Have you or your company received a state and local tax bill that you do not think you owe or that you cannot afford to pay?
In New York State, the tax department evaluates offers in compromise (i.e. settlement offers) based upon doubt as to liability, doubt as to ability to collect tax and undue economic hardship.
There are two basic types of offer in compromises. The first type of offer in compromise is where the liability is considered fixed and final. The liability is not subject to administrative or judicial review. This liability is subject to tax department collection activity. A liability is subject to tax department collection activity if the taxpayer has exhausted the pre-payment appeals rights or has failed to appeal the assessment by the appeals deadline. Tax department collection activity can include tax warrants, tax levees and garnishments. The tax department will evaluate the solvency and bankruptcy status of the taxpayer when determining whether to accept a settlement offer. The tax department will also settle with individual taxpayers who can prove that collection in full of the liability will result in undue economic hardship. Undue economic hardship occurs if a taxpayer is unable to pay reasonable basic living expenses. Basic living expenses provide for the health, welfare, and production of income for the taxpayer or the taxpayer's family.
The second basic type of offer in compromise is for liabilities that are still subject to administrative review. The tax department may not undertake collection activities for liabilities that are still subject to administrative review. The taxpayer has the right to appeal such liabilities. The tax department will consider settlement offers for liabilities that are still subject to administrative review based upon doubt as to liability. The tax department will also settle with individual taxpayers with liabilities that are still subject to administrative review if they can prove that collection in full of the liability will result in undue economic hardship.
Doubt as to liability means that there is a genuine question of fact or law underlying the liability. The tax department may consider the possibility of losing an appeal brought by the taxpayer. For example, a liability may be based upon a business deduction taken by the taxpayer on an income tax return. The tax department may believe that the particular expense deducted on the return does not qualify as a business deduction based on the law. This scenario may include an offer in compromise based on doubt as to the taxpayer’s liability that is itself based on doubt as to the correct interpretation of the law.
Alternatively, the tax department may agree that the particular expense deducted on the taxpayer’s income tax return qualifies as a deductible business expense under the law but disagree that the taxpayer has adequately documented the expense. In other words, the tax department might believe that the taxpayer’s receipts, cancelled checks and invoices (or whatever documentation that taxpayer brings to the table) do not substantiate the amount of expenses deducted by the taxpayer. This scenario may include an offer in compromise based on doubt as to liability that is itself based on the correct interpretation of the facts.
Finally there are special rules for compromise of spousal share of liability on a joint tax return. The rules are somewhat different for innocent spouse relief and for divorced or separated spouses.
Call us today at 212-232-2410 or contact us online to discuss your options.