The California Franchise Tax Board says that if you qualify, your delinquent taxes, penalties and interest can be "compromised" so that your payment of an agreed-upon portion will be treated as if you paid the full amount. Here's what you need to do to pay pennies on the dollar when you owe income taxes in California:
What you should know before preparing an Offer in Compromise
Are you an Offer in Compromise candidate?
If you are an individual or business taxpayer that does not have the income, assets, or means to pay your tax liability now or in the foreseeable future, you may be a candidate. The Offer in Compromise program allows you to offer a lesser amount for payment of a non-disputed final tax liability.
Generally, we approve an Offer in Compromise when the amount offered represents the most we can expect to collect within a reasonable period of time.
Although we evaluate each case based on its own unique set of facts and circumstances, we give the following factors strong consideration:
• The taxpayer's ability to pay.
• The amount of equity in the taxpayer's assets.
• The taxpayer's present and future income.
• The taxpayer's present and future expenses.
• The potential for changed circumstances.
• Whether the offer is in the best interest of the state.
Can we process your application?
We will only process your Offer in Compromise application if you have done all of the following:
• You have filed all of the required tax returns. If you have no filing requirement, note it on the application.
• You have fully completed the Offer in Compromise application, and provided all supporting documentation.
• You agreed with the Franchise Tax Board on the amount of tax that you owe.
• You authorized the Franchise Tax board to obtain your consumer credit report and to investigate and verify the information you provided on the application.
Will a collateral agreement be required?
Upon approval, we may require you to enter into a collateral agreement for a term of five years. Generally, a collateral agreement will be required if you have significant potential for increased earnings. A collateral agreement requires you to:
• Pay us a percentage of your future earnings that exceed an agreed upon threshold.
Are collections suspended?
Collection activity is not automatically suspended. If delaying collection activity jeopardizes our ability to collect the tax, we may continue with collection efforts. Interest will continue to accrue.
When should offered funds be submitted?
You should not submit the offered funds until we request them. When we do ask for the funds, submit them by cashiers check or money order.
What documentation is required with the application?
For a check list of required items:
• Personal Income Tax - see page 3 of FTB 4905PIT
• Business Income Tax - see page 4 of FTB 4905BE
You have questions? The Franchise Tax Board has these answers:
1. What does the Franchise Tax Board consider a fair offer in relation to the amount due?
Generally, an offer will be accepted when the amount offered is the most the Franchise Tax Board can expect to collect within a reasonable period of time.
2. How long will it take to get a decision on my Offer in Compromise?
Generally, if we accept your offer for processing, we will have a decision to you within 90 days after receiving your offer. If your account is more complex, it may take longer than 90 days.
3. Can I make payments on the offered amount?
No. We require a lump sum payment of the offered amount.
4. Can I apply prior payments to the offered amount?
We cannot apply prior payments toward the offered amount. However, we will consider prior payments and the offered amount compared to the total liability when evaluating your offer.
5. My Internal Revenue Service Offer in Compromise has been accepted. Will the Franchise Tax Board automatically approve my offer?
No. We will evaluate your Franchise Tax Board offer separately from your Internal Revenue Service offer.
6. If the Franchise Tax Board determines that my offer is not acceptable, will I be contacted?
Yes. We will contact you to discuss your account and to determine the most appropriate resolution. For example, if it is determined that you will have the ability to make monthly payments that will exceed the amount offered, we will work with you to establish an installment agreement.
7. Will state tax liens be released if the Franchise Tax Board accepts my offer?
Generally, we release state tax liens upon final approval of your Offer in Compromise.
8. Do I need to have someone represent me?
Representation is not required. The Offer in Compromise program is available to all taxpayers, whether or not they are represented.
9. Can I get relief from the tax liability by filing bankruptcy?
Part or all of your taxes may be dischargeable under the bankruptcy code. If this is a consideration, you may want to seek legal advice.
10. Can I apply for an Offer in Compromise if I have no funds to offer?
No. We will not accept a zero dollar offer. Your offer must represent the most the Franchise Tax Board can expect to collect over a reasonable period of time.
11. What is a collateral agreement?
A collateral agreement is a contractual agreement between you and the Franchise Tax Board. By signing the agreement, you agree to pledge to us a percentage of income that exceeds an agreed upon threshold. Generally, the collateral agreement period is five years.
12. If my offer is approved, will I have to sign a collateral agreement?
If you are on a fixed income or have limited potential for increased earnings, a collateral agreement will generally not be required.
13. I am single now. If I marry while the collateral agreement is in effect, how will this affect me?
If you marry or enter into a Registered Domestic Partnership (RDP) while the collateral agreement is in effect, we will review any joint tax returns you are required to file. Generally, we consider your joint annual income in the collateral agreement. If you are married or a RDP filing separately, the evaluation will be based on your separate income.
14. Can I complete one application if I owe the Employment Development Department, the Board of Equalization, or the Franchise Tax Board?
To relieve some of the paperwork burden for taxpayers or their representatives, the State's three taxing agencies developed a single offer in compromise application. Individual taxpayers can use DE 999CA (OIC Multi-Agency Application) to apply with any or all of the three agencies.
For tax help on obtaining your offer in compromise, contact a tax attorney who has the experience you can rely on - call Mitchell A. Port at 310.559.5259.