(As seen in The CPA Journal)
State Programs for Delinquent Taxpayers
Options for Those without the Means to Pay
There are many reasons why taxpayers can owe back state taxes (i.e., sales tax, payroll tax, income tax), penalties, and interest. These reasons may include making bad business decisions, having bad luck, or getting caught doing something inappropriate. If the taxpayer’s mistakes were not a criminal matter, many states have programs that enable taxpayers to “wipe the slate clean,” regardless of the reason back taxes are owed. The specifics of these programs vary based on the state, the type of tax, and the taxpayer either voluntarily coming forward or being caught by the state. The four most common programs states offer are 1) payment plans, 2) voluntary disclosure agreements, 3) amnesty, and 4) offers in compromise.
THE PAYMENT PLAN
There are several important factors taxpayers should consider before agreeing to a payment plan: First, interest continues to accrue on the outstanding balance until the liability is completely relinquished. Second, depending on the state and the length of the plan, the state may issue a tax lien or warrant on the taxpayer, which could affect the taxpayer's ability to borrow money and therefore stay in business. Finally, depending on the length of the plan (typically ranging from 12 to 18 months), states can require taxpayers to provide detailed financial information before a plan is approved—the longer the plan requested, the more financial data the state will likely require. In the authors’ experience, the financial information requirement can become a contentious issue. In the case of a business requesting a plan, not only does the state want to see the company’s financial records; it also wants to see its owners’ records.
VOLUNTARY DISCLOSURE AGREEMENT
A voluntary disclosure agreement (VDA) is an agreement used in situations where a taxpayer proactively discloses prior years’ tax liabilities previously not known by the state. In return for voluntarily coming forward, states will typically limit the number of back years on which they will assess tax (typically three to six years). In addition, depending on the state, all penalties and some amount of interest may also be abated.
VDAs are generally viewed as a win-win by both states and taxpayers. States generate revenue from the VDA and, in most cases, have a new taxpayer on the tax roll. Taxpayers are typically happy to put an unpleasant situation behind them.
Most states do not permit a VDA in situations where the taxpayer has already been identified by the state for audit. Therefore, it is critical that once the decision is made to move forward, taxpayers begin the process immediately. Once the taxpayer receives an audit notice, a VDA may no longer be available.
From time to time, states offer amnesty programs to taxpayers that owe back taxes. While some of the terms of the amnesty are similar to a VDA, amnesty programs tend to be more favorable to taxpayers. For example, from September 1, 2015, through October 30, 2015, Maryland is offering amnesty program for personal income, fiduciary, pass through entity nonresident income, corporate income, employer with holding, sales and use, and admissions and amusements taxes. Taxpayers who failed to file a required return or pay a tax imposed on or before December 31, 2014, can file an application with the Maryland comptroller requesting a waiver of all civil penalties (except for previously assessed fraud penalties) and one half of the interest due. During the amnesty period, a taxpayer cannot be charged with a criminal tax offense arising out of any return filed and tax paid, provided the taxpayer does not have any pending criminal charges in the state courts and is not currently under investigation by the Office of the Attorney General, the Office of the State Prosecutor, the Office of the State’s Attorney, or any office with constitutional authority.
OFFER IN COMPROMISE
An offer in compromise (OIC) allows qualified taxpayers owing state taxes to negotiate a settled amount that is less than the total amount currently due. Typically, states are not obligated to offer or accept a taxpayer’s OIC. Most states require taxpayers to meet at least one of the following conditions in order to be considered for an OC settlement:
- The taxpayer can demonstrate that the past tax liability may not be correct.
- The taxpayer can show that the liability is likely uncollectable in full under any circumstances.
- The taxpayer does not contest liability or collectability but can demonstrate extenuating circumstances that the collection of the debt would “create an economic hardship or would be unfair and inequitable.”
Once the state determines that a taxpayer meets one of the above requirements, the taxpayer must provide full financial disclosure of all known assets and liabilities. Based upon this author’s experience, this is not an easy process to go through. If the state determines that the taxpayer had undisclosed assets, the OIC would become null and void.
NO FREE LUNCH
States look to maximize revenue from audits, not forgive liabilities. All of the programs described in this article have potential negative implications for taxpayers—significant financial disclosures, penalties and interest, and detailed audits—so it is very important that each program be carefully considered based on taxpayers’ specific circumstances. Taxpayers should consult with their CPA and attorney before finalizing which, if any, programs make sense because there are many exceptions to the general rules discussed above depending on the state, or states, involved and the type of taxes owed.
David Seiden, CPA, is a partner based in Citrin Cooperman’s New York City office, where he leads the firm’s state and local tax practice.