The following is an excerpt from:

"For Whom the Tax Tolls: Significant Events That Extend IRS Collection Rights"

Published in Tax Practice & Procedure - October/November 2004

By Michael S. Fried and Zachary S. Fried

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LTR 200404049

Prior to the IRS Restructuring & Reform Act of 1998 (RRA), the IRS was not prohibited from pursuing collection activity during the pendency of an offer in compromise. Hence, under pre-RRA law, there was no statutory or equitable basis for tolling the three-year look back period or the two-year filing period during the pendency of an offer in compromise. However, the RRA changed the landscape. Pursuant to the RRA, after December 31, 1999, the IRS is prohibited from engaging in collection activity once an offer in compromise is accepted for processing. Accordingly, after December 31, 1999, commentators have suggested that the IRS may seek to impose an equitable tolling period on the running of the three-year look back period and the two-year filing period during the pendency of an offer in compromise.

Before January 28, 2004, the IRS provided no meaningful guidance on its position concerning the effect of an offer in compromise on the running of the three-year lookback or two-year filing periods. The Supreme Court, in the case of C.P. Young, held that a prior bankruptcy always tolls the three-year look-back period during the time of overlap. Although Young was decided in connection with the affect of a prior bankruptcy on the three-year look-back pe period, not an offer in compromise, some commentators felt that the Young opinion would encourage the IRS to assert that the rationale of Young applied to the three-year look-back period and the two-year filing period during an offer in compromise, and that both of these time periods must be tolled during an offer?s pendency.

Notwithstanding Young, on January 5, 2004, the IRS Chief Counsel issued CCA 200404049, concluding that an offer in compromise does not toll the three-year look-back period. Although limited to the three-year look-back period, the rationale of the CCA also applies to the two-year filing period. Essentially, the IRS determined that equitable tolling of the three-year lookback period is inconsistent with the text of applicable Bankruptcy Code provisions. Furthermore, the IRS concluded that an assertion of equitable tolling would not be upheld by the courts because the IRS retained the ability to protect its claims during an offer in compromise by filing a notice of federal tax lien, using its right of setoff against an overpayment, and asserting levy rights in a jeopardy situation.

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