Many taxpayers, when confronted with an overwhelming New York State tax liability, throw their hands up to the sky in despair and wonder how the fates could be so cruel. But not to worry, a modicum of relief is available for certain qualifying taxpayers in the form of the State’s Offer in Compromise Program (“OCP”).
Under New York State’s tax law, the Commissioner of the Department of Taxation and Finance (the “Department”) is empowered to accept less than the full amount of tax, interest and penalties due under certain circumstances. The OCP allows eligible taxpayers the opportunity to settle their obligation to New York by paying a reasonable amount in compromise. The OCP is open to both businesses and individuals if they meet the criteria necessary to be accepted into it.
The State will consider compromise offers from:
- Individuals and businesses which are insolvent or bankrupt.
- Individuals who are not insolvent or bankrupt when payment in full would create undue economic hardship. (Only individuals may apply for relief based on undue economic hardship. This may include relief from business debts for which an individual is personally responsible.
A taxpayer is considered insolvent when its liabilities, including tax liabilities, exceed the fair market value of its assets. The taxpayer must conclusively demonstrate this insolvency.
Types of Offers
Generally, the Department considers offers in two different types of circumstances. First, it will consider offers when the liabilities at issue are fixed and final. In this situation, further administrative or judicial review is not available to the taxpayer. Offers from businesses with fixed liabilities are, for example, weighed by the Department if the businesses have been discharged from bankruptcy within the last year or are shown to be insolvent.
The Department also considers offers regarding tax liabilities that are still subject to administrative review, and consequently, not fixed and final. This type of offer may be based on doubt with respect to the taxpayer’s liability for the taxes due, or doubt as to the taxpayer’s ability to pay the taxes due in full within a reasonable period of time.
Trust Tax Liabilities
Normally, in the case of trust tax liabilities (e.g., sales tax, withholding tax), an offer of an amount less than the tax amount owed, exclusive of penalties and interest, will not be accepted. If, however, the Department determines that it is in the best interest of all parties concerned, it may accept a lesser amount. In making its determination, the Department considers whether the business is still in operation, and whether the trust taxes were actually collected.
Responsible Person Liability Relief
Under New York law, certain taxpayers may be held personally liable with respect to the collection and payment of trust taxes for a business. Such liabilities can be particularly onerous to taxpayers, since they continue to exist even if the business no longer has any assets to satisfy all or any part of them.
A taxpayer assessed as a “responsible person” in connection with trust taxes may compromise its trust tax liability separately from the business. The Department makes a separate determination on each offer, based on the particular circumstances of the taxpayer making the offer.
If the individual’s offer is accepted, the payments made regarding the offer will reduce the business’s liability by the same amount. However, while the individual taxpayer’s responsible person assessments are abated upon payment of the full amount of the accepted offer, the business’s assessments and the assessments of any other responsible person will remain open and subject to collection, less all payments made pursuant to the accepted offer.
Undue Economic Hardship Relief Available
Pursuant to amendments made in 2011 to the OCP, individual taxpayers may be granted relief in circumstances where they are experiencing “undue economic hardship.” Under this standard, the Department may consider factors other than bankruptcy or insolvency when deciding whether to accept an offer in compromise. Such factors as extraordinary individual or family healthcare costs, or unemployment are examples of circumstances that may prompt the Department to accept an offer of less than the full amount of a taxpayer’s assessed liability. It should be noted that the while the amended legislation does not define the situations that constitute an undue economic hardship, it specifically provides that the inability to maintain an affluent or luxurious lifestyle is not one of them.
Revised Offer Evaluation Standard
Prior to the 2011 legislation, the amount payable through an offer in compromise was required to be at least the amount recoverable through legal proceedings. However, the 2011 legislation amended that a requirement that is currently an offer in compromise, is required to be an amount that reasonably reflects collection potential or is otherwise justified by proof offered by the taxpayer.
When facing what seems like insurmountable New York State tax liabilities, taxpayers should always consider whether relief may be available to them through the OCP. In making that determination, the experience of a trusted tax professional can be invaluable. While the Department does not accept every offer, it does accept a significant amount of reasonable offers. Preparing and submitting the right documentation is key. Taxpayers carry the burden of proving that they fall within the parameters of the OCP, and, thus are eligible for the assistance it provides.
If you have any questions regarding New York State’s OCP, please contact State and Local Tax Director Tom Corrie at email@example.com or 212-842-7019, or contact your Friedman LLP tax professional.