Offers in Compromise for a Deceased Taxpayer’s Estate

Offers in compromise are the best-known way to settle IRS debt for less than the full balance. When the taxpayer has died, an offer is still possible. It just works differently, because the IRS is not evaluating a living person's future earning ability. It is evaluating a pile of assets that are about to be distributed, and its legal right to be paid from them first.

Who can submit the offer

An offer for a deceased taxpayer is submitted on Form 656 by someone with authority to act for the estate: the court-appointed personal representative, or in an intestate situation, an individual authorized to act on behalf of the estate. IRM 5.8.10.4.1, the IRS's guidance on death of a taxpayer in offer cases, says that when assets are being distributed under state law because the taxpayer died without a will, an offer may be considered if submitted by an individual authorized to act on behalf of the estate.

The IRS will want to see a Form 56 and proof of authority, such as Florida letters of administration. The same IRM section warns IRS employees not to assume a surviving spouse is the executor, and notes that a Form 2848 or Form 8821 signed by the decedent expired at death.

Joint offers end at death

Spouses often file joint offers on joint liabilities. If one spouse dies after a joint offer is submitted but before it is accepted, IRM 5.8.10.4.1 states that the IRS no longer has authority to accept that joint offer and must return it. The executor does not step into the decedent's shoes on the old offer.

The IRS may solicit a new offer from the surviving spouse. If the survivor is also the personal representative and files a valid Form 56, a new joint-type offer covering both the survivor and the estate may be possible. If not, the survivor's offer covers only the survivor.

That is a hard turn for a family already dealing with a death. It also resets timing: a new offer means new financial statements reflecting the estate, not the household as it was.

The probate priority test

Here is the core principle. IRM 5.8.10.4.1 states that, absent special circumstances, an offer should not be accepted if the government would receive a greater amount through the probate proceedings. If the IRS would receive more through probate, an offer filed on behalf of a decedent should not be considered at all, because of the government's right to full payment or priority position.

That follows from the federal priority statute. When an estate cannot pay all of its debts, federal claims come first, after reasonable administration and funeral expenses. If the estate has enough to pay the IRS in full through probate, there is no reason for the IRS to take less.

So an estate offer makes sense mainly when:

• The estate is genuinely insolvent and the IRS would receive less through probate than the offer amount, perhaps because of secured debts, administration costs, or assets that are hard to sell.
• There is real doubt about whether the tax is owed at all. That is a doubt as to liability offer, a different analysis. For estate and gift tax, IRM 4.25.9 covers doubt as to liability offers in estate and gift cases.
• Special circumstances make an offer fair and efficient, such as assets tied up in litigation or property the IRS could reach only through expensive collection action.

How the IRS values an estate offer

For a living taxpayer, an offer is measured against reasonable collection potential: net equity in assets plus future disposable income. For a decedent, future income largely drops out, and the focus is on what the estate holds.

IRM 5.8.10.4.1 points out several differences:

• The low-income waiver of the application fee and initial payment, under IRC 7122(c)(3) and the Form 656 procedures, does not apply to offers submitted by an executor or administrator for a deceased taxpayer.
• The personal exemptions for bank accounts, vehicles and tools of the trade referenced on Form 433-A (OIC) do not apply.
• The IRS considers additional collection avenues against estate administrators, heirs and transferees when investigating the offer. Assets already distributed may be counted if the IRS could recover them.

That last point is critical. If the family distributed assets before submitting an offer, the IRS may treat those assets as collectible through transferee liability and expect the offer to account for them.

Estate tax and the ten-year lien

Offers can be submitted for estate tax too, but timing is unforgiving. IRM 5.8.10.4.1 notes that the estate and gift tax liens have an absolute life of ten years from the date of death or gift and are not extended because an offer is filed. The IRS will weigh that when deciding how to proceed.

Estates facing a large estate tax bill with illiquid assets should look first at section 6166 installments or a section 6161 extension before considering an offer.

Practical steps

1. Stop distributions. Do not distribute while an offer is being considered.
2. Get the numbers right. Pull transcripts, file missing returns, and challenge overstated assessments first. Many decedent balances shrink substantially once substitutes for return are replaced with real returns.
3. Value the estate honestly. Use realistic values for real estate and other assets, with the costs of sale and secured debts documented.
4. Compare to probate. Show the IRS what it would realistically receive through probate. The offer has to beat that number, or explain the special circumstances.
5. Coordinate with the probate case. If probate is open in Sarasota County, the probate timeline and the offer timeline need to work together.

What the IRS will ask for

Expect the IRS to want a complete picture of the estate: an inventory of assets at death and today, date-of-death values and current values, the probate inventory and any accountings filed with the court, secured debts against estate property, administration expenses paid and expected, distributions already made and to whom, and copies of the will or trust. The financial statement in the offer package should reconcile to those documents.

If the estate holds a homestead that passed outside the probate estate under Florida law, expect questions about whether a federal tax lien attached during life. See inheriting property under a federal tax lien.

Collection while the offer is pending

Under IRC 6331(k)(1), the IRS generally may not levy to collect a liability while an offer in compromise for that liability is pending, for 30 days after a rejection, and while a timely appeal of the rejection is pending. For an estate holding real estate or business assets, that pause can protect the assets while the offer is evaluated. It does not stop the probate process, and it does not stop the IRS from filing a claim in probate.

Alternatives worth considering

Before investing in an offer, look at what else is available. Penalty abatement can remove a large part of many decedent balances, particularly where illness preceded death. The collection period under IRC 6502 may be close to expiring. And in a genuinely small estate, the IRS may file a claim, collect what exists, and move on.

For general information on how the IRS evaluates offers, the getirshelp.com page on the offer in compromise covers the basics. The existing guide to offers in compromise for Florida taxpayers covers offers by living taxpayers.

An estate offer is not a shortcut around probate. It is a negotiation over what probate would actually produce. Done right, it can close the IRS chapter for an estate that would otherwise sit open for years.

If you are an executor trying to resolve a decedent's IRS balance for less than the full amount, call (813) 229-7100. Let's talk.