With funding and staffing low, and caseloads high, you would expect the IRS to be more attentive in its efforts to resolve cases. But in my experience the opposite holds true, with IRS personnel seemingly more interested in moving a case to someone else’s desk rather than out the door. So how do you get the IRS to seriously consider an otherwise fair settlement offer? Make it a qualified offer.
What is a qualified offer? It is an offer pregnant with consequences. The concept is embodied in I.R.C. Section 7430, which permits the award of reasonable administrative and litigation costs to a taxpayer in an administrative or court proceeding brought against the United States in connection with the determination of any tax, interest, or penalty. An award of reasonable administrative or litigation costs is available where: (1) the taxpayer did not unreasonably protract the proceedings, (2) the amount of the costs requested is reasonable, (3) the taxpayer exhausted available administrative remedies (i.e., sought review by IRS Appeals after the audit), and (4) the taxpayer is the “prevailing party.” The latter requirement is the most difficult, as it requires the taxpayer to establish, among other things, that it substantially prevailed as to the most significant issues and that the IRS position was not substantially justified. Where a taxpayer makes a qualified offer which the IRS rejects, and the taxpayer later wins a judicial determination to pay less than the amount offered, the taxpayer is treated as the “prevailing party,” largely paving the way for the award of practitioner fees and costs.
This point is worth stressing. When the IRS rejects a qualified offer, there are serious potential future consequences. That rejection could cost the Government money, and no IRS official wants their name associated with an award of fees and costs. Not every taxpayer wants to go to trial, and in some cases, a taxpayer’s case – either due to the amount at issue or the factual/legal challenges presented – should not be tried in court. But regardless of whether the case will go the distance, the potential for accountability makes the IRS look and think twice about the settlement offer.
So what is a qualified offer and how is it made? Under Code Section 7430(g), a qualified offer is a written offer that: (i) specified the offered amount of the taxpayer’s liability (without interest), (ii) designated as a “qualified” offer under Section 7430(g), and (iii) is made by the taxpayer after the 30-Day Letter (i.e., final audit report offering IRS Appeal review rights) but before the date that is 30 days before the case is first set for trial.
It is important to note that qualified offers are not limited to income tax disputes. They can be made in connection with proposed trust fund penalty assessments, transferee liability disputes, and according to a 2017 court decision, TEFRA proceedings involving proposed partnership tax return adjustments.
Simply put, the qualified offer is an effective negotiation tactic that raises the stakes for the IRS, putting increased pressure on the IRS to settle a matter. If you have any questions on qualified offers or any other tax-related topic, please do not hesitate to contact me at (214) 749-2464 or firstname.lastname@example.org.