CA Franchise Tax Board Offer in Compromise Overview
The FTB has a formal Offer in Compromise (OIC) program in which they will settle delinquent tax debts for less than what is owed “when the amount offered represents the most we can expect to collect within a reasonable period of time.” An Offer in Compromise merely is the taxpayer asking the state to accept a lesser payment in full settlement of their delinquent tax liability. The tax settlement will include the delinquent tax due, as well as, penalties, interest and any collection fees that have accrued.
This article discusses below more details such as information as to the general eligibility requirements, submission requirements, and a list of financial documents required.
The FTB states that each case’s unique set of facts and circumstances determines acceptance. However, the following is a list of factors that are most strongly considered when they are making acceptance determinations:
- The taxpayer’s ability to pay
- The taxpayer’s equity in assets
- Present and future income of the taxpayer
- The taxpayer’s current and future expenses
- The potential for changed circumstances
- The offer is in the best interest of the state
Taxpayers must meet the following requirements for the FTB to consider an Offer in Compromise application for acceptance:
- The taxpayer has filed all required tax returns and does not dispute the amount that is owed
- The taxpayer has completed the Offer in Compromise application and provided all requested supporting documentation (see below)
- Taxpayers can find the OIC application here: https://www.ftb.ca.gov/forms/misc/4905pit.pdf
- The taxpayer authorizes the FTB to obtain their consumer credit report. Furthermore, they can investigate and verify the information that they have provided on the application
The following is a list of documents that the FTB requires to be included with the submission of the Offer in Compromise application, if applicable:
- Verifying Income: Recent copies of pay stubs for the past three months or two years of financial statements for self-employed taxpayers. Include any income from investments or ownership in any business entity or trust. It includes distributions, K-1 Income, or dividends for example.
- Verifying Expenses: Include copies of the most recent three months of billing statements. It may include credit card statements, other creditor billing statements, and any personal loan settlements.
- Banking Information: Include copies of savings and checking account bank statements for the most recent six months. For self-employed taxpayers, then include the last twelve months of bank statements. Lastly, provide any bank accounts that closed during that period.
- Securities: Account statements for investments like stocks, bonds, profit sharing plans, mutual funds, and retirement accounts. For example, 401ks, IRAs, Keogh, or Annuities.
- Current Lease or Rental Agreements – Recent lease or rental agreements
- Real Property Information: Include mortgage statements and escrow statements for the property the taxpayers owns, sold, or gave away for the most recent five years.
- Medical Information: For any medical condition that the FTB must consider, include the Doctor’s letter for the diagnosis and prognosis.
- IRS Information: IRS application for an OIC and letter of acceptance or other IRS arrangements
- Legal Documents: Bankruptcy documents, trust documents, marital property settlement agreements, and divorce decrees.
- Power of Attorney: If a representative designated by the taxpayer submits the OIC, include the Power of Attorney form
Filing Process and Considerations
The FTB requires that the taxpayer complete and submit a paper copy of the Offer in Compromise application. Taxpayers should mail their request and supporting documents to:
State of California
OIC Group MS A453
Franchise Tax Board
PO Box 2966
Rancho Cordova, CA 95741-2966.
In some circumstances, the FTB will only accept an Offer in Compromise if the taxpayer agrees to enter into a collateral agreement for 5 years. A collateral agreement requires the taxpayer to pay a percentage of their future earnings that exceed an agreed upon threshold in the event that the taxpayer earns more than anticipated in those future years.
CA usually suspends enforced collection while they review an Offer in Compromise application. However, the FTB still may pursue enforced collection if they believe delaying collection jeopardizes their ability to ultimately collect some or all of the delinquent tax debt.
Taxpayers should be aware that the FTB reserves the right to use any information that is provided in the Offer in Compromise application for debt collection purposes. Further, the FTB reserves the right to rescind the offer terms if the taxpayer becomes delinquent with their tax obligations in future years.
Review and Determination
Once the FTB has received the Offer in Compromise application and supporting materials, they will conduct a review. The review generally takes approximately 90 days from the date the taxpayer applies. The FTB will accept, accept with the collateral agreement, reject or counter-offer.
Once the FTB has reached a determination they will contact the taxpayer. Taxpayers are generally contacted within 90 days after filing the Offer in Compromise application. If the offer has been accepted the taxpayer will be required to make a lump sum payment in the accepted amount. Once that payment has been made the FTB, they will begin the process of releasing any state tax liens. The taxpayer does not have the right to appeal a denial of an Offer in Compromise. However, they do have the ability to refile the application if their circumstances change.
Disclaimer: This article is not legal or tax advice. This article should not be used as a substitute for the advice of a competent attorney or a licensed tax professional.