By: The Attorneys of Tenenbaum Law, P.C.

As published in the National Conference of CPA Practitioners, Nassau/Suffolk Chapter Newsletter – Volume 11, Issue 1 (April 2014), available here.

For taxpayers who owe large sums of money to the New York State Department of Taxation and Finance, the problems can seem insurmountable. Liabilities continue to grow as penalties and interest accrue. Bad credit and repeated bank levies become a routine part of life. Taxpayers who owe $10,000 or more in back taxes may also have their driver’s license suspended.

One solution may be to enter into an Offer in Compromise with the State. Although the Offer program has been in place for many years, recent changes to the program have allowed more taxpayers to be eligible. In addition, the State has taken steps to reduce its backlog of cases. This is a good time to take a look at whether an Offer is a feasible resolution for your clients with tax debt.

In 2011, the law permitting Offers in Compromise was amended to allow the State to consider the economic hardship of an individual taxpayer in its evaluation of an Offer, if the offered amount reflects the reasonable collection potential of the debtor. In 2013, regulations were published to implement the law, providing guidance for practitioners as well as State representatives. Note that the economic hardship provision is not applicable to corporate taxpayers.

The regulations combine compassion and practicality. The State will review taxpayer’s assets, living expenses and anticipated future income. The State can consider elements such as the age and health of the taxpayer and his dependents, special education needs, a medical catastrophe, and natural disasters. A luxurious lifestyle is discouraged and expenses such as private school tuition are not permitted.

In determining an acceptable amount to be paid on an Offer, the State generally reviews how much could be collected from the taxpayer in the next five to ten years with the usual collection tools. Each case is evaluated individually. The State may consider a collateral agreement, such as an agreement based on future income of the taxpayer, if this would be appropriate in the taxpayer’s unique circumstances.

Previously, the Offer evaluation was tied closely to the outstanding tax amount due. Although the State has more flexibility in determining an acceptable Offer amount since the new law was enacted, the State still may consider the liabilities to be compromised, including the amount of tax involved, and whether trust taxes are involved such as sales or withholding tax. An important factor is whether acceptance of the Offer is in the best interests of the State.

In light of the taxpayer-friendly changes to the NYS Offer in Compromise program, the possibility of settlement is more realistic for many tax debtors. It is important for practitioners to be aware of the requirements and parameters of the program, in order to evaluate whether an Offer is an appropriate resolution, and if so, to prepare and negotiate a viable Offer for their clients.