The Michigan Offer in Compromise for back taxes

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The federal Offer in Compromise program is a powerful and often successful option for those who are unable to pay back taxes.

Effective Jan. 1, the Michigan Department of Treasury will also provide an Offer in Compromise program. Similar to the federal program, the Michigan version may allow individual or business taxpayers with tax debt to settle with the state for less than the total amount due.

If you or your company has back taxes, you may be able to reduce the liability based on one of the following criteria:

  • Based on the taxpayer’s financial condition, a doubt exists as to the collectability of the outstanding debt
  • Based on evidence provided by the taxpayer, there is a doubt as to the existence of the liability
  • A federal Offer in Compromise has already been approved by the IRS for the same tax year. Note that this option is only available for personal and business income taxes

Taxpayers are permitted to submit an offer if the following are true:

  • The taxpayer is current with tax filings
  • The taxpayer must have been assessed and the statute of limitations for appeals has expired
  • The taxpayer does not have an open bankruptcy proceeding

The process of applying for an offer is fairly mechanical but also quite cumbersome. For example, for offers for individual taxpayers based on doubt as to the collectability, the state looks at “household resources” and determines if the taxpayer has sufficient income to fund the proposed offer. The taxpayer is required to prepare and submit a collection information statement. This 11-page form summarizes most of the taxpayer’s financial activity, including the fair market value of all assets and liabilities, as well as actual income from all sources and actual living expenses. Supporting documentation, such as paychecks, bills, and statements, also need to be included. The submission of an Offer in Compromise requires a good-faith payment of the greater of $100 or 20 percent of the offer amount.

If the taxpayer’s offer is accepted, the state allows taxpayers to choose from a few options to make payment of the balance due. Taxpayers can make a lump sum payment, a periodic payment to be paid within five months, or structure an installment plan with payment to be made between 6 and 24 months. The terms proposed by the taxpayer should be carefully considered as these could impact the state’s decision to accept the offer.

The new program puts Michigan on par with other states that have previously implemented their version of the Offer in Compromise. It also gives Michigan taxpayers another option for settling and repaying back taxes. Prior to this, a taxpayer’s best option was to structure an installment agreement to pay 100 percent of the outstanding liability. With the Offer in Compromise, taxpayers now have the opportunity to settle a liability for less than the full amount.

If you have back taxes and qualify to submit an offer, contact your attorney or CPA immediately. Take advantage of this program. The state is permitting you to leave the past behind and to focus on the future. It may be the best call you make this year!

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Steven Struck, CPA, MST, CSEP is a principal at Baker Holtz in Grand Rapids and carries the special distinction of being the only Mets fan currently living in the area. When he’s not busy signing autographs, his responsibilities at Baker Holtz include generating and implementing tax-saving ideas, advising clients on mergers and acquisitions and tax planning for businesses and their owners. Outside of work, Steven serves on the finance committee at Legacy Christian School and is the treasurer at his home church, Brookside Christian Reformed. He holds a B.S. in accounting from Calvin College and a master of science in taxation from Grand Valley State University. Steven can be contacted at sstruck at bakerholtz dot com.