are “in dispute in a judicial proceeding.” This seems straightforward: hooray for easy statutes!
Of course, lawyers can always make things more difficult if we choose to. And by writing this post (and others to come) I have clearly chosen to make this statute tricky.
But, I believe, with good reason. Bear with me.
It isn’t hard to imagine how things can get complicated with IRC § 7122(f). A slight twist on the facts of Brown illustrates how this could happen. To quickly recap:
In Brown, the petitioner submitted an Offer that was returned as non-processible in six or seven months. Brown submitted the Offer as part of a Collection Due Process (CDP) hearing, so he was able to effectively appeal the “non-processible” determination. The Offer was held “open” pending the CDP determination on that issue. Much later (well over a year) the Appeals Settlement Officer upholds the preliminary determination to return the Offer.
Here is where I’d like to add a twist to the facts: what if the CDP determination was that the Offer was processible, and kicked back to the Offer Unit? In that case, how would we calculate the remaining time left for the IRS Offer Unit to reject the Offer under IRC § 7122(f)?
Post-Brown, there are at least three different answers to this question that I can see.
First, one could argue that the IRS Offer Unit has unlimited time remaining to reject the Offer under IRC § 7122(f). This is because they already rejected the Offer within 24 months via the preliminary determination to return the Offer, so IRC § 7122(f) has already been met.
This seems wrong. But in fact it is the IRS’s current position and arguably consistent with the Brown opinion. Let’s hold that thought for now.
A second answer is that the IRS Offer Unit has 24 months from the date of the Settlement Officer reversing the “non-processible” determination. This is because the Offer Unit did, in fact, reject the Offer by returning it, but the clock is re-starting now that they need to make a new determination.
This seems a little less wrong… but I still don’t like it. Let’s look at one more option.
A third answer is that the IRS Offer Unit has 17 or 18 months left from the date of the Settlement Officer reversing the “non-processible” determination. This is because the IRS Offer Unit already ate up six or seven months of the clock before reaching their (incorrect) preliminary determination to return the Offer.
This is the only option that really allows for tolling. But I’d actually say the best answer is one that may be foreclosed by Brown: the IRS Offer Unit only has however much time is left from the original submission date, including the time that elapsed during Appeals review.
But am I being just too taxpayer friendly? Let’s look at the authorities…
The Law After Brown and Tax Court Confusion
The “deemed acceptance” statute has precious little case law outside the Brown progeny. From the multiple Brown decisions, however, we can glean the following:
First, a “returned” Offer is a “rejected” Offer for IRC § 7122(f).
I think that is generally defensible, with a caveat: if the preliminary determination to return an Offer is overturned by Appeals, the Offer has not been (and never was) rejected. The Courts have not directly addressed that issue since it did not come up in Brown.
Second, Appeals can take as long as they want to reach a determination on an Offer so long as there was a preliminary determination made by the Offer unit within 24 months.
I don’t think that is correct, but that’s the lesson of the most recent Brown case, since it took Appeals over 24 months to uphold the original decision to return the Offer. I think facts and arguments exist that would likely lead a Circuit Court to finding otherwise, depending on how much that Circuit Court defers to IRS/Treasury guidance.
Treasury Regulations and IRC § 7122(f)
Allow me say something that shouldn’t be controversial: there really aren’t any Treasury Regulations (or at least no final Treasury Regulations) on point for IRC § 7122(f). The Brown court cited to Treas. Reg. § 301.7122-1, but it is mostly irrelevant to IRC § 7122(f). It was finalized 4 years before IRC § 7122(f) even existed and has not been updated since. It provides little if any real guidance on the later-enacted statute at play (this is also true of Rev. Proc. 2003-71, for the same reasons).
In fact, importing Treas. Reg. § 301.7122-1 and Rev. Proc. 2003-71 to the IRC § 7122(f) analysis just muddies the water. To the extent they deal with when (or whether) an Offer is rejected or returned, they do so only in determining if there is a right to administrative appeal or if the Offer is “pending.” Again, these are both non-issues to the statutory language of IRC § 7122(f) which only cares about the date the Offer is “submitted” and whether it is subject to a “judicial proceeding.”
The Tax Court appears to have been confused on this point, with the confusion culminating in the phrase, “for the purpose of IRC § 7122(f) an Offer is pending if…” As I have stated before, there simply is no “pending” for the “purpose of IRC § 7122(f).” There are two questions for IRC § 7122(f): when the Offer was “submitted” and when it was “rejected.” If I mail an Offer to the IRS and someone in Brookhaven locks it away in a dusty trailer my Offer will never be “pending.” But two years later you better believe my Offer is accepted under IRC § 7122(f).
“Clarity” From Notice 2006-68
Instead of Treas. Reg. § 301.7122-1, however, we do have Notice 2006-68, which is directly on point. Notice 2006-68 provides that:
the “period during which the IRS Office of Appeals considers a rejected offer in compromise is not included as part of the 24-month period because the offer was rejected by the Service within the meaning of section 7122(f) prior to consideration of the offer by the Office of Appeals.”
How to make sense of this…
One way to read this is that it supports our least satisfactory interpretation of IRC § 7122(f): once the IRS Offer Unit decides to return or reject an Offer the 24-month cap goes out the window never to return “because the offer was rejected by the Service within the meaning of 7122(f) prior to consideration of the Offer by the Office of Appeals.” All the IRC § 7122(f) requires is that the IRS make some sort of preliminary determination on the offer within 24 months, and the Offer unit did exactly that. Case closed.
Again, this was the least satisfying answer to the hypothetical. I am also convinced that it is wrong, though it appears to be the position of the IRS in the IRM. See IRM 220.127.116.11.1.3(5) (08-26-2020) (specifically providing that a decision to “return” by the Offer Unit will end the 24-month clock even if Appeals determines that the decision was “erroneously made.”)
You could also read Notice 2006-68 as supporting the second or third answer to our hypothetical: the clock stops only for “the period during which the IRS Office of Appeals” considers the Offer. If the IRS Office of Appeals kicks the Offer back to the Offer Unit, the clock either starts anew (our second answer) or picks back up from where it left off (our third answer).
Again, I think that the correct answer is that the clock never stopped with the preliminary determination. But failing that, and particularly if IRS Notice 2006-68 is given the force of law (more on why that’s wrong in my next post), I’d say tolling is the least-bad alternative. Using all the traumatic wisdom gained through the submission of hundreds of Offers, here is why:
IRS Appeals does not send “rejected” Offers back to the Offer Unit: the decision ends with Appeals. See IRM 18.104.22.168.1.1 (08-26-2020). However, IRS Appeals does send “returned” Offers back to the Offer Unit if the processing determination was incorrect. See IRM 22.214.171.124.4.1 (08-26-2020).
In other words, if the Offer is “rejected” the Offer Unit’s work is done forever and ever amen, even if Appeals ends up reversing that determination. But if the Offer is “returned” it might go back to the Offer Unit if they were wrong. Tolling can only even present itself as an issue (with the Offer Unit) if it is an erroneously “returned” Offer in a CDP hearing, because you normally don’t get Appeal rights unless it is actually “rejected.” See Treas. Reg. § 301.7122-1(f)(5)(ii).
It doesn’t make sense to me that the IRS Offer Unit can quickly make an incorrect decision (“non-processible Offer”), which usually takes place well before reviewing the substance of the Offer itself, and then can take as long as it wants to review the Offer after that error is reversed. The statute certainly doesn’t seem to require that reading.
A Better Understanding of Returned Vs. Rejected Offers
It may be problematic to always equate “returned” Offers with “rejected” Offers. The IRS doesn’t even treat them as the same thing. The issue is that “rejecting” was a term-of-art in Offer parlance prior to IRC § 7122(f) being enacted. A rejected Offer was one that allowed for Appeal rights, had tolled the statute of limitations on collection, and had been determined to be processible. Not all Offers that the IRS didn’t agree to were “rejected” as a term of art.
In contrast, “returning” an Offer is just one way of many that the IRS can decide not to agree to an Offer. Indeed, Notice 2006-68 lists out the myriad ways an Offer can find an ending without acceptance, including if it is:
“rejected by the Service, returned by the Service to the taxpayer as nonprocessable or no longer processable, withdrawn by the taxpayer, or deemed withdrawn under section 7122(c)(1)(B)(ii) because of the taxpayer’s failure to make the second or later installment due on a periodic payment offer.”
What Notice 2006-68 does, I think quite sensibly, is to say that each of these means of resolutions is a “rejection” under IRC § 7122(f). Thus, Notice 2006-68 defines “rejection” in IRC § 7122(f) as it would be used in common parlance or contract law as an umbrella term for failing to accept an Offer, rather than solely the IRS term-of-art that generally gives appeal rights.
Ultimately, however, the bigger issue is the question of finality. Brown sees no distinction between a preliminary determination to return or to reject and a final decision. Perhaps this is an example of bad facts making bad law: $50 million at issue for an Offer of a few hundred thousand just doesn’t look good, especially for a repeat player. It would have been far more defensible for the Tax Court to say that the 24-month period tolled, rather than finding that the Offer was conclusively “rejected” when the Offer unit made the preliminary determination to return the Offer.
But to understand why we will need to dive into administrative and even contract law… Which will require at least one more post on this deceptively simple statute.