A question often asked by our clients is can we reduce the amount of taxes owed to the California Franchise Tax Board (FTB) through an Offer in Compromise (OIC). The short answer is yes, it is possible. However, there are eligibility requirements that must be met, financial documents that must be gathered and reviewed, and finally a lengthy process for having the offer accepted. In this blog, we will go through each of these steps and how a tax attorney may be able to help.
Before You Apply
Before beginning the process of gathering financial information or filling out any forms for the FTB Offer in Compromise, there are a few items you must take into consideration.
First, have you filed all of your tax returns that have filing requirements? If the answer is no, you should start this process first. The FTB will not even look at an OIC until all required tax returns have been filed. This makes sense because it shows the FTB that you are getting current with your tax filings, which should indicate this will continue after an OIC has been accepted.
Second, have you exhausted all other avenues for paying back the tax debt? This includes setting up a payment agreement with the FTB, looking at loan options, and asking friends and family for help. Unfortunately, these are exactly the questions the FTB will be asking when reviewing the OIC.
Third, are you financially unable to enter into a payment agreement to pay back the taxes owed to the FTB? If the answer is yes, an OIC may be an option. The biggest part of whether the FTB accepts an OIC comes down to a taxpayer’s ability to pay the liability within the remaining time the FTB has to collect the tax debt.
You should also be aware that submitting an OIC to the FTB does not automatically stop collection action like it does with the IRS. This is one reason why it is important to have an experienced tax attorney to help you through this process.
Eligibility Requirements
In order to qualify for an OIC with the FTB they will take into consideration the following:
- Your ability to pay
- The value of your assets
- Your current and future income
- Your current and future expenses
- The potential that your circumstances could change
- Whether your offer is in the best interest of California
If you are wondering what items 3-6 mean, you should be. Determining eligibility by just looking at someone’s financial situation is fairly cut and dry. If you don’t have equity in assets or disposable income at the end of each month, clearly your ability to pay the tax debt back is zero.
The problem is how open ended the FTB leaves these eligibility requirements. When they reference future income or future expenses, they are giving themselves the ability to deny an OIC simply based on the fact that your financial situation may become better in the future. And whether the offer is in the best interest of the state is almost always going to be a NO in the eyes of the FTB.
Because of these hurdles that will come up during the course of having an OIC accepted by the FTB, it is very important to have an experienced tax professional who has navigated this process before. They will be able to not only make sure your financial situation will qualify, they will also be able to build a case to address the other eligibility requirements.
The OIC Process
Gathering Financial Documents
The first step in the FTB OIC process is going to be gathering all necessary financial documents to prove the inability to pay back the tax debt. If you have read about or attempted an IRS Offer in Compromise, you may be familiar with this step. The big difference is the FTB will require records that go back much further than what the IRS requires.
The following are a list of financial documents that will need to be gathered for you and, if you are married, your spouse:
- The last 3 months of pay stubs or the last 2 years of financial statements if you are self-employed. You will also need information regarding investment or ownership in any business or trust and the income that may be derived from this.
- The 6 most recent bank statements for each checking or savings account you have. If you are self-employed, the FTB will require the last 12 months for each checking or savings account.
- The last 3 months of billing statements for any recurring payments you may have including credit card payments, payments to other creditors, and loan payments.
- A current statement showing the balance of each investment account or retirement account that you may have. This includes 401k, IRA, stocks, bonds, annuities, and mutual fund statements.
- A current lease or rental agreement if applicable.
- Mortgage statements or escrow statements for any property you may currently own, have sold, or gave away within the last 5 years.
- An application or acceptance of an IRS OIC if applicable.
- Any legal documents regarding a marital settlement agreement, divorce decree, trust documents, or bankruptcy.
- Medical information from a physician that includes a diagnosis/prognosis of any medical condition that should be taken into consideration.
- Any power of attorney form you have for your legal representation.
Gathering this information can be overwhelming for most people, let alone trying to organize all the information to present to the FTB. Having an experienced tax attorney can ensure that the information is clear and cannot be misconstrued.
Filling Out Form 4905, Offer in Compromise for Individuals
Form 4905 will be where all the financial information you have gathered is then transcribed. Of course the financial documents you have gathered will also be submitted to the FTB alongside form 4905 for the FTB’s verification. This form will also include the amount you will be offering the FTB to settle the tax debt. To determine the offer amount the equity in assets and disposable monthly income should be greatly considered along with circumstances that may be specific to your case. Also, an offer amount cannot be $0.
It is important to understand that upon signing and sending the OIC to the FTB you are accepting that the amount the FTB claims you owe is in fact correct. So, if the OIC is rejected, you will not be able to dispute the amounts in the future. Any previous payments or amounts collected for the tax debt included in the OIC will also be kept and cannot be included as part of the offer amount.
Negotiating The Offer
After the OIC has been submitted, it will generally take between 2-4 weeks (possibly longer) for the FTB to send a notice acknowledging that they have received the OIC. From here the FTB will assign an offer examiner to review the OIC (no definitive time frame for this). Once the OIC has been assigned it typically takes 4-6 months for the FTB to come to a decision on whether the OIC should be accepted, rejected, or if they need additional information.
The offer examiner asking for additional information is better than a flat out rejection. This allows you or your legal representation to strengthen your case for the OIC being accepted by providing more information. Again, your legal representation will also be able to communicate the details of your specific situation in a way to give your OIC the best chance of being accepted.
After the offer examiner reviews the additional information, they may possibly reject the OIC. If this happens, they will most likely make a counter offer for a monthly payment agreement that works within your financial situation. They may also determine you are currently experiencing a financial hardship but, that the financial hardship will not be permanent. So, they will suggest a currently non-collectible status until your financial situation improves. A currently non-collectible status will protect you from collection action such as bank levies or wage garnishments but not from tax liens being filed.
Should the OIC be accepted, the offer examiner will let you know whether the offer amount you submitted is being accepted or if they are recommended a larger amount. If a larger amount is proposed, it will be up to you to decide whether that amount is feasible. Unlike the IRS, the FTB does not accept the settlement amount in payments. Another term that may be added to the conditional acceptance of the OIC is that your business be dissolved.
On top of all this, the FTB may require a collateral agreement be put in place. This is an agreement that the FTB uses to collect the tax debt included in the OIC should your financial situation improve within the first five years after the OIC is accepted.
Once all these conditions are met and the offer amount has been paid, you will have settled your tax debt. However, if you do not file your future tax returns on time and pay any tax liability you may incur in a timely fashion, the FTB can rescind the accepted OIC and begin collecting. Unlike the IRS, which requires 5 years of compliance, the FTB does not have a time frame for this, which means you will forever need to be vigilant in your tax filings.
Do I Need An Attorney?
Preparing and submitting an Offer in Compromise to the FTB does not require an attorney. Just like with any other tax issue the taxpayer is able to represent themselves. However, we often times have clients who attempt this without an attorney and ultimately end up finding themselves in over their heads.
Hiring a tax attorney will ensure that before an OIC is even attempted that it is the correct route to take, saving you a lot of time and effort that could be focused elsewhere. If it is determined that an OIC is the best solution to the tax issue, the tax attorney will be able to make sure every requirement is met prior to submitting the OIC so the FTB cannot easily reject the OIC. Ultimately, a tax attorney will make the process more manageable for you and give you the best chance to succeed.
If you are dealing with an FTB tax issue and are interested in seeing if you qualify for an OIC, please give us a call for a free phone consultation at 760-932-0042.
