One of the reasons why tax debts are so challenging for taxpayers is because they’re so difficult to get rid of. They often can’t be discharged during bankruptcy. Then there’s the ability of the IRS or the California Franchise Tax Board (FTB) to place liens on the taxpayer’s property and garnish wages.
Luckily, these taxing authorities are willing to work with taxpayers to settle their tax debts. One option is the offer in compromise (OIC). This allows the taxpayer to settle their tax debt for an amount less than the full tax liability.
In this blog post, we’ll take a brief look at some of the different offer in compromise options available to taxpayers in California.
An IRS Offer in Compromise
Getting an IRS to accept your OIC isn’t easy, as more than half of IRS OIC requests get rejected. In deciding whether to grant an OIC request, the IRS will look at various facts and circumstances, including the taxpayer’s:
- Income
- Ability to pay
- Expenses
- Asset equity
The IRS doesn’t publicize a formula that guarantees what it takes to get an OIC request granted. But the IRS will usually approve an OIC if the offered amount is the most the IRS can expect within a reasonable amount of time.
Applying for an IRS OIC takes some time, so to get a rough idea of whether you’re eligible, the IRS offers a pre-qualifier tool. Just remember that this just lets you know if you’re qualified for an OIC, not that the IRS will approve your request.
Not only does applying for an OIC take some effort, it also takes money. Part of the OIC application includes an initial payment. This is equal to 20% of the total offer or the first initial periodic payment. If the IRS refuses the OIC request, they will keep this initial payment and apply it to your tax debt.
Keep in mind that while the IRS considers your OIC, they may still file a tax lien against your property. However, other tax collection activities will be put on hold. Also, your OIC is automatically accepted if the IRS doesn’t make a decision within two years of your request. Finally, the IRS’ rejection of your OIC is appealable.
An Offer in Compromise from the FTB
The OIC program from the FTB is very similar to the IRS in several respects.
First, the decision to grant an OIC will depend on whether the amount offered by the taxpayer is the most the FBT can realistically expect within a reasonable amount of time.
Second, the FBT OIC is available for both individuals and business entities.
Third, the FTB doesn’t have to grant an OIC just because the taxpayer is eligible for one.
To apply, businesses will use Form FTB 4905 BE and individuals will use Form FTB 4905 PIT.
California Department of Tax and Fee Administration’s OIC
To apply for an OIC from the California Department of Tax and Fee Administration (CDTFA), a taxpayer or feepayer must meet the following requirements:
- Has a final tax or fee liability with an account that’s been closed.
- Is no longer connected to the business that incurred the tax or fee debt.
- Does not challenge the amount of taxes or fees owed.
- Is unable to pay the full fee or tax debt within a reasonable amount of time.
The CDTFA’s OIC is available to businesses and individuals, but to see if you qualify, you can use the CDTFA’s pre-qualification tool.
Summary
If you owe federal taxes that you can’t pay, you may be eligible for an OIC from the IRS. If you have a tax debt in California, the FTB and CDTFA also have OIC programs.
All of these OIC programs are discretionary, meaning the respective taxing authority doesn’t have to grant an OIC just because the taxpayer is eligible to apply. But the less likely a taxpayer can pay off the full tax debt in the foreseeable future, the more likely the FTB, IRS or CDTFA will accept the OIC request.
The good news is Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!