The Qualified Offer: The Taxpayer’s 90-Day Letter

By W. Lance Stodghill, J.D., MBA


  • 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 heradministrative remedies before making the offer or has unreasonably protracted the proceeding.

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

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 rules 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.3 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: m 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 may be resolved separately if the resolution of one year does not affect the taxpayer’s liability for other years in the proceeding.12 For example, if one proceeding involves two different years, each with a distinct issue, a qualified offer resolving an unreported income issue in year 1 is allowed, though the business deduction issues in year 2 remain unresolved. In contrast, if a proceeding contains an issue that involves multiple years, an offer to settle one of the multiple years will not be a qualified offer. For instance, if a case involves adjustments to the recovery period for a single depreciable asset in three different tax years, a taxpayer cannot use a qualified offer to resolve one of the years alone.13

Designated as a qualified offer: The statute requires that the offer be designated as a qualified offer at the time it is made. The following statement should suffice to put the government on notice that it has received a qualified offer: “This settlement offer is designated as a ‘qualified offer’ for the purposes of Internal Revenue Code Sec. 7430.”

Time offer remains open: A qualified offer must remain open for the statutory period set forth in Sec. 7430(g)(1)(D). Again, the following words should satisfy the requirement:

As required by Internal Revenue Code Sec. 7430(g)(1)(D), this qualified offer shall remain open until the earliest of (a) the date the offer is rejected; (b) the date the trial begins; or (c) the 90th day after the date the offer is made.

Therefore, if the government does not act on the offer, it is deemed rejected on the 91st day after it is made.

Additional Requirements

A qualified offer remains subject to certain requirements that apply to an award of administrative and litigation costs under Sec. 7430.

Net worth requirement: In order to be eligible for costs, the taxpayer must meet net worth requirements.14 An individual taxpayer must have a net worth of $2 million or less at the time he or she files suit.15 For a partnership, corporation, association, or organization, the net worth must be $7 million or less on the date it files suit. Further, the entity must have no more than 500 employees to qualify.16

Unreasonably protracting proceedings: No administrative or litigation costs will be awarded if the taxpayer has unreasonably protracted the proceeding. In some cases, the government may reject a qualified offer and later be willing to settle the case on the taxpayer’s terms. If the government will not offer to settle the administrative and litigation costs as well, the taxpayer should be able to safely refuse to settle the case without fear that the court will find that the taxpayer acted unreasonably. A taxpayer’s refusal to sign a stipulated decision does not constitute unreasonable protraction of the proceeding when the taxpayer’s refusal is based on the parties’ failure to reach an agreement on litigation costs.17

In Mason, the taxpayer declined to sign the proposed settlement document sent to him two months before trial because the parties could not agree on litigation costs. The taxpayer instead appeared at trial to request an award of litigation costs. The Tax Court held that the taxpayer did not unreasonably protract the court proceeding.

Exhaustion of administrative remedies: To be eligible for litigation costs, a taxpayer must exhaust the administrative remedies available within the IRS, which typically means a trip to Appeals. Many practitioners decline to participate in an appeals conference before the issuance of a notice of deficiency, based on the perceived risk that new issues may be raised at an Appeals conference.18 In making this tactical choice, practitioners should evaluate whether the value of foreclosing new issues by bypassing Appeals outweighs preserving the opportunity to recover administrative and litigation costs. Appeals officers rarely raise new issues during the appeals process. If a client may need to litigate his or her case, the client’s best interests may be served by taking the case to the Appeals division to preserve the ability to make a qualified offer.

If an Appeals conference is available, a taxpayer must generally participate in order to make a qualified offer. “Participates” means disclosing all relevant information regarding the tax matter to the extent the information and its relevance were known or should have been known to the taxpayer or the taxpayer’s qualified representative.19

A taxpayer does not exhaust administrative remedies if he or she fails to participate in an Appeals conference before filing a petition in the Tax Court.20 In McGowan,21 the taxpayer received a 30-day letter but did not participate in an Appeals conference. After the IRS issued the notice of deficiency, the taxpayer requested a conference with Appeals. The Tax Court held that the taxpayer had failed to exhaust his administrative remedies and would not be entitled to an award of administrative or litigation cost.

Even if no Appeals conference is granted, a taxpayer will be considered to have exhausted administrative remedies if—before the issuance of a notice of deficiency in a deficiency case or notice of disallowance in a refund case—the taxpayer requests an Appeals conference and files a written protest if required.22

The statute of limitation for assessment can affect whether Appeals will grant a taxpayer’s request for an Appeals conference. Field territory managers are advised not to transmit cases to Appeals if fewer than 180 days remain until the statute of limitation expires. However, if a qualified offer is filed after the issuance of the 30-day letter and fewer than 180 days remain on the statute of limitation, Appeals will accept jurisdiction of the case so that it can consider the qualified offer. The appeals officer may issue the notice of deficiency on receipt of the case to protect the government’s interest. The appeals officer can then determine whether Appeals will accept the qualified offer during the 90-day offer period. 23

A taxpayer’s refusal to extend the statute of limitation for assessment will not affect whether the taxpayer has exhausted his or her administrative remedies.24 If Appeals denies a request for conference because a taxpayer declines to extend the statute of limitation, the taxpayer has exhausted his or her administrative remedies.25

The IRS may also issue a notice of deficiency without first sending a 30-day letter. If the failure to send a 30-day letter was not due to the taxpayer’s actions—such as failing to supply requested information—then the taxpayer may exhaust administrative remedies by participating in an Appeals conference while the case is docketed with the Tax Court.26


The qualified offer provisions do not apply to any judgment issued in a settlement, subject to certain exceptions.27 The Tax Court has issued two opinions discussing the effect of the “judgment issued pursuant to a settlement” clause. In Gladden,28 the parties ultimately reached a settlement after issues integral to the adjustment at issue were litigated and decided by the Tax Court and the Ninth Circuit. The Tax Court held that the ultimate settlement entered into by the parties could not be viewed as entered into exclusively pursuant to a settlement, as the government contended. The final regulations acknowledge that if adjustments covered by a qualified offer are settled following a ruling by the court that substantially resolves those adjustments, then those adjustments will not be treated as having been settled prior to the entry of the judgment by the court and instead will be treated as amounts included in the judgment as a result of the court’s determinations.29

In Lippitz,30 the Tax Court addressed whether a concession by the government equates to a “judgment issued pursuant to a settlement.” Mrs. Lippitz filed a qualified offer to settle her innocent spouse claim for $100. When the government did not accept her offer, she filed a motion for summary judgment. Rather than responding to the motion, the government asked for more time and expressed an intent to concede the innocent spouse issue. When Mrs. Lippitz sought attorneys’ fees, the government argued, among other things, that the matter was resolved by settlement and therefore the qualified offer provisions did not apply.

The Tax Court acknowledged that in certain scenarios, “a concession would be difficult to differentiate from an agreement to settle. However, that is not the case here.” Mrs. Lippitz actively litigated her innocent spouse claim by filing a motion for summary judgment, which the government conceded. The Tax Court analogized this result to a concession after trial and found that Mrs. Lippitz was entitled to attorneys’ fees under the qualified offer provisions. The Tax Court reasoned that Congress had not intended to allow the IRS to wait until after a dispositive motion or trial to concede and still benefit from the settlement exclusion. Because the IRS was unwilling to settle on the terms and at the time Mrs. Lippitz offered, it could not avoid the consequences of its refusal by conceding after she had presented her case for disposition by the Tax Court. With the Lippitz and Gladden decisions, the Tax Court has begun narrowing the qualified offer settlement exclusion.

Finally, one other exception applies to the qualified offer rules. The provisions do not apply to actions in which the amount of tax liability is not in issue, including any declaratory judgment proceeding and any proceeding to enforce or quash a summons.31

What Can Be Recovered?

A prevailing party can recover its reasonable administrative and litigation costs.32 Ordinarily, administrative and litigation costs refer to expenses, costs, and professional fees incurred on or after the earliest of (1) the date the taxpayer receives the notice of the Appeals decision, (2) the date of the notice of deficiency, or (3) the date of the first letter of proposed deficiency, which allows the taxpayer to go to Appeals. However, under the qualified offer provisions, only costs incurred on or after the date of the qualified offer are recoverable.33 For 2008, the maximum hourly rate for professional fee awards is $170 per hour, unless special circumstances justify a higher rate.34

Strategic Use of a Qualified Offer

Quick settlements reduce a client’s costs, interest liability, and often stress levels. The qualified offer allows the practitioner to resolve a controversy as quickly as possible after an audit. Because a qualified offer is deemed rejected after 90 days, practitioners can ensure that their client’s case gets attention.

By definition, a qualified offer remains open for a limited period of time. If the government does not act on the offer, it may become liable for administrative and litigation costs. A case with a qualified offer should quickly move to the top of the government employee’s to-do list. Indeed, these offers are closely monitored when re-ceived in the office of Chief Counsel. Field attorneys are required to promptly notify their national office when they receive a qualified offer.35

In addition, some issues—though meritorious—do not justify the expense of litigation. The qualified offer affords a taxpayer some leverage to challenge an issue that would normally settle due to the expense rather than the merits. For example, a $10,000 deficiency would rarely be worth the expense of an attorney going to trial. Qualified offers allow a taxpayer to either settle a meritorious though relatively insignificant issue on reasonable terms or have the government bear the costs of litigating the issue if the taxpayer prevails.

How Much to Offer

What amount should the taxpayer offer? For all-or-nothing issues, any amount should suffice. Consider the disallowance of a dependency exemption. Either the taxpayer is entitled to the exemption and there will be no deficiency, or the exemption was rightfully disallowed and there will be a deficiency of a few hundred dollars. In such a case, a minimal offer should suffice.

In more complex matters, the practitioner’s judgment will be necessary to assess the hazards of litigation. For example, suppose the IRS asserts the trust fund recovery penalty against a taxpayer for $100,000 for each of four quarterly tax periods, for a total of $400,000. Based on the facts, it appears likely the taxpayer willfully failed to pay the employment taxes for the fourth quarter but not the first three quarters. In this situation, a taxpayer might offer $100,000 to resolve all four quarters.

Practitioners should consider offering a small amount over the expected liability. Suppose a practitioner expects his client’s liability to total $50,000. Offering $55,000 would help ensure that the offer exceeds what the government would be expected to win at trial, in the event of minor computational anomalies. No practitioner would want to explain to a client why he or she made a qualified offer of only $50,000—and lost the chance to claim administrative and litigation costs—when the correct amount of tax was $50,011.

Timing Considerations

The qualified offer period begins when the IRS sends the taxpayer a letter proposing a deficiency and allowing the taxpayer an opportunity for review by Appeals. At that point, the practitioner should have a good idea of the taxpayer’s liability. A practitioner could file a protest to go to Appeals, along with a qualified offer.

Unfortunately, the IRS’s recordkeeping procedures may work against resolving matters quickly. For instance, IRS Chief Counsel attorneys frequently encounter delays in obtaining administrative files for cases that are filed in the Tax Court on or near the end of the 90-day notice of deficiency period. A qualified offer sent to the government after receipt of the notice of deficiency may be deemed rejected before the IRS attorney receives the Tax Court petition or the administrative file.

A qualified offer sent after the Tax Court petition is filed should reach the IRS docket attorney before the deemed rejected date of the offer. However, the attorney may not have the administrative file necessary to evaluate the offer. In such a case, the attorney may have to allow the offer to lapse without acceptance and evaluate the offer once the administrative file arrives. If the attorney wishes to settle the case on the terms of the qualified offer—deemed rejected at this point—the practitioner should also attempt to resolve the issue of costs in the taxpayer’s favor.

Similar delays can occur when a case is protested to the Office of Appeals. It is not uncommon for a case to take several weeks to travel from the auditor to the Appeals employee who will evaluate the case. Therefore, an offer made concurrently with a protest to Appeals could be deemed rejected before the Appeals employee receives the administrative file.

Settlement After the Qualified Offer Has Been Rejected

If the government has rejected a qualified offer and later wishes to settle for an amount less than the last qualified offer, the best strategy would be to not sign a stipulated decision on the merits of the case without a provision in the decision for the payment of litigation and administrative costs. Instead, a prudent practitioner would go before the judge and let the government concede the relevant issues at trial. Arguably, this would not be a judgment issued pursuant to a settlement, since the taxpayer has not accepted the government’s concession. Instead, it would be a judgment based on the government’s concession.

The Tax Court decided the Mason case before the qualified offer provisions applied. Nevertheless, that decision provides a clue as to how courts may interpret such a strategy. When the parties could not agree on litigation costs, the taxpayer refused to sign a proposed settlement document and appeared for trial to request litigation costs. The court awarded litigation costs after finding that Mason did not unreasonably protract the court proceeding.

The government will likely argue that refusing to sign decision documents solely to make the government concede at trial frustrates the purpose of the qualified offer provisions. Such an argument ignores the fact that the government previously had the opportunity to concede while the qualified offer was pending.

Professional Billing Considerations

In order to award reasonable administrative and litigation costs, courts must know whether the work performed on a case was reasonable. In some instances, only amounts allocable to a particular issue will be awarded. Practitioners should therefore, to the extent practicable, note the particular issue involved in their time sheets. Practitioners should state the matter with specificity, such as “reviewed case file to determine whether the farm was a for-profit venture in 1995 and 1996” rather than “reviewed case file.” With flat fee arrangements, track hours spent on the case and break them out by issue in the event the court wants more specificity to be able to allocate a percentage of the fee to a particular issue.

Another potential pitfall involves related entities, such as a closely held corporation and its shareholders. If the corporation pays the legal bills for itself and its owners, the parties should consider having reimbursement agreements so that each party is liable for its own litigation costs. Otherwise, if the shareholder prevails on an issue subject to a qualified offer, the government could argue that the shareholder did not have any litigation costs to recover because the costs were borne by the corporation.

See Exhibit


Realistically, nearly all tax controversies settle. Qualified offers bring the spotlight to bear on a case, serving two useful purposes. First, practitioners can use the qualified offer to get a case resolved, or hopefully at least reviewed, within 90 days. Second, practitioners can use the qualified offer to impose administrative and litigation costs on the government when it refuses to accept a reasonable settlement offer. Whether the qualified offer is accepted or rejected, it places some power in the hands of the taxpayer.

For more information about this article, contact Mr. Stodghill at



1 Though the qualified offer provisions of Sec. 7430 took effect in early 1999, the Tax Court had issued only 13 opinions involving qualified offers as of March 6, 2008.

2 Sec. 7430(c)(4).

3 Sec. 7430(c)(4)(B)(i).

4 The qualified offer provisions adopted an additional method to be considered the prevailing party and did not replace the former method to obtain administrative and litigation costs. A taxpayer may still obtain relief under both methods.

5 Sec. 7430(c)(4)(E).

6 Internal Revenue Manual (IRM) Section

7 Sec. 7430(g).

8 Regs. Sec. 301.7430-7(c)(2).

9 Sec. 7430(g)(2).

10 Regs. Sec. 301.7430-7(e), Example 12.

11 Id., Example 13.

12 Regs. Sec. 301.7430-7(c)(3).

13 Regs. Sec. 301.7430-7(e), Example 7.

14 Sec. 7430(c)(4)(A)(ii).

15 28 USC Section 2412(d)(2)(B)(i).

16 28 USC Section 2412(d)(2)(B)(ii). However, Sec. 501(c)(3) organizations and certain cooperatives are not subject to the net worth requirement.

17 Mason, TC Memo 1998-400; Buck, TC Memo 1993-16. These cases were decided prior to the enactment of the qualified offer provisions.

18 See Haas & Assocs. Accountancy Corp., 117 TC 48 (2001), aff’d, 55 FedAppx 476 (9th Cir. 2003).

19 Regs. Sec. 301.7430-1(b)(2).

20 Regs. Sec. 301.7430-1(b)(1)(i).

21 McGowan, TC Memo 2005-80.

22 Regs. Sec. 301.7430-1(b)(1).

23 IRM Section

24 Sec. 7430(b)(1).

25 Regs. Sec. 301.7430-1(g), Example 4.

26 Regs. Sec. 301.7430-1(f)(2).

27 Sec. 7430(c)(4)(E)(ii)(I).

28 Gladden, 120 TC 446 (2003).

29 Regs. Sec. 301.7430-7(b)(1).

30 Lippitz, TC Memo 2007-293.

31 Sec. 7430(c)(4)(E)(ii)(II).

32 Sec. 7430(a).

33 Sec. 7430(c)(4)(E)(iii).

34 Sec. 7430(c)(1)(B)(iii); Rev. Proc. 2007-66, §3.39, 2007-45 IRB 970.

35 IRM Section


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