October 30, 2022 | Offer in Compromise
The New York State offer in compromise program allows taxpayers to lower the amount of tax debt they owe the State when they can’t afford to pay it all.
The program was developed to help insolvent New York taxpayers in need of tax debt relief because paying the full tax debt would create an undue economic hardship. With the tax debt resolved through this program, you typically have a settlement by paying a reasonable amount of the debt owed with a sixty (60) month payment plan (with Interest). More details of the program are described in Offer in Compromise Program Publication 220.
Back ground: Undue Economic Hardship
Undue economic hardship is when an applicant taxpayer can’t pay their tax debt in full and meet all of their reasonable financial obligations. Therefore, it needs to be more than just a hardship to pay the taxes owed. Typically, it also requires that the taxpayer is insolvent, which means that when you add up all of your assets and liabilities (including the tax debt), that when you subtract the liabilities from the assets that you have a negative number. It is important to note that if the State thinks your lifestyle is luxurious, it will deny the offer, or cause you to have a high settlement. Such lifestyle issues would be high private school tuition, fancy cars, college costs paid by without a loan, large contributions to retirement accounts, or large credit card payments for unnecessary expenses. The undue economic hardship rule only applies to individuals and not businesses. For a business, the central factor is whether the business is still open.
Under the New York State offer in compromise program reasonable financial obligation includes but are not limited to:
– food, clothing, housing costs, auto, etc.
– medical expenses for taxpayers or dependents.
– child support payments you must make under a court order, or other court ordered payments.
The key to understanding undue economic hardship under the offer in compromise program is that the taxpayer needs to demonstrate extreme hardship and not that it would just be difficult or inconvenient to pay the tax debt in full. The State typically uses the IRS standards for expenses allowed for such items as food, housing and automobiles. That is where it is very helpful to have a New York State tax attorney with experience making these requests handling your case since we have handled many cases and have a good understanding of how they would view your case.
The New York State offer in compromise program is an agreement between the taxpayer and the state, which allows for full or partial reduction of unpaid taxes. In almost all cases, the penalties and interest are waived. The amount owed will be reduced based on applicant’s assets, income, expenses, family size and overall ability to pay off debt within five years from the date of acceptance under this program (without extra penalties, but they charge 7.5% interest). The program is not helpful if the taxpayer has no ability to pay, and in many instances since the New York Tax Department will want a reasonable amount to settle the obligation. In many cases however, the reduction they agree to is very significant and worth the effort and there is no significant downside of submitting an offer.
To qualify for a New York State OIC your total tax liability must typically exceed $25,000; and you have be up to date with filing your tax returns. If there are unfiled tax returns, we can file them as part of the application process. If you owe a smaller amount owed (under $15,000), there is an online procedure that you can probably handle yourself. It is also important that the tax debt does not relate to a crime, since in those cases as a matter of public policy the State will not settle and reduce the tax debt owed.
What tax forms need to be filed?
In most cases, you will need to file form NYS Tax Form DTF-5 and DTF-4, Application for Reduction of Tax Dues through the Offer in Compromise program.
To qualify for an offer in compromise the applicant must meet all eligibility criteria and provide supporting documentation with their application. The tax examiner assigned to your case will determine if your offer is accepted or rejected based on internal guidelines that are strictly followed by the NYS Department of Taxation and Finance personnel and how your case is presented to them by the written submission and verbal negotiations. If qualified, an approval can take up to 365 days from date of submission, but during that time period further collection activity will cease, and if your driver’s license has been suspended, we can often have that suspension removed while the offer in compromise is being considered.
Supporting documents required with offer in compromise DTF-5 form.
– proof of income (tax returns for the past three years and one year of bank statements).
– proof of expenses (auto, home, utilities, food), and a recent credit report.
– valuations of Assets (auto and home value and mortgage documents and other loan documents, retirement account statments).
– A recent credit report (within the past 30 days).
Types of Tax Debts that can be compromised under this program
– personal income tax (PIT)
– business tax liability, mostly sales tax and unpaid payroll tax debts. These are called “trust fund” taxes. In Trust Fund tax cases, they typically want the Trust Funds taxes owed as part of the settlement, and will eliminate the interest and penalties owed.
– estate tax.
If you have an accepted offer, and then you can’t fulfill the negotiated payment terms, the State will generally give you an opportunity to correct the default. If the taxpayer does not remedy the default, the State will reinstate the original amount owed, less any payments made. The good news with this is that the State will work with you on this issue.
In order to qualify for the New York State Offer in Compromise program, you must have a reasonable ability to pay your debts in the future if an offer is accepted. If they determine that you owe taxes to them in the next five years, and they remain unpaid, they will reverse the financial benefits of the offer in compromise agreement, less the amount already paid to them. This is a great program when you can offer to pay a realistic amount that the State thinks it can collect, and you have the peace of mind of reaching a settlement of the taxes owed.
Additionally, when you make arrangements to settle your state tax debt, you can avoid collection actions such as tax warrants, wage garnishments, and asset seizures.”