Individual California taxpayers without the income, assets or means to pay state tax liability right away or in the foreseeable future can try to use the option of a “California State Tax Offer in Compromise” (OIC). The California State Tax Offer in Compromise program allows taxpayer to offer a lesser amount for payment of a final tax liability, if taxpayer does not dispute it. Generally, FTB approves a California State Tax Offer in Compromise when the amount offered by taxpayer is pretty much the most FTB can expect to collect from taxpayer within a reasonable period of time. FTB look at the following facts:
- The taxpayer’s ability to pay.
- The amount of taxpayer’s assets or equity.
- The taxpayer’s present and future income.
- The taxpayer’s present and future expenses.
- The potential for change in circumstances.
- Whether the offer is in the best interest of the state.
Taxpayer can apply for a California State Tax Offer in Compromise only if he or she filed tax returns or is not required to file tax returns. Taxpayer also must fully complete Offer in Compromise application, and provide all supporting documentation. Then consumer must come to an agreement with FTB regarding the amount of tax he or she owes, and must authorize the Franchise Tax Board to conduct investigation and verify information on the taxpayer’s application.
If the Franchise Tax Board thinks taxpayer has a potential for future increase in earnings, it may, after approval of the application, require that taxpayer enters into so called “collateral agreement” with the Franchise Tax Board. The agreement is for a duration of 5 years and will require the taxpayer to pay FTB a percentage of future earnings if earnings become higher than certain threshold established by FTB and agreed to by taxpayer. FTB usually does not require collateral agreement if taxpayer is on fixed income or has limited potential for increase in income.
Unfortunately, collection activity by the Franchise Tax Board does not stop even if the Franchise Tax Board and taxpayer enter into agreement. The Franchise Tax Board may continue to collect tax if stopping collection efforts can potentially result in loss of FTB’s ability to collect what is owed. Interest also continues to accrue.
Taxpayer submits agreed upon payment amount only when the Franchise Tax Board requests payment according with the Offer in Compromise Agreement. The Franchise Tax Board requires lump sum payment under this program. The Franchise Tax Board can also work in installment agreement if taxpayer has the ability to make monthly payments that in total will exceed the amount initially offered by taxpayer and accepted by the Franchise Tax Board.
To fill out a California State Tax Offer in Compromise application, individual taxpayer will need to provide significant volume of information. That includes verification of income, documents, such as paystubs for the previous 3 months, or financial statements for previous 2 years, if self-employed. Any investment or ownership in business or trust will have to be disclosed. For expenses taxpayer can provide billing statements for previous three months. The Franchise Tax Board will require complete bank information, including statements for all accounts for last six months for those who are employed, and for previous two years for self-employed taxpayers. Information submitted must include closed bank accounts.The Franchise Tax Board also requires information about securities owned, interest in real estate, information from the IRS, legal documents such as divorce decrees or marital settlement agreements, medical information such as medical condition that should be considered by the Franchise Tax Board and any powers of attorney. On the application taxpayers will be required to provide information about any court proceedings, bankruptcies, repossessions, recent transfers of assets, assets owned (like vehicles), life insurance, other assets, including anticipated assets and anticipated increase in income. Application will ask detailed information about taxpayer’s expenses too.
Business taxpayer will have to provide additional information, including complete information about ownership and management of business, all bank accounts and credit cards, all assets and liabilities of a business, life insurance, receivables, pending litigation or pending judgments. Also, information about machinery, equipment, vehicles, trucks, aircraft, securities. The Franchise Tax Board will ask for business references, for detailed income information, about alaries and disposals of assets worth more than $500 in recent period.
The Franchise Tax Board mails its decision within 90 days of receiving the OPIC application but for complex cases it can take longer than that. FTB does not consider prior payments, so this fact must be taken into consideration by taxpayer when deciding whether to apply for offer in compromise option.
After approval of a California State Tax Offer in Compromise, the Franchise Tax Board releases all state lien claims. Taxpayers who contemplate filing bankruptcy should discuss strategy with their attorney prior to applying for offer in comprise, as bankruptcy filing may help to reduce or discharge tax liability of taxpayer.