NYS Offer In Compromise: Qualifications, Details, and How to Apply
If you owe a tax debt in New York State, you may qualify for an NYS Offer in Compromise (OIC). That’s where the state allows you to clear your tax debt for less than you owe. Both businesses and individuals can apply. It is a great option if you can’t afford monthly payments on an Installment Payment Agreement.
The Department of Tax and Finance provides this option for taxpayers struggling financially. In addition, if you believe your tax liability is incorrect, you can also apply.
NYS Offer In Compromise Reasons
NYS accepts Offers in Compromise for one or both of the following reasons:
- Doubt as to Liability
- Doubt as to Collectibility or an individual taxpayer would experience undue economic hardship if he or she had to pay in full
It is important to understand the difference between both of these reasons.
Doubt as to Liability
This refers to cases where the state isn’t sure whether or not you owe the funds. This can happen in a number of different situations. It can include cases where the state refused to process your amended tax return. It also includes situations where the state made incorrect changes to your tax return.
Doubt as to Collectibility
This is when the state believes it simply won’t be able to collect the funds from you. It also includes cases where collection in full would cause “undue economic hardship.” However, the hardship provision only applies to individuals and not businesses.
Undue economic hardship is when you cannot afford basic living expenses. Reasonable living expenses include food, clothing, and housing. It also includes utilities, health care, transportation, and so forth. In other words, these are expenses that support the health, welfare, and production of income for you and your family (if applicable).
New York State uses the IRS’s Financial Standards as a guide for determining allowable living expenses. Fortunately, New York is a bit more flexible than the IRS. The state accepts most reasonable expenses. However, DTF generally does not allow certain expenses.
Generally Not Allowed Living Expenses
When calculating your ability to pay, NYS does not take into account certain living expenses. In particular, you cannot include private school tuition or any college expenses. In addition, charitable donations, voluntary contributions to retirement plans, unsecured debt payments, and cable do not fall under the necessary expense category.
When determining doubt as to collectibility, DTF considers the following.
- Taxpayer’s age, employment history, current employment status, and ability to earn.
- The total number of dependents, their ages, and their health.
- The cost of living in the taxpayer’s area.
- Extraordinary situations such as special educational expenses, medical catastrophes, or natural disasters.
The state also looks at the following factors when establishing economic hardship for individuals.
- The taxpayer or a family member has a disability or long-term illness that is likely to take up all their financial resources.
- All of the monthly income is consumed on caring for a dependent.
- The taxpayer can’t borrow against assets, and selling assets would make it impossible to cover basic living expenses.
Individuals and businesses must meet certain criteria in order to be eligible for an NYS offer in compromise. Most importantly, you must be insolvent or bankrupt, or paying in full must create undue economic hardship for an individual. You must also be compliant with all other tax periods. Compliance includes filing returns, paying estimated taxes, and making tax deposits.
If New York State believes that the offer undermines tax compliance, it won’t work with you either. In other words, the state will not approve offers that undermine its authority. That usually happens if you have a history of noncompliance or if you have urged others to be noncompliant.
Finally, the state only allows one proposal for a tax debt from a particular period. DTF only considers new offers if your circumstances have changed or you have increased the offer. NYS also accepts new offers if it misinterpreted information from the original offer.
To recap, the state requires the taxpayer to meet the following conditions to be eligible:
- The taxpayer is bankrupt or insolvent
- Paying in full would creating economic hardship (applies to individuals only)
- The taxpayer is compliant with all tax issues for previous and current years.
- The offer doesn’t undermine the state’s terms for compliance.
- It is the first offer for that tax debt, or it is a higher offer than the original offer.
NYS Offer in Compromise Forms and Required Docs
These are the related form to submit an NY Offer in Compromise. Each form comes with directions.
DTF-5, Statement of Financial Condition. This is required for doubt as to collectibility offers.
DTF-4.1 – Offer In Compromise. This is the most common form. It is also for doubt as to collectibility offers. It applies when the tax debt is fixed and final.
DTF-4 – Offer In Compromise. This form is for doubt as to liability and doubt as to collectibility offers. It is for tax debt that is not fixed or final. It is also for situations where you have the right to appeal and the tax liability is subject to administrative review.
DTF-4.2 – Compromise of Spousal Share of Liability on Joint Tax Return. This is for taxpayers who have joint liability with a former spouse. See DTF 4.2 for details.
To establish doubt as to collectibility, you also need to provide the following documents.
- Copies of the last three years of federal income tax returns.
- A credit report that is less than 30 days old.
- Last 12 months of bank statements or financial institution statements.
The Offer Amount
If you are applying for an OIC because of doubt as to liability, the amount you offer depends on the degree of doubt found in your case.
If you are applying for an OIC because you can’t pay, you need to make an offer that is greater than your reasonable collection potential (RCP). The RCP refers to how much money you have left over after paying your basic expenses. It takes into account your income, assets, debts, expenses, and other factors.
The offer needs to reflect the realizable value of your assets and your potential future earnings during the collection period. That’s usually a five to ten year period.
What’s the realizable value of your assets? That’s the amount that can be expected from the sale of assets within 90 days (quick sale value) minus any amount owed to secured creditors.
The state may counter the offer and request a higher amount. Although it’s not an official rule, you should expect to pay off your offer over 24 months.
Considerations You Need to Understand
Here are some additional points you should understand before submitting an offer.
- Submitting an OIC does not automatically suspend collection of a warrant.
- Submitting an offer does not change the time you have to respond to an assessment.
- The statutory period for collections is suspended while the offer is pending and for a year afterward.
- You must file all tax returns and pay all tax owed for five years after the offer is accepted.
- If you qualify for any refunds or credits, the state applies those amounts to your tax debt. That applies to the calendar year that you submit the offer and to any years prior to the offer.
- You may have to provide a collateral agreement to the state. A collateral agreement is where you agree to pay more than the offer if you come into extra money. For example, if your income goes up in the next few years, you agree to pay some of that money to the state.
- If you submit an OIC for trust taxes on behalf of a business, responsible individuals part of the business may still be personally liable. Trust taxes are withholding taxes that were withheld from an employee’s paycheck but not paid to the state. They also include sales taxes which are held in trust by the business on behalf of the consumer and remitted to the state.
- If the tax bill is more than $100,000, a New York Supreme Court judge needs to approve the OIC.
Mailing Your Offer In Compromise
Once you have completed all necessary forms and gathered all supporting documentation, send everything to the following address.
NYS Tax Department
CED Offer In Compromise Unit
W A Harriman Campus
Albany, NY 12227-5100
Include a cover letter. Explain the circumstances and reasons for your request in the letter. NYS will send you a confirmation letter and let you know if you need to include any additional information.
Common Rejection Reasons for an NY Offer in Compromise
Here are some common reasons for rejections.
- The taxpayer is not insolvent or discharged in bankruptcy.
- Your application doesn’t prove that paying in full would cause undue economic hardship.
- The state thinks it could collect more by taking legal action against you.
- The application includes false or misleading information.
- There is evidence that you transferred assets after learning about the tax liability.
- You didn’t make a good faith effort to pay the tax debt.
- The tax debt is related to a crime for which the taxpayer pled or were found guilty.
- The offer undermines voluntary tax compliance.
- Accepting the offer is not in the best interests of the state of New York.
As with IRS application process, the New York State Offer in Compromise process is not easy. We highly recommended that you work with a tax firm or a licensed tax professional. You can request a free consultation online.
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 tax professional admitted or authorized to practice in your jurisdiction.