Pursuing an Offer in Compromise “Effectively”

The IRS offers multiple payment options for taxpayers who are unable to pay their tax liabilities. Some may be placed in “Currently Not Collectible” status, while others may be able to enter into an installment payment plan with the IRS to pay down their debt over time. Some may be able to pay a lower amount than their full tax liability if they meet the criteria to make an “Offer in Compromise” (OIC). However, as the recent Tax Court case Richard L. Brown et ux v. Commissioner, (T.C. Memo 2025-17) shows, merely claiming economic hardship is not enough to qualify for an Effective Tax Administration (ETA) OIC. Additionally, the case highlights the importance of following the proper procedure in these cases or risk losing the ability to argue all aspects of your case.

The IRS’ Offer in Compromise Program

An Offer in Compromise (OIC) is one collection alternative the IRS offers taxpayers with outstanding tax liabilities that allows taxpayers to settle their tax debt for less than the full amount they owe. It is available to taxpayers who cannot fully pay their tax liabilities without experiencing financial hardship. To qualify, taxpayers must meet strict eligibility criteria, including filing all required tax returns and making necessary payments for the current year.

There are three kinds of offers the IRS may accept:

1. Doubt as to Liability: There is uncertainty about whether the tax debt owed by the taxpayer is correct;
2. Doubt as to Collectability: The taxpayer's assets and income are insufficient to cover the debt; and
3. Effective Tax Administration (ETA): The taxpayer owes the liability and has the ability to pay, but doing so would cause undue economic hardship for the taxpayers or be unfair due to exceptional circumstances.

Additionally, there are two kinds of ETA Offers:

1. Economic Hardship is available when payment-in-full would create significant financial difficulties, such as preventing access to basic living needs.
2. Public Policy or Equity may justify acceptance of an ETA offer in exceptional circumstances, such as reliance on erroneous advice from the IRS or criminal actions by others causing the tax liability.

ETA offers are seldom accepted. Of the approximately 55,000 offers in compromise that were submitted in 2020, the IRS only accepted 531 OIC ETAs.

Background of Richard L. Brown et ux. v. Commissioner

The Browns operated an early childhood education facility and sold the property in 2017, reporting a taxable capital gain of $605,597. Earlier that year, they had purchased a new childcare facility. The sale and purchase of the properties did not comply with the qualifications for a tax-free IRC Sec. 1031 exchange. Accordingly, the Browns reported the property sale as a capital gain on their 2017 Form 1040, with a total tax liability of $605,597. The IRS assessed the amount of reported tax, plus additional failure to pay and failure to pay estimated tax penalties.

When the Browns subsequently failed to pay their outstanding liability for 2017, the IRS issued a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. The Browns requested a Collection Due Process Hearing (CDP) and filed an OIC based on Doubt as to Liability (DATL), arguing that the purchase and sale of childcare facilities was intended as an IRC Sec. 1031 like kind exchange despite not technically complying with the requirements, and therefore, no liability was due. The Browns did not contest the underlying liability or additions to tax assessed by the IRS during this process. Appeals rejected Taxpayers’ OIC and the levy was sustained.

The IRS then issued a Notice of Federal Tax Lien Filing and Your Right to a Hearing. The Browns again requested a CDP hearing, and again submitted an OIC, this time under the public policy or equity ETA. They argued that accepting the OIC would be equitable given their intent to comply with IRC Sec. 1031 as well as their role as educators providing community service. The Browns offered $75,000 to settle their $605,597 debt.

The Offer in Compromise Unit, ETA Group, evaluated their OIC and rejected it because it did not meet the criteria for ETA. The IRS will not accept an ETA OIC made on public policy grounds because the taxpayer believes a provision of the tax law to be unfair. Appeals presented the rejection to the Browns and provided them an opportunity to respond. After receiving no response, Appeals sustained the lien. A Notice of Determination was issued, and the Browns brought the action against the Commissioner, challenging the IRS's Notice of Determination sustaining a Notice of Federal Tax Lien (NFTL) for their 2017 tax year.

Tax Court Opinion and Reasoning

As the underlying liability was not properly at issue, the court only reviewed the determination for abuse of discretion. It found the Appeals Officer properly verified legal requirements, considered relevant issues raised, and performed the required balancing analysis. The court concluded there was no abuse of discretion in rejecting the OIC and sustaining the NFTL, reasoning that allowing the OIC would effectively grant IRC Sec. 1031 benefits without meeting statutory requirements, potentially undermining compliance and fair tax administration.

Brown highlights the importance of finding the right collection alternative for a taxpayer’s situation. An ETA OIC has stringent criteria that need to be met in order to be accepted. A taxpayer must be able to demonstrate that their offer is either based on economic hardship so severe they are unable to meet basic living needs, or their offer should be accepted for a public policy and equity reasons, such as erroneous advice given by the IRS or a tax professional.

The case also stresses the importance of challenging a taxpayer’s underlying liability, including penalties and additions to tax, at the first opportunity available. The IRS and the courts continue to take the position that a taxpayer does not have a right to dispute the existence or amount of a liability if the taxpayer failed to dispute it at a prior opportunity. The Browns should have contested the additions to tax in their first CDP hearing and, in failing to do so, were precluded from raising the issue in their second CDP hearing.

An OIC is just one collection alternative. Taxpayers could also consider Currently Non-Collectible status, a Partial Pay Agreement, or an Installment Agreement. Taxpayers who are contacted by the IRS regarding unpaid taxes who are unable to fully pay should engage a trusted tax advisor to help them navigate through the collection process.

The EisnerAmper Controversy team has decades of experience navigating and assisting clients with the IRS collection process. Contact us below if you have questions about how we can assist.