An offer of compromise does not become binding until the IRS sends written acceptance to the taxpayer or an authorized representative; therefore, the taxpayer's death can terminate the pending offer even if the IRS later sends an acceptance letter.
Holding
The Tax Court concluded that the IRS Independent Office of Appeals had not abused its discretion in refusing to recognize an offer in compromise which the IRS apparently accepted six months after the taxpayer had died. Since the taxpayer had died before the IRS issued its written acceptance, no valid compromise could have arisen under §7122 and the relevant Treasury regulations. The court therefore granted summary judgment for the IRS and upheld the federal tax lien.
Why It Matters
Death before written acceptance can terminate a pending offer. An IRS employee’s recommendation to accept an offer does not complete the compromise. Written notification of acceptance remains necessary.
A later IRS acceptance letter does not necessarily cure the problem. The IRS mailed an acceptance letter six months after the taxpayer died, but the Court held that the letter could not create a binding compromise because no living taxpayer or authorized representative could receive it.
The decision gives practical importance to the Internal Revenue Manual. The IRM does not have the force of law, but the court treated its instruction to terminate consideration of an offer after the death of a sole offeror as consistent with §7122 and its regulations.
Practitioners handling an OIC should address a taxpayer’s death immediately. The estate may need to submit a new offer through its legal representative rather than try to preserve the deceased taxpayer's offer.
This is primarily an application of established compromise rules rather than a new substantive rule. Its significance lies in how those rules operate when a taxpayer dies while an offer remains pending.
Key Facts
Jacqueline Farwell owed self-reported but unpaid federal income taxes for 2008 through 2011, 2013, and 2015. The IRS recorded a federal tax lien in September 2018 for approximately $119,386.
Farwell requested a collection due process hearing and proposed an offer in compromise (OIC) as an alternative. An OIC allows the IRS to settle a tax liability for less than the full amount owed when statutory and administrative requirements are satisfied.
Farwell suggested paying $100 to settle the liabilities referred to in the offer. She grounded the offer in either doubt about collectibility given the special circumstances or the effectiveness of tax administration. In her submission, she said the assets she had left were needed for medical care and that attempting to collect them would cause serious economic hardship.
An IRS offer examiner requested updated financial information in February 2020.
Farwell died on March 12, 2020.
On April 17, 2020, the examiner told Farwell’s attorney she recommended accepting the offer based on effective tax administration. The IRS had not yet issued the written acceptance required to complete a compromise.
On September 22, 2020, six months after Farwell’s death, the IRS sent a letter stating that it had accepted her offer.
An Appeals settlement officer later discovered Farwell’s death while reviewing IRS records. The IRS later concluded that the offer should have terminated when Farwell died and informed the parties that the estate's legal representative would have to file a new Form 656.
Farwell’s estate asked Appeals to restore the offer to accepted status. The estate argued that Treasury Regulation §301.7122-1(e)(5) generally prohibits reopening an accepted compromise unless the acceptance resulted from false information, concealment of assets, or a mutual mistake of material fact.
Appeals rejected that argument and sustained the federal tax lien. The estate then petitioned the Tax Court.
Statutory and Regulatory Framework
Section 7122 authorizes the Treasury Department to compromise federal tax liabilities.
Treasury Regulation §301.7122-1(e)(1) provides that an offer is not accepted until the IRS notifies the taxpayer or the taxpayer’s representative of acceptance in writing.
The Internal Revenue Manual addresses what happens when a sole taxpayer dies while an offer remains pending. IRM 5.8.7.5 states that consideration of the offer must terminate upon the death of a single offeror.
The IRM is administrative guidance and does not itself have the force of law. The Tax Court nevertheless may consider whether Appeals reasonably followed IRM procedures when reviewing the IRS’s exercise of discretion.
Arguments
Taxpayer argued:
The September 2020 acceptance letter created a valid and binding compromise.
Once the IRS accepted the offer, Treasury Regulation §301.7122-1(e)(5) prevented the IRS from reopening it unless the case involved false information, concealment, or mutual mistake.
None of those exceptions justified setting aside the agreement.
The IRS could not rely during litigation on a rationale different from the rationale Appeals used administratively because of the administrative-law rule established in SEC v. Chenery Corp.
Communications among Appeals, Collection personnel, and the IRS offer unit improperly violated restrictions on ex parte communications.
The estate also disputed the underlying tax liabilities.
Government argued:
Farwell’s death ended the IRS’s authority to continue considering the offer she submitted personally.
No compromise existed when she died because the IRS had not yet issued written acceptance.
The September 2020 letter therefore could not create a binding compromise.
Because no valid compromise existed, the regulatory exceptions governing the reopening of an accepted compromise did not apply.
Appeals consistently relied on Farwell’s death as the reason the original offer could no longer be accepted.
The internal IRS communications concerned verifying and administering the offer and did not constitute prohibited ex parte communications.
Court’s Reasoning
Written acceptance was required. Section 7122 and Treasury Regulation §301.7122-1(e)(1) provide the exclusive mechanism for creating a federal tax compromise. An OIC is not accepted until the IRS provides written notice to the taxpayer or an authorized representative.
Farwell died before the IRS satisfied that requirement. She died on March 12, 2020. At that point, the IRS had not issued written notice accepting her offer. Her attorney’s authority to represent her and her brother’s authority under his power of attorney also terminated upon her death.
The September acceptance letter could not create the missing agreement. When the IRS mailed the letter six months later, Farwell was deceased, and her former attorney had not yet been retained to represent her estate. The Court therefore found no taxpayer or authorized taxpayer representative to whom the IRS could provide the required acceptance notice.
The IRM supported termination of the offer. Section 7122 and its regulations do not expressly address the death of a taxpayer while an OIC remains pending. IRM 5.8.7.5 fills that administrative gap by directing the IRS to terminate consideration after the death of a sole offeror. The court acknowledged that the IRM does not have the force of law but found that the provision was consistent with the statute and regulations.
The reopening rules did not apply because nothing needed to be reopened. The estate relied on the regulatory restrictions governing when the IRS may reopen an accepted compromise. The Court concluded that those restrictions were irrelevant because no valid compromise had ever been formed.
The government did not improperly change its rationale during litigation. Appeals personnel discussed mutual mistake after the estate raised the reopening rules, but the administrative record consistently identified Farwell’s death as the principal reason the offer could not remain accepted. The Court therefore rejected the estate’s argument under the Chenery doctrine.
The IRS’s internal communications were permissible. Appeals personnel communicated with Collection and the offer unit while verifying whether the OIC satisfied applicable legal and administrative requirements. The court treated those contacts as permissible verification and procedural communications rather than prohibited ex parte communications that compromised Appeals’ independence.
Challenge to the Underlying Tax Liabilities
The estate also stated during the CDP proceeding that it disputed Farwell’s underlying tax liabilities.
That assertion was insufficient.
A taxpayer may challenge the underlying liability in a CDP proceeding only when the statutory requirements permit the challenge and the taxpayer properly raises the issue before Appeals. Properly raising the issue requires more than stating disagreement. The taxpayer must provide evidence supporting the challenge when given a reasonable opportunity to do so.
The estate presented no evidence contesting either the existence or the amount of Farwell’s self-reported liabilities. The Tax Court therefore held that the estate had not properly placed those liabilities at issue and reviewed Appeals’ determination only for abuse of discretion.
That procedural point is routine but useful. A taxpayer cannot preserve an underlying-liability challenge during a CDP hearing merely by asserting that the amount is disputed. The administrative record must contain evidence supporting the challenge.
Abuse of Discretion Review
Because the underlying liabilities were not properly before the court, the Tax Court reviewed Appeals’ collection determination for abuse of discretion.
Under that standard, the Court considered whether Appeals:
verified compliance with applicable law and administrative procedures;
considered relevant issues raised by the taxpayer; and
balanced the government’s interest in efficient collection against the taxpayer’s interest in avoiding unnecessarily intrusive collection.
The Court found no deficiency in any of those requirements. Appeals verified the relevant tax information, considered the estate’s objections to the treatment of the OIC, and sustained the lien after concluding that the purported acceptance had occurred after Farwell’s death.
The estate did not challenge Appeals’ statutory balancing determination, so the Court treated that issue as conceded.
Result
The Tax Court granted summary judgment for the IRS and sustained the federal tax lien because Appeals did not abuse its discretion in refusing to recognize the post-death acceptance of Farwell’s offer in compromise.
List of Citations
IRC §6320: Provides collection due process rights following the filing of a notice of federal tax lien.
IRC §6330: Governs CDP procedures and the issues a taxpayer may raise before Appeals.
IRC §7122: Authorizes the Secretary to compromise federal tax liabilities.
Treas. Reg. §301.7122-1(e)(1): Provides that an OIC is not accepted until the IRS issues written notice of acceptance.
Treas. Reg. §301.7122-1(e)(5): Limits the circumstances in which the IRS may reopen an accepted compromise.
Treas. Reg. §301.6330-1(f)(2), Q&A-F3: Addresses when an issue is properly raised during a CDP hearing.
IRM 5.8.7.5: Directs the IRS to terminate consideration of an offer upon the death of a sole offeror.
Estate of Jacqueline R. Farwell v. Commissioner, T.C. Memo. 2026-95: Holds that an acceptance letter issued after the taxpayer’s death did not create a valid compromise and that Appeals properly sustained the collection action.
Shumaker v. Commissioner, 648 F.2d 1198 (9th Cir. 1981): Treats §7122 and its regulations as the exclusive method for creating a federal tax compromise.
Laurins v. Commissioner, 889 F.2d 910 (9th Cir. 1989): Supports the requirement that an OIC is not accepted without written notification.
Thompson v. Commissioner, 140 T.C. 173 (2013): Supports Appeals’ use of applicable IRM guidance when evaluating a collection alternative.
Giamelli v. Commissioner, 129 T.C. 107 (2007): Requires taxpayers to properly raise an underlying-liability challenge during the administrative CDP proceeding.
SEC v. Chenery Corp., 318 U.S. 80 (1943): Limits judicial review of agency action to grounds invoked by the agency itself.
Rev. Proc. 2012-18: Governs ex parte communications involving IRS Appeals personnel.