The qualified offer: the taxpayer's 90-day letter: although rarely used, a qualified offer under sec. 7430 can be an effective way to speed up the process of resolving a tax issue with the IRS.

• Author: Stodghill, W. Lance
• Position: Practice & Procedures

EXECUTIVE SUMMARY

* If the IRS does not accept a taxpayer's qualified offer and the judgment awarded to the government is smaller than the amount of the qualified offer, the taxpayer is entitled to an award of administrative and litigation costs.

* A qualified offer must be in writing and conform to the specific requirements of Sec. 7430, and the taxpayer making the offer must meet the net worth requirements of the section.

* No administrative or litigation costs will be awarded if the taxpayer has not exhausted all his or her administrative remedies before making the offer or has unreasonably protracted the proceeding.

* The qualified offer rules typically do not apply to judgments issued in settlement.

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Most tax practitioners are familiar with the 90-day letter, the notice of deficiency the IRS uses to tell a taxpayer what the government has determined the taxpayer owes. The IRS will assess the taxes determined in a notice if the taxpayer does not petition the Tax Court within 90 days. However, Sec. 7430, an often-overlooked provision of the Code, gives taxpayers an opportunity to send their own "90-day letter" and offer the government what the taxpayer believes to be the "correct" amount of tax. (1) If the government does not respond within 90 days of that letter, it could be liable to the taxpayer for the taxpayer's reasonable administrative and litigation costs.

Taxpayers and practitioners often complain that a tax controversy with the IRS takes too long and costs too much. The qualified offer provisions of Sec. 7430 provide a tool that can help remedy these problems. This article provides an overview of the qualified offer provisions and discusses the hales for and the practical considerations involved in making a qualified offer.

Before enacting the qualified offer rule in 1998, Congress made it extremely difficult to recover attorneys' fees and costs from the IRS. First, a taxpayer had to substantially prevail as to the amount in controversy or the most significant issues in the case. (2) After a taxpayer substantially prevailed in a case, the government would attempt to show that its position was substantially justified) If the government's position was substantially justified (a relatively low threshold), the taxpayer would not recover, leaving the taxpayer with nothing more than a Pyrrhic victory.

The qualified offer rule changed the playing field dramatically in an effort to promote settlement and reduce controversies about whether the government's position was substantially justified. (4) A taxpayer can make a qualified offer to resolve the tax matter. If the government does not accept the offer within 90 days, it must receive a judgment in excess of the amount the taxpayer offered to settle the case or pay reasonable administrative and litigation costs. (5) Substantial justification for the government's position no longer matters. (6) In other words, make the government a better offer than it can win in court. If the government does not win more than the taxpayer offered, it must pick up the tab for litigation.

What Makes a Settlement Offer a Qualified Offer?

A qualified offer is a written offer that:

* Is made to the United States;

* Is made during the qualified offer period;

* Specifies the taxpayer's liability (without regard to interest);

* Is designated as a qualified offer at the time it is made; and

* Remains open until the earliest of (1) the date the offer is rejected, (2) the date the trial begins, or (3) the 90th day after the date the offer is made. (7)

Made to the United States: The taxpayer must make a qualified offer by delivering the offer to the office or personnel within the IRS, Office of Appeals, Office of Chief Counsel, or Department of Justice that has jurisdiction over the tax matter in the administrative or court proceeding. (8) For instance, if a case has been petitioned to the Tax Court, the offer would be delivered to the attorney who answered the case on behalf of the IRS or to the Chief Counsel in Washington if no answer has been filed.

Made during the qualified offer period: A qualified offer must be made during the aptly named "qualified offer period." This period commences when a letter is sent to the taxpayer that proposes a deficiency and allows the taxpayer an opportunity for administrative review in the IRS Office of Appeals (Appeals). In a deficiency case, this will be the 30-day letter (so named because it gives the taxpayer 30 days to ask Appeals to consider the case). The qualified offer period ends on the date that is 30 days before the date the case is first set for trial. (9) Therefore, a valid qualified offer can be made 31 days before the first trial setting in a case. If the court resets the trial setting before the expiration of the qualified offer period--31 or more days before the trial setting--then the qualified offer period remains open until 30 days before the next trial setting. (10) If a case is reset after the qualified offer expires, the qualified offer period is not revived. (11)

Specifies the taxpayer's liability: A qualified offer must clearly specify the taxpayer's liability. The taxpayer may offer a specific dollar amount of the total liability or a percentage of the adjustments at issue at the time of the offer. The offer must be an amount that, if accepted by the government, will fully resolve the taxpayer's liability for the year at issue. No complex legal language is necessary. Simple statements such as "My clients offer to accept liability of $1,000, exclusive of interest and with no penalties or additions to tax, to settle their 2005 income tax liability" should meet the requirements.

If multiple years are involved, they...