If you find yourself in litigation with the IRS, or in the middle of an IRS administrative dispute that seems to be going nowhere, it's time to consider a taxpayer's best friend: the qualified offer. The qualified offer provisions allow taxpayers to recover fees and costs when the IRS rejects a settlement offer, and the taxpayers win a determination that requires a lesser amount than the offer. This article will discuss the technical requirements of an offer, and the best strategies for deploying a qualified offer.
What is a Qualified Offer?
Congress enacted the qualified offer rule in section 7430(g) as part of the IRS Restructuring and Reform Act of 1998 (RRA 1998). Section 7430 provides a more general rule that a prevailing party, after meeting certain conditions, may obtain reasonable administrative costs and litigation costs from the opposing party. But that general rule requires that a party prove that they are a prevailing party, and that can be difficult. The qualified offer rule, however, provides that a taxpayer is deemed to be a prevailing party where the liability of the taxpayer pursuant to the judgment in the proceeding (determined without regard to interest) is equal to or less than the amount offered by the taxpayer.
A qualified offer must:
- Specify the offered amount of the taxpayer's liability (determined without regard to interest) – it can be a dollar amount or a percentage;
- Settle all issues and adjustments in the proceeding and only those issues and adjustments;
- Be designated at the time it is made as a qualified offer for purposes of section 7430(g); and
- By its terms, remain open during the period beginning on the date it is made and ending on the earliest of the date the offer is rejected, the date the trial begins, or the 90th day after the date the offer is made.
When Must I Make a Qualified Offer?
A qualified offer must be made during the “qualified offer period.” The qualified offer period is defined by section 7430(g)(2). It tells us that the qualified offer period begins on the date on which the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals is sent, and ends on the date which is 30 days before the date the case is first set for trial.
The Treasury Regulations give us some additional guidance:
- A notice of claim disallowance begins the qualified offer period for a refund case.
- Where no notice of claim disallowance is sent, the qualified offer period begins on the date on which the answer or other responsive pleading is filed with the court.
- A case set for trial in the Tax Court is considered to be set for trial on the date of the calendar call (the first day of the trial session).
- If a case is removed from a trial calendar, the qualified offer period does not end until the case remains on a trial calendar on the date that precedes by 30 days the scheduled date of the calendar call for that trial session.
How Long Does the IRS Have to Respond to a Qualified Offer?
You set the period in which the IRS must respond to your offer. But to be a qualified offer, that period must be at least the shorter of the 90th day after the date the offer is made, or the trial date.
What Amount Should I Offer to the IRS?
Making a realistic qualified offer as soon as possible after the IRS issues its 30-day letter is a smart tactic. The offer amount should be an amount that is slightly more than you expect to be determined to owe if you proceed with the matter to litigation. If the issues in the case are all or nothing—meaning a court could not possibly find a middle ground—then an offer of $1 could be sufficient. However, most cases involve multiple issues with many possible outcomes, and the offer amount should be your best estimate of your potential liability. If you believe you are due a refund, and the procedural posture of the case and forum in which you intend to litigate would allow for a refund, your offer amount could be a negative number.
If new information becomes available, and the period in which to make a qualified offer is still open, you may submit additional qualified offers. But costs may only be awarded under the qualified offer provision from the date of the qualified offer. Costs incurred earlier than the qualified offer may be recovered under the more general rule, but it is difficult to prove that the taxpayer is a prevailing party.
What Will the IRS Do When It Receives My Offer?
The IRS will first attempt to determine whether the offer is a valid qualified offer. Generally the receiving party—Appeals or Counsel—will transmit the qualified offer to a branch in the National Office with expertise in qualified offers. The branch attorney will then determine whether the qualified offer is technically valid. If it is technically valid, it will inform the appeals officer or IRS Counsel attorney with jurisdiction over the case that the offer is valid. It is then up to the appeals officer or IRS counsel attorney, generally with his or her manager, to determine whether to accept or reject the qualified offer.
A qualified offer indicates a taxpayer's confidence in the offer amount and increases the IRS's stake in the case because the IRS must now be concerned about the potential for paying the taxpayer's litigation costs. This generally means that the IRS will carefully consider the hazards of litigation, and it may be the first time that the IRS has taken a look at its weaknesses in the case. Sometimes, however, the extra scrutiny that comes with a qualified offer is not advantageous. For example, if the IRS has not identified potential examination issues, it may do so when carefully evaluating the qualified offer, and depending on the stage of the controversy, it may make additional adjustments or raise new issues in Tax Court.
What If the IRS Rejects My Qualified Offer?
If the IRS rejects your offer, it will tell you if it does not believe the qualified offer is technically valid, and that will allow you to cure if time permits by submitting a new qualified offer. If the IRS rejects your offer on the merits, it will say as much, and you should attempt to obtain the reasons for the IRS's decision to reject the offer. You should evaluate the IRS's substantive reasons for rejecting the offer and determine whether your initial offer considered all possible outcomes. If you determine that your original analysis did not consider important issues, you should consider submitting a new qualified offer if time permits.