The Qualified Offer rules are part of the broader framework for resolving federal tax disputes. As a general rule, taxpayers who prevail in disputes with the IRS may recover reasonable administrative and litigation costs (“Fees and Costs”) only if the IRS’s position was not substantially justified. However, the Qualified Offer rules create a safe harbor: If a taxpayer makes a Qualified Offer to settle a dispute with the IRS, the IRS rejects it, and the taxpayer later obtains a better result in court, the Tax Court will automatically treat the IRS position as not substantially justified, making it easier for taxpayers to recover their Fees and Costs.

A Qualified Offer is a formal written offer made by a taxpayer to the IRS during a tax dispute. For a taxpayer’s settlement offer to be a Qualified Offer, the taxpayer must:

Make the offer in writing;
Make the offer after the IRS issues a notice of proposed deficiency (either the final examination report of the revenue agent or the notice of deficiency allowing a taxpayer to file a petition in Tax Court);
Make the offer more than 30 days before the trial begins;
Specify the amount of liability the taxpayer is willing to accept;
Designate the offer as a Qualified Offer under Section 7430(g); and
Let the offer remain open until the earlier of 90 days or the trial date.

If the taxpayer meets those conditions, and the court later determines the taxpayer’s liability is equal to or less than the amount in the Qualified Offer, the taxpayer may recover its Fees and Costs. However, there are important limitations:

The taxpayer must exhaust all administrative remedies available, such as filing a protest before the IRS Independent Office of Appeals if the Examination Division provides the opportunity. The taxpayer, however, does not have to extend the statute of limitations for assessment.
There are limits tied to the taxpayer’s net worth. The net worth of an individual taxpayer cannot exceed $2 million. The net worth of a business, corporation, or partnership cannot exceed $7 million, and it cannot have more than 500 employees.
Legal fees cannot exceed $360 per hour (adjusted for inflation) unless the court determines a special factor, such as the limited availability of qualified attorneys, the difficulty of the issues in the case, or the local availability of tax expertise, justifies a higher rate.

There are a number of strategic and financial reasons for a taxpayer to make a Qualified Offer. The Qualified Offer rules enable taxpayers to recover Fees and Costs without proving the IRS position lacked substantial justification, a difficult standard to meet. Also, a well-thought-out Qualified Offer may incentivize the IRS to settle a case. Further, given litigation is expensive and the outcome often uncertain, a Qualified Offer can reduce a taxpayer’s financial risk by creating an easier path to settlement or the opportunity to recover Fees and Costs if the case continues and the result is no worse than the Qualified Offer.

While there are risks in making a Qualified Offer, they generally do not outweigh the benefits. A Qualified Offer cannot be changed, unless the taxpayer withdraws it and makes another one. In addition, just as taxpayers may use Qualified Offers to push the IRS towards settlement, the IRS may use the offer strategically in its own settlement negotiations. Most importantly, if the taxpayer’s offer does not meet all the statutory requirements, neither the Tax Court nor the IRS will treat it as a Qualified Offer, and it will have no impact on the recovery of Fees and Costs.

The timing of a Qualified Offer is critical. Where the result entirely favors the taxpayer or the IRS, such as a hobby loss case or a case involving the interpretation of a law or regulation where the facts are otherwise agreed, a minimal Qualified Offer made shortly after receiving the final examination report may force the IRS to review its analysis and the hazards of litigation, leading to a settlement or the taxpayer’s potential recovery of Fees and Costs. In other cases, it may be better to wait until after reviewing the IRS position or engaging in discovery in Tax Court to better evaluate the case. But waiting too long to make a Qualified Offer, after trial preparations are well underway, may undermine one of its key benefits – a taxpayer can recover only the Fees and Costs incurred after making the offer.

Conclusion

The Qualified Offer rules are a powerful tool for taxpayers engaged in federal tax disputes. They provide a path to recover reasonable administrative and litigation costs. Taxpayers can use a Qualified Offer as a litigation strategy as well as a negotiation tool. Often a Qualified Offer results in the IRS’s making a counteroffer after reviewing the strength of its case. The requirements for a Qualified Offer, however, are technical. It is essential for the taxpayer to engage an experienced tax practitioner to insure the offer meets all the requirements of a Qualified Offer.

Brian C. Bernhardt is tax controversy/litigation attorney with Fox Rothschild in Greensboro.

October 27, 2025/by TAX