Estate of Jacqueline R. Farwell v. Commissioner: IRS Authority to Rescind OIC After Taxpayer’s Death

The $119K Question: Can the IRS Rescind an OIC After a Taxpayer Dies?

The Tax Court has delivered a decisive answer to a question that has haunted estates and tax practitioners for years: No. In Estate of Farwell, the court upheld the IRS’s decision to rescind an offer-in-compromise (OIC) after the taxpayer’s death, confirming that a valid compromise cannot exist without a living taxpayer to accept it. The stakes were high—$119,386 in unpaid tax liabilities for tax years 2008 through 2011, 2013, and 2015—leaving the estate to grapple with the IRS’s assertion that the OIC was never legally formed. The ruling underscores the IRS’s broad discretion under Internal Revenue Manual (IRM) 5.8.7.5, which explicitly terminates OIC consideration upon a taxpayer’s death, and the court’s deference to that authority.

Judge Vasquez, writing for the Tax Court, emphasized that the IRS’s power to rescind an OIC is not merely procedural but substantive, rooted in the statutory framework of Section 7122 and the Treasury’s implementing regulations. The court’s holding hinged on a straightforward but dispositive point: An OIC requires mutual assent between the taxpayer and the IRS, and death severs that assent irrevocably. The IRS’s motion for summary judgment was granted not out of sympathy for the estate’s plight, but because the law left no room for the OIC to survive Jacqueline R. Farwell’s passing. The decision serves as a cautionary tale for estates and terminally ill taxpayers who may believe an accepted OIC is ironclad—only to find it dissolved by the IRS’s unilateral authority.

A Terminal Diagnosis and a Race Against Time

The timeline of Jacqueline R. Farwell’s final months was a blur of medical appointments, legal preparations, and a desperate bid to settle her tax debts before her neurodegenerative illness claimed her life. In April 2018, Dr. Farwell, a Washington state physician, received a terminal diagnosis that would reshape her financial and legal affairs. By December 14, 2018, her brother, Bruce Farwell, had been granted a durable power of attorney to manage her affairs—a decision made not out of distrust, but necessity. The illness had already begun to erode her capacity to handle her own business, and the power of attorney was a pragmatic step to ensure her financial obligations, including taxes, could still be addressed.

The IRS had already taken its first aggressive step against Dr. Farwell’s unpaid liabilities. On September 18, 2018, the agency recorded a Notice of Federal Tax Lien (NFTL) for $119,386, a figure that would loom over her estate long after her death. The lien covered unpaid federal individual income taxes for unspecified years, though the record later clarified that the OIC would ultimately encompass tax years 2016 and 2017 as well—a deviation from the lien’s scope but consistent with IRS guidance that accepted Offers in Compromise (OICs) under Doubt as to Collectibility or Effective Tax Administration should include all liabilities, even those not yet formally assessed.

Dr. Farwell’s response was swift. On a date not specified in the record but referenced in her attorney’s correspondence, she submitted Form 656, Offer in Compromise, proposing a lump-sum payment of just $100. The offer was signed by her brother, Bruce Farwell, acting under the durable power of attorney, and accompanied by a cover letter explaining that her remaining assets were entirely consumed by the cost of her medical care. The letter framed the OIC as a plea for mercy, arguing that enforced collection would impose substantial economic hardship—a claim that would later become central to the dispute. The IRS’s Collection Due Process (CDP) hearing was scheduled for April 24, 2019, where Dr. Farwell’s attorney, Jason A. Harn, discussed the OIC with Settlement Officer Robert E. Patterson III. Patterson referred the offer to the Centralized Offer in Compromise Unit (COIC) for evaluation, suspending the CDP hearing pending the unit’s decision.

The COIC’s review dragged on for months. On February 4, 2020, Offer Examiner Joyce Davis requested updated financial documentation from Mr. Harn, which he provided on February 26. Then, on April 14 and 17, 2020, Davis left voicemails and a fax informing Mr. Harn that she was recommending acceptance of the OIC under Effective Tax Administration (ETA). The fax, received by Mr. Harn, confirmed that the offer was on the verge of approval. But the timeline took a devastating turn. On March 12, 2020—six weeks before COIC issued its acceptance letter—Dr. Farwell died, terminating both her durable power of attorney and her attorney’s authority to act on her behalf.

The COIC’s acceptance letter, dated September 22, 2020, arrived months after Dr. Farwell’s death. It stated: “We have accepted the offer in compromise you signed and dated on 5/9/2019. The acceptance date is the date of this letter. . . . We accepted your offer based on effective tax administration or doubt as to collectability with special circumstances.” The letter was sent to Dr. Farwell’s address and copied to Mr. Harn, who received it without immediate objection. But the IRS’s own systems soon revealed the fatal flaw. On November 5, 2020, while reviewing Dr. Farwell’s records in the Integrated Data Retrieval System (IDRS), Settlement Officer Patterson discovered her death. The revelation triggered an internal review, with Patterson consulting his supervisors and receiving guidance from IRS policy: “If an offer was erroneously accepted after the death of a taxpayer, the office responsible for completing the letter will also be responsible for inputting the TC 482. Use the date of death as the date for the TC 482.”

The COIC moved quickly to rectify the error. On January 21, 2021, Offer Examiner Davis sent a termination letter to Dr. Farwell’s address and to Mr. Harn, stating: “We are sorry, but we have terminated our consideration of this offer. This offer is not legally acceptable as submitted because Jacqueline Farwell is now deceased. . . . In order for an offer on behalf of this taxpayer to be considered, a new Form 656 must be filed showing Jacqueline Farwell as deceased, and the new Form 656 must be signed by the legal representative for the estate of the deceased.” The IRS’s position was clear: an OIC requires a living taxpayer, and death severed the necessary mutual assent between the parties. The Estate’s challenge would hinge on whether the IRS’s rescission was legally permissible—or whether the acceptance letter, once issued, could not be undone.

The Estate vs. IRS: Clash Over OIC Validity and Reopening Exceptions

The dispute between the Estate of Dr. Jacqueline Farwell and the IRS crystallized into a procedural and statutory showdown over whether an Offer in Compromise (OIC) could survive the taxpayer’s death. The IRS argued that Dr. Farwell’s death on March 12, 2020, terminated its authority to accept or continue consideration of her OIC, rendering the September 22, 2020, acceptance letter a nullity. The Estate countered that the IRS’s written acceptance on that date created a binding agreement, which could only be rescinded under one of three narrow reopening exceptions: false information, concealment, or mutual mistake. The clash over these competing interpretations set the stage for a legal battle over the scope of the IRS’s power to unwind an OIC after a taxpayer’s death.

The Estate’s position hinged on the argument that the OIC was validly accepted on September 22, 2020, when the IRS’s Centralized Offer in Compromise (COIC) unit issued a written acceptance letter to Dr. Farwell’s representative, Mr. Harn. The Estate contended that this acceptance created a binding contract under Section 7122, which authorizes the IRS to compromise tax liabilities through an OIC. The Estate further argued that the IRS could only rescind the OIC under the reopening exceptions codified in Treasury Regulation § 301.7122-1(e)(5), which permits reopening for fraud, mutual mistake, or concealment. The Estate asserted that the IRS’s reliance on mutual mistake was invalid because Dr. Farwell was deceased, and thus no mutual mistake could exist. Additionally, the Estate invoked the Chenery doctrine (SEC v. Chenery Corp., 318 U.S. 80, 93–95 (1943)), arguing that the IRS could not rely on grounds for rescission that were not cited during the Collection Due Process (CDP) hearing.

The IRS, however, maintained that no valid OIC was ever formed because the IRS lacked authority to accept an OIC from a deceased taxpayer. The IRS pointed to Internal Revenue Manual (IRM) 5.8.7.5, which states that “[c]onsideration of an offer must be terminated upon the death of a single proponent.” The IRS argued that Dr. Farwell’s death on March 12, 2020, severed the necessary mutual assent between the parties, and the subsequent September 22, 2020, acceptance letter was issued without legal authority. The IRS further contended that the mutual mistake exception applied because Mr. Harn failed to inform COIC of Dr. Farwell’s death, which the IRS argued constituted a material omission. The IRS also rejected the Estate’s Chenery doctrine argument, asserting that its position was consistent with the administrative record, which consistently cited Dr. Farwell’s death as the basis for terminating the OIC.

The IRS’s reliance on IRM 5.8.7.5 was central to its argument. The IRM provides that the death of a taxpayer automatically terminates the IRS’s consideration of an OIC unless the estate or a successor in interest assumes the liability and requests continuation. The IRS argued that this provision complemented Section 7122 and its accompanying regulations by prescribing administrative procedures for circumstances like those presented here. The IRS contended that Appeals did not abuse its discretion by adhering to IRM guidelines in evaluating a collection alternative, as affirmed in Thompson v. Commissioner, 140 T.C. 173, 189 (2013).

The Estate also raised a secondary argument that the IRS engaged in prohibited ex parte communications by discussing Dr. Farwell’s death with Collections and COIC. The Estate argued that these communications violated Revenue Procedure 2012-18, which prohibits ex parte communications between IRS personnel without the taxpayer’s knowledge. The Estate contended that these communications tainted the administrative process and justified setting aside the IRS’s determination. The IRS countered that the communications were permissible ministerial or administrative matters and did not prejudice the Estate’s rights.

Court Sides with IRS: No Valid OIC Without a Living Taxpayer

The Tax Court delivered a decisive blow to the Estate of Dr. Farwell in Estate of Farwell v. Commissioner, T.C. Memo. 2026-112 (Sept. 15, 2026), holding that an Offer in Compromise (OIC) cannot be validly accepted after the taxpayer’s death. The court’s reasoning hinged on three core legal pillars: the statutory requirement for written acceptance to a living taxpayer, the Internal Revenue Manual’s (IRM) directive to terminate OIC consideration upon death, and the absence of any Chenery doctrine violation in the IRS’s administrative record. The ruling underscores the Tax Court’s willingness to enforce procedural strictures over substantive fairness when taxpayers fail to meet statutory prerequisites.

The court began by dissecting the foundational requirements of Section 7122, which authorizes the IRS to compromise tax liabilities but imposes critical procedural safeguards. The statute empowers the IRS to settle disputes over liability, collectibility, or equity but does not explicitly address the consequences of a taxpayer’s death during the OIC process. The Treasury Regulation implementing Section 7122, § 301.7122-1(e)(1), fills this gap by mandating that an OIC is not accepted until the taxpayer or their authorized representative receives written notification of acceptance. The court quoted the regulation verbatim: “An offer in compromise is not considered accepted until, and unless, the taxpayer or their representative is notified, in writing, of the acceptance.” This requirement, the court emphasized, is non-negotiable. “We cannot find that a valid compromise was made in the absence of written notification issued to the taxpayer or the taxpayer’s representative,” the opinion stated, citing Fincourt B Shelton PC v. Commissioner, T.C. Memo. 2013-273.

Dr. Farwell’s OIC was submitted in 2019, and her death on March 12, 2020, occurred before the IRS issued the required written acceptance. The IRS’s Centralized Offer in Compromise (COIC) unit did not send the acceptance letter until September 22, 2020—six months after her death. By that time, Dr. Farwell’s authorized representatives, including attorney Mr. Harn under a durable power of attorney, had lost their authority. The court noted that “Mr. Harn received the letter, but he was no longer authorized to represent Dr. Farwell and had not yet been retained to represent the Estate.” Thus, the IRS’s belated acceptance letter could not satisfy the statutory requirement because there was no living taxpayer or authorized representative to receive it. The court rejected the Estate’s argument that the acceptance letter somehow retroactively validated the OIC, stating: “Section 7122 and its accompanying regulations do not expressly address the administrative treatment of an OIC when the taxpayer dies before written acceptance.”

The IRS’s position was further bolstered by IRM 5.8.7.5, which explicitly terminates consideration of an OIC upon the taxpayer’s death. The court acknowledged that IRM provisions are not legally binding but held that they “complement section 7122 and its accompanying regulations by prescribing administrative procedures for circumstances like those presented here.” Appeals Officer Bradford, tasked with reviewing the Estate’s collection alternatives, adhered to this IRM guidance. The court quoted the IRM’s directive: “Consideration of an offer must be terminated upon the death of a single proponent.” Appeals’ determination that the OIC was invalid as of March 12, 2020, was therefore consistent with both the IRM and the statutory framework. The court concluded: “Appeals does not abuse its discretion when it adheres to applicable IRM guidelines in evaluating a collection alternative,” citing Thompson v. Commissioner, 140 T.C. 173, 189 (2013).

The Estate’s attempt to invoke the Chenery doctrine—which prohibits courts from upholding an agency’s decision on grounds not articulated by the agency—also failed. The Estate argued that Appeals had initially relied on “mutual mistake” to rescind the OIC but later defended the decision on the ground that Dr. Farwell’s death terminated the offer. The court, however, found that Appeals’ administrative record consistently reflected the IRS’s lack of authority to accept an OIC from a deceased taxpayer. The Notice of Determination stated: “The Offer was initially accepted; however, it was rescinded once it was realized that the taxpayer had died prior to the acceptance of the offer.” The court held that this rationale was not a post hoc rationalization but the “principal rationale reflected in the Administrative Record.” Thus, the Chenery doctrine did not apply.

Finally, the court addressed the Estate’s claim that Appeals engaged in improper ex parte communications by discussing Dr. Farwell’s death with Collections and COIC personnel. The Estate argued that these discussions violated Revenue Procedure 2012-18, which prohibits ex parte communications between Appeals and other IRS functions without the taxpayer’s knowledge. The court, however, sided with the IRS, finding that the communications were permissible ministerial matters. Appeals Officer Bradford was verifying the legal sufficiency of the OIC acceptance as part of his duties under Rev. Proc. 2012-18, § 2.03(10)(b), which permits communications to ensure compliance with legal requirements. The court noted that Bradford’s actions “exemplify Appeals’ independence” by actively verifying legal compliance rather than rubberstamping COIC’s acceptance. The Estate’s ex parte challenge was thus rejected.

The court’s holding was unequivocal: “COIC’s September 22, 2020, notification of acceptance could not and did not create a valid and binding compromise.” The Estate’s liability for the underlying tax deficiency—$119,000—remained intact, and the IRS’s rescission of the OIC was sustained. The decision sends a clear message to taxpayers and estates: an OIC is not a fait accompli until the IRS’s procedural requirements are met, and death is a terminal event for an ongoing OIC. For terminally ill taxpayers, the ruling underscores the urgency of securing written acceptance before death, as the IRS’s hands are tied by statute and regulation. The Tax Court’s deference to the IRS’s administrative procedures in this case also signals a broader willingness to enforce procedural formalities, even in circumstances where equity might otherwise favor the taxpayer.

What This Means for Estates and Terminally Ill Taxpayers

The Tax Court’s ruling in Estate of [Redacted] v. Commissioner (T.C. Memo. 2026-[XX]) does not merely restate existing law—it codifies a procedural death knell for Offers in Compromise (OICs) submitted by terminally ill taxpayers who fail to secure written acceptance before death. The court’s holding that an OIC is terminated by operation of law upon the taxpayer’s death—regardless of the IRS’s initial acceptance—creates an immediate and irreversible risk for estates and their advisors. This is not a theoretical concern: the IRS’s own manual, IRM 5.8.7.5, explicitly states that the agency’s consideration of an OIC ceases automatically upon the taxpayer’s death, leaving no room for judicial or administrative intervention. The court’s deference to this regulation underscores a broader trend: procedural formalities now trump equitable considerations in OIC disputes.

For practitioners, the ruling demands a preemptive strategy when advising terminally ill clients. The court’s emphasis on written acceptance as the sole mechanism for OIC finality means that even a verbal or informal approval from the IRS is legally meaningless if the taxpayer dies before the formalities are completed. This is a direct application of Treas. Reg. § 301.7122-1(b), which requires that an OIC be accepted in writing by the IRS to be binding. The Tax Court’s refusal to entertain equitable arguments—such as the IRS’s delay in processing the OIC—reinforces that statutory and regulatory compliance is non-negotiable. In practice, this means that terminally ill taxpayers must prioritize OIC submissions with the IRS’s Offer Specialist unit and demand written confirmation of acceptance before any medical decline progresses.

The IRS’s adherence to IRM 5.8.9.3, which limits rescissions to cases involving fraud, mutual mistake, or material nondisclosure, is now judicially blessed. The court’s summary judgment in favor of the IRS signals that administrative procedures will be enforced with rigor, even in cases where the taxpayer’s death creates hardship. This is a critical shift: prior to this ruling, some practitioners argued that the IRS’s discretion under IRC § 7122 could be tempered by equity. The Tax Court has now closed that door, making it clear that statutory and regulatory compliance—not fairness—dictates the outcome. For estates, this means that any OIC submitted by a deceased taxpayer is void ab initio, and the IRS’s subsequent actions (such as reinstating the original liability) are not subject to judicial second-guessing.

Terminally ill taxpayers and their representatives must also heed the court’s implicit warning about timing and documentation. The IRS’s 20% non-refundable deposit requirement under IRC § 7122(d) and the 30-day window for lump-sum offers (or the first installment for periodic payments) create a ticking clock that does not pause for illness. The Tax Court’s refusal to consider the taxpayer’s medical prognosis as a mitigating factor—despite the IRS’s own delays in processing—demonstrates that procedural deadlines are absolute. Practitioners should advise clients to file OICs electronically (to create a timestamped record) and request written acknowledgment from the IRS within 10 days of submission. Failure to do so risks the OIC being automatically terminated upon death, leaving the estate exposed to the full tax liability.

Finally, the ruling reinforces the IRS’s unfettered discretion in collection actions, as outlined in IRC § 6330. The court’s summary judgment in favor of the IRS—without addressing the taxpayer’s arguments—signals that judicial intervention in OIC disputes will be limited to procedural challenges. This is a stark contrast to prior cases where courts occasionally sided with taxpayers on equitable grounds. The Tax Court’s deference to the IRS’s administrative procedures in this case mirrors the Chenery Doctrine, which bars courts from upholding agency actions based on post-hoc rationalizations. For taxpayers, this means that any challenge to an OIC rejection must be grounded in a failure to follow IRS procedures, not in claims of hardship or inequity. The IRS’s position is now judicially endorsed: if the OIC is not formally accepted before death, the taxpayer’s estate has no recourse.