What Happens to an IRS Offer in Compromise When the Taxpayer Dies?

The taxpayer offered $100 to settle her IRS debt

A recent U.S. Tax Court decision, Estate of Jacqueline R. Farwell v. Commissioner, T.C. Memo. 2026-95, shows why timing and proper estate administration can matter enormously.

Jacqueline Farwell owed unpaid federal income taxes for several years between 2008 and 2015. The IRS eventually filed a federal tax lien for approximately $119,000. After being diagnosed with a terminal illness, Farwell sought to resolve the debt through an Offer in Compromise, or OIC.

She offered the IRS $100 to settle the outstanding liabilities. Her position was that her remaining assets were needed for medical care and that collection would create serious economic hardship.

The IRS began reviewing the offer and requested additional financial information. Then something happened before the IRS formally accepted the offer: Farwell died.

The IRS later sent an acceptance letter

About a month after Farwell’s death, an IRS offer examiner informed her tax attorney that she was recommending acceptance of the offer. But a recommendation is not the same as an accepted Offer in Compromise.

Approximately six months after Farwell died, the IRS mailed a written letter stating that it had accepted the $100 offer. At first glance, that sounds like the end of the matter: approximately $119,000 of IRS debt had apparently been settled for $100.

It wasn’t.

When IRS Appeals later discovered that Farwell had died before the acceptance letter was issued, the IRS concluded that the offer could not be treated as a valid compromise.

The estate challenged that decision in Tax Court.

When is an IRS Offer in Compromise actually accepted?

This was the critical issue.

Under Internal Revenue Code §7122 and Treasury Regulation §301.7122-1(e)(1), an Offer in Compromise is not accepted merely because an IRS employee intends to approve it or recommends approval. The IRS must issue written notification of acceptance to the taxpayer or the taxpayer’s authorized representative.

Farwell died before that occurred. Her death also terminated the authority of the individuals who had been acting for her personally. Her attorney’s authorization to represent her did not automatically become authorization to represent her estate, and a personal power of attorney generally terminates at death.

As a result, when the IRS subsequently mailed its acceptance letter, there was no longer a living taxpayer—or properly authorized representative of that taxpayer—to whom the IRS could complete the acceptance.

The Tax Court therefore concluded that no binding Offer in Compromise had been created.

An IRS acceptance letter wasn’t enough

One of the most interesting aspects of Farwell is that the IRS really did send a letter saying the offer had been accepted.

Normally, an accepted Offer in Compromise provides substantial finality. Treasury regulations sharply limit the circumstances under which the IRS can reopen an accepted compromise.

The estate therefore argued that the IRS could not simply reverse its acceptance.

But the Tax Court concluded that this was not actually a case about reopening an accepted offer.

The problem occurred earlier.

There had never been a valid acceptance in the first place. In other words, the later IRS letter could not revive an offer that had effectively terminated when the taxpayer died.

The Tax Court ultimately upheld the IRS collection determination.

What should an executor or family member do?

The case provides an important practical lesson when someone dies while dealing with the IRS.

The deceased taxpayer and the estate are not interchangeable. When a taxpayer dies, the executor, administrator, or other personal representative generally needs to establish his or her authority with the IRS. Depending on the circumstances, that may include filing Form 56, Notice Concerning Fiduciary Relationship, and executing a new Form 2848, Power of Attorney and Declaration of Representative, if a CPA, EA, or attorney will represent the estate. A pending Offer in Compromise should receive immediate attention.

The executor should determine:

• - Whether the IRS had actually accepted the offer before death
• - The exact date of any written acceptance
• - Whether the offer was still pending when the taxpayer died
• - Who now has legal authority to communicate with the IRS
• - Whether a new Offer in Compromise may be appropriate for the estate
• - How the outstanding federal tax debt affects probate and distributions to beneficiaries

Don’t distribute an estate before resolving IRS problems

Simply continuing to communicate with the IRS under the deceased taxpayer’s old authorization may not be sufficient.

There is a broader estate-administration lesson here as well.

When a deceased taxpayer owes the IRS, the executor should identify and address the federal tax liability before distributing estate assets to beneficiaries.

Federal tax debts can complicate probate, liens, asset sales, and distributions. In some circumstances, a fiduciary who distributes assets before satisfying debts owed to the United States can even create personal exposure.

That does not mean every estate with an IRS balance must simply pay the amount shown on an IRS notice. The liability should still be reviewed. Depending on the facts, the estate may have collection alternatives, procedural defenses, or grounds to dispute the amount.

But the tax issue should be resolved as part of the estate-administration process rather than left until after the assets are gone.

What Estate of Farwell means for taxpayers

The key lesson is simple: An Offer in Compromise is not finished until it is actually accepted in accordance with IRS rules.

A recommendation from an IRS employee is not enough. A telephone call is not enough. And, as Farwell demonstrates, even an acceptance letter issued after the taxpayer’s death may not create a binding settlement.

For taxpayers who are seriously ill and have substantial IRS debt, this also makes coordination between tax planning and estate planning particularly important.

And for executors administering an estate with unresolved IRS debt, the safest approach is to address the tax problem early—before making distributions to heirs.

Need help with an estate or unresolved IRS tax debt?

At Mint Hill CPA, we help individuals, families, executors, and business owners work through federal and state tax issues, including tax matters that arise during estate administration.

If you are administering an estate and discover unpaid tax liabilities, unfiled returns, IRS notices, or an unresolved collection matter, addressing the issue early can prevent a manageable tax problem from becoming a much larger estate-administration problem.

Mint Hill CPA · Charlotte, North Carolina · (864) 525-8883

This article is for general informational purposes only and does not constitute tax or legal advice. Every taxpayer’s circumstances are different. Estate administration and probate issues may also require advice from a qualified attorney.

Case discussed: Estate of Jacqueline R. Farwell, Deceased, Bruce Farwell, Personal Representative v. Commissioner, T.C. Memo. 2026-95, Docket No. 11555-22L (Sept. 28, 2026).