A Possible Solution For Clients Who Don’t Have Deep Pockets
By: The Attorneys of Tenenbaum Law, P.C.
Your client telephones your office, frantic, because he has just received a Notice of Determination (“Notice”), showing that he is liable for sales tax, interest and penalties as an officer of his company. There is no question that he is a responsible person for tax purposes1; there is also no doubt that he will never be able to pay the amount owed. What can you do to help?
A new client calls, admitting that he filed his tax returns for the past few years but he hasn’t paid the tax owed. He’s been sick, and his company went out of business. He has a low-paying job now and he’s only a few years away from retirement. He’s been receiving Notices and he wants to straighten out his affairs with New York State. He hasn’t got any spare cash or other assets. 2 What should he do?
Submit an Offer In Compromise
In both of these circumstances, and in many others, a good answer is to file a New York State Offer in Compromise (OIC). This is a procedure which may allow a taxpayer to pay less than the full amount owed of tax, interest and penalties. It involves submitting various forms to the State, backed up by documentation and persuasive arguments. If accepted, the liability of that taxpayer is reduced. An OIC can be submitted on behalf of an individual taxpayer or a corporation.
The major difference between an OIC and an Installment Payment Agreement is the total amount to be paid. With an Installment Payment Agreement, the taxpayer still pays the full amount due, but over a period of time. In comparison, with an OIC, you are actually lowering the amount due. If the taxpayer does not have sufficient assets or income to satisfy the liabilities in full, and is unlikely to have the ability to do so in the future, then an OIC is a sensible choice.
Practice Tip: An accepted OIC is valid solely with respect to the offering taxpayer. If the taxpayer in the first example above has his OIC accepted, and pays the full amount of his decreased amount, he has wiped out his liabilities on those assessments. Any other responsible persons of that company, however, remain liable for the full amount of the assessments, less payments made as part of the Offer.
Practice Tip: You should make sure that all assessed liabilities are included in the OIC. If the OIC is accepted, the taxpayer must remain in compliance with all tax laws for five years. Any nonfiling or nonpayment of taxes during those five years is a trigger for default on the OIC, and the full liability will be due and payable. Minimize the risk of default by including as many assessments as possible in the OIC. Beware, though – you can’t compromise a liability that is not yet assessed.
The forms: which ones to use, and when
If there is some dispute or doubt over whether the taxpayer is liable, then Form DTF-4 “Offer in Compromise” must be submitted. If there is no doubt as to liability but only the issue of collectibility, that is, the liability is fixed and final, then Form DTF-4.1 “Offer in Compromise- Fully Determined Liability” is appropriate. In addition, whenever there is doubt as to collectibility, Form DTF-5 “Statement of Financial Condition and Other Information” is necessary.
An important part of the DTF-4 or DTF-4.1 is the statement of reasons for why you believe the OIC should be accepted. You should note the taxpayer’s financial difficulties, and how he reached this condition. Be sure to include an explanation of how you computed the Offer amount.
An Offer based on doubt as to collectibility will only be considered if the taxpayer is insolvent, or has been discharged in bankruptcy in the past year. In determining whether his liabilities outweigh his assets, you can include his tax liabilities. If he owes more in taxes than the value of his assets, he is eligible for an OIC.
How much is a reasonable offer?
One big question is always how much to offer. No matter how poor someone is, you cannot submit an offer of zero. First, figure out how much the taxpayer’s assets are worth.
Look at the appraised value, and deduct the value of any outstanding secured loan or mortgage balances. The State is only interested in the equity the taxpayer has in the asset. All the assets must be declared on the DTF-5.
Be prepared to back up your statement of the value of any asset with documentation. At the very least, the State will require a recent valid real estate appraisal of any real property.
Other assets must be revealed. The State will want to know whether the taxpayer can liquidate or borrow against any life insurance policy. Similarly, the State will ask for details of pension plans. Bank accounts must be listed, and the value of that asset is the balance in the account.
The State requests details of expenses or disbursements by the taxpayer.
Practice Tip: The State’s overriding consideration is whether the expense is reasonable. Any unusual or large expenses should be documented and explained.
Next, consider the taxpayer’s gross income. The Offer must be more than the State could legally collect by other means, including wage garnishment over the years remaining in any warrant. Compute how much such a garnishment would yield, and reduce it to present value. Add that result to the asset calculation above: your Offer must be equal to or greater than that amount.
If the taxpayer has judgments or debts which have priority over the State’s warrants, such as Federal tax liens which are being actively pursued, proof must be available. Also, it may affect the amount of the Offer.
Trust taxes are a special case. The State is reluctant to compromise trust tax liabilities for less than the taxes owed. In some circumstances, however, a lower amount may be accepted.
Supporting documentation can make or break your offer
Filling out these forms can take some time, as can gathering all the appropriate back-up documentation. Fortunately, New York State now has a more flexible policy regarding supporting papers. In the past, the State required a large number of documents and a large amount of information before an OIC could be processed. Now, however, since Spring of 2000, the reviewer has discretion to determine how much documentation is needed.
Certainly, you will still have to submit items like bank statements, Federal tax returns, a house appraisal (if relevant) and a recent credit report. Where the case is uncomplicated, though, the reviewer might not ask for much more. Of course, it can go the other way, too: a complex matter might require the submission of numerous papers. The real benefit is that the simpler cases can now be moved along much more quickly.
Once the OIC is recommended for approval by the reviewer, the end may be in sight but it will still be some time before a final decision is issued. The OIC must be reviewed by several higher authorities, and any offer to compromise liabilities greater than $25,000 must be reviewed by a judge. If your OIC is finally accepted – and there is no guarantee that it will be accepted – the most important thing you can do for your client is to make sure that he pays the amount of the Offer as soon as possible. You don’t want him to be in default after all your hard work.
Practice Tip: For that reason, even though an OIC may be paid out over time, it is good practice to pay it off in the shortest time your client can manage.
Conclusion: Negotiate your way to success
An OIC is a good solution for a taxpayer who wants to satisfy his liabilities to New York State, but has few assets and little income. Not all Offers are accepted, but if you work with the State to comply with their requests, and to negotiate an Offer amount which is agreeable to all sides, you may be able to achieve a successful outcome for your client.
1) Not all officers of companies are “responsible persons” in the eyes of the law. The determination rests on the facts and circumstances of each case. See “New Law Affects Responsible Officers”, written by this office, NYSSCPA, Nassau Chapter Newsletter, Nov. 1998. For copies, contact our office.
2) If he has substantial assets and thus is not a good candidate for an Offer in Compromise, he may still be able to have penalties abated for reasonable cause, or be able to enter into an Installment Payment Agreement.