N.Y. Comp. Codes R. & Regs. tit. 20 § 5005.1

Current through Register Vol. 46, No. 45, November 2, 2024

Section 5005.1 - Offers in compromise of fixed and final tax liabilities

Tax Law, § 171(15th)

(a)General.

Section 171 subdivision fifteenth of the Tax Law allows for offers in compromise for any taxes or other impositions or any warrant or judgment of taxes or other impositions administered by the Commissioner of Taxation and Finance. The provisions of section 171, subdivision fifteenth and this Part apply to any tax or other imposition administered by the commissioner. Under section 171 subdivision fifteenth, an offer in compromise may only be made where the liability has been finally fixed and where the taxpayer has exhausted the taxpayer's protest rights.

(b)Grounds for compromise.

(1) A compromise under this section may be made where the taxpayer has been discharged in bankruptcy or is shown by proof to be insolvent, or where an individual taxpayer shows by proof that collection in full would cause the taxpayer undue economic hardship. The amount acceptable in compromise must reasonably reflect collection potential or be otherwise justified by proof offered by the taxpayer. In the case of trust tax liabilities (e.g., withholding or sales, but not use, taxes), an amount less than the tax, exclusive of penalties and interest, would not normally be acceptable. If, however, upon consideration of all factors, it is apparent that accepting an offer would be in the best interests of all parties, an offer may be accepted for an amount less than the tax as long as the amount offered reasonably reflects collection potential. In addition, with respect to trust tax liabilities, a responsible person of the taxpayer may make an offer to compromise such person's liability. A separate appraisal will be made of the ability of such responsible person to pay in determining if an individual offer should be accepted. Acceptance of an offer from one responsible person with respect to trust tax liabilities will not relieve any remaining responsible persons - nor the entity itself - from any outstanding balance due on the total liability.

(2) For purposes of paragraph (1) of this subdivision, a taxpayer is insolvent where the taxpayer's liabilities exceed the fair market value of the taxpayer's assets. In determining the taxpayer's liabilities, all liabilities will be included, including the amount of the taxpayer's tax debt.

(3) Undue economic hardship.

(i) Undue economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the department and will vary according to the unique circumstances of the individual taxpayer. The inability to maintain an affluent or luxurious lifestyle does not constitute undue economic hardship. Because economic hardship is the inability to meet reasonable basic living expenses, it applies only to individuals, including sole proprietorship entities. Undue economic hardship does not apply to corporations or other non-individual entities. The taxpayer's financial information and special circumstances will be examined.

(ii) Financial information. The taxpayer's income and basic living expenses must be considered to determine if the taxpayer qualifies for an offer in compromise due to undue economic hardship.

(a) Basic living expenses are those expenses that provide for the health, welfare, production of income of the taxpayer and the taxpayer's family. The department will look to national and local standard expense amounts used by the Internal Revenue Service as a guideline to provide accuracy and consistency in determining a taxpayer's basic living expense.

(b) Expenses that are not generally allowed as necessary living expenses unless the taxpayer can show that the expenses are necessary for the health and welfare of the taxpayer or the taxpayer's family or for the production of income include but are not limited to:

(1) tuition for private schools;

(2) public or private college expenses;

(3) charitable contributions;

(4) voluntary retirement contributions;

(5) payments on unsecured debt, such as credit cards; or

(6) other similar expenses.

(iii) Other factors. In addition to the basic living expenses, other factors are considered that can impact a taxpayer's financial condition, including:

(a) taxpayer's age and employment status and history, and the taxpayer's ability to earn;

(b) number, age and health of dependents;

(c) cost of living where the taxpayer resides;

(d) extraordinary circumstances such as special educational expenses, a medical catastrophe or a natural disaster;

(e) any other fact that the taxpayer claims bears on economic hardship.

(iv) Factors that support an undue economic hardship determination may include:

(a) The taxpayer is incapable of earning a living because of a long term illness, medical condition or disability, and it is reasonably foreseeable that the taxpayer's financial resources will be exhausted providing for care and support during the course of the condition.

(b) The taxpayer has a set monthly income and no other means of support and the income is exhausted providing for the care of dependents.

(c) The taxpayer has assets, but is unable to borrow against equity in assets, and liquidation to pay the outstanding liability would render the taxpayer unable to meet basic living expenses.

(4)

(i) Reasonable collection potential is based on the total realizable value of the taxpayer's assets and the amount that could reasonably be expected to be collected from the taxpayer's anticipated future income, after giving effect to all priorities granted to New York State and applicable statutes of limitations on collections.

(a) The realizable value of the taxpayer's assets is the amount that could reasonably be expected from the sale of the assets within 90 days or less (quick sale value) minus any amount owed to a secured creditor with priority over the department's interest. Assets such as real property, personal and business assets, and vehicles will generally be valued at 80 percent of fair market value to determine the quick sale value.

(b) Generally, anticipated future income is calculated over the remainder of the collection period, but no less than a period of 5 years and no more than a period of 10 years, unless there are circumstances indicating that a significant recovery can reasonably be expected if a longer period is used. Other circumstances, including the age of taxpayer, the age of the liability, and the best interests of the State are also considered. In addition, collateral agreements, such as agreements pertaining to payments from future income, may also be required based on the facts in a particular case.

(ii) When evaluating an offer in compromise, the department will consider the legal collection proceedings available to it. Under the Tax Law, where a taxpayer has failed to pay the taxpayer's outstanding liabilities, the department may file a tax warrant against the taxpayer with the Department of State and in the appropriate county clerk's office. A filed tax warrant is entered in the judgment docket and secures the State of New York as a lienholder of the taxpayer's personal and real property, and empowers the department to use the collection procedures set forth in article 52 of the Civil Practice Law and Rules relating to enforcement of money judgments. These collection procedures may result in, for example, the seizure and sale of the taxpayer's real and personal property, including but not limited to, seizure of money from the taxpayer's bank accounts and seizure of any motor vehicles which the taxpayer may own, or a levy against money that a third party owes the taxpayer, such as a loan or rent owed to the taxpayer. In addition, the department may issue an income execution against the wages of the taxpayer. Under an income execution, the department generally may take up to 10 percent of the taxpayer's gross wages to satisfy the liability.

(5) An offer in compromise will not be accepted for any reason where acceptance of such an offer would undermine voluntary compliance with the taxes or other impositions administered by the commissioner or would not be in the best interest of the State. Factors indicating that an offer would undermine voluntary compliance or would not be in the best interests of the State may include a taxpayer's overall history of noncompliance, a taxpayer's deliberate actions to evade payment, and a taxpayer's encouragement of others to refuse to comply with the tax laws.

(c)Submission of an offer.

(1) An offer in compromise must be filed on forms prescribed by the Commissioner of Taxation and Finance for such purpose at the address prescribed in the forms. The forms are available from the department or on the department's website. The compromise offer must be in addition to the total amounts previously paid, or collected, against the liability being compromised, if any. If the final payment on an accepted offer is contingent upon the immediate or simultaneous release of a tax lien in whole or in part, such payment must be remitted by means, acceptable to the Department of Taxation and Finance, that assures unconditional and final payment, such as certified check, bank check or postal money order.

(2) As a condition to accepting an offer in compromise, a taxpayer must submit a statement of financial condition and other information on the forms prescribed by the department for such purpose. Although current financial statements, which have been examined and upon which an opinion has been expressed by an independent licensed public accountant or an independent certified public accountant pursuant to an audit conducted by such accountant, will generally not be required, in some circumstances a taxpayer may be required to submit such statements. The statement of financial condition, and any other information submitted to support an offer in compromise, becomes the property of the department and cannot be returned to the taxpayer. The department may also require, as a condition of approval of an offer:

(i) a signed agreement wherein the taxpayer agrees to pay over a fixed percentage of the taxpayer's future earnings or other income for a specific period of time;

(ii) where an offer is to be satisfied through periodic payments as provided in paragraph (d)(2) of this section, collateral or other security pledged over the life of the installment payments; or

(iii) anything else deemed necessary given the facts of the case and the taxpayer's circumstances.

(3) No offer in compromise shall be accepted unless the taxpayer:

(i) agrees that the commissioner shall keep all payments, funds collected and other credits made to the liability for the periods covered by the offer, and all amounts to which the taxpayer may be entitled under the Tax Law, due through overpayments of any tax or other liability, including, interest and penalties, for periods ending before or within or as of the end of the calendar year in which the offer is accepted (and which are not in excess of the difference between the liability sought to be compromised and the amount offered);

(ii) agrees to immediately return to the department any refunds of overpayments referred to in subparagraph (i) of this paragraph received by the taxpayer after the taxpayer's offer was filed;

(iii) agrees to not contest in court or otherwise, the amount of the liability sought to be compromised;

(iv) waives the running of the statutory period of limitations on collection of the tax liability involved for: the period during which the offer is pending; the period during which any installment remains unpaid; and for one year thereafter;

(v) agrees to comply with all provisions of the New York State Tax Law relating to filing of returns and paying required taxes for all returns required to be filed in the five-year period beginning with the date of the acceptance of the offer; and

(vi) is in compliance with all New York State tax filing and payment requirements for periods not covered in the offer.

In addition, the department may require the taxpayer to agree to any other conditions which may be necessary to effectuate a just offer in compromise.

(4) The taxpayer must make a good faith offer. Generally, taking into account the reason for denial, once an offer has been denied, another offer may be reconsidered only upon a showing of a material change in circumstances or if there is a meaningful increase in the offer. Additionally, the department may reconsider an offer that was previously denied due to a misinterpretation or a misunderstanding on the part of the department of the information contained in such offer. The department will work, to the extent possible, with the taxpayer to try to effectuate a compromise likely to be accepted by the commissioner.

(5) The filing of an offer in compromise shall not automatically operate to stay the collection of any tax liability. However, enforcement of collection may be deferred if the interests of the department shall not be jeopardized thereby.

(d)Review of an offer.

(1)

(i) The commissioner, or such person as may be designated by the commissioner, will accept or reject the offer in compromise and the department will promptly notify the taxpayer in writing of such action.

(ii) Where the tax amount (exclusive of penalty and interest) to be compromised is more than $100,000, the offer accepted by the commissioner, or such person as may be designated by the commissioner, must be referred to a justice of the Supreme Court for approval prior to notification of acceptance by the commissioner, or such person as may be designated by the commissioner. Such an offer is not effective until approved by a justice of the Supreme Court.

(2) Generally, within 60 days of notification of final approval of an offer, full payment of the compromised amounts must be made to the department. However, where a taxpayer can demonstrate the need for periodic payments over a period of time, the department has the authority to grant a reasonable period of time for repayment of an offer not to exceed two years. Where special circumstances are demonstrated, the two-year period may be extended at the discretion of the commissioner or such person as may be designated by the commissioner. In the case of periodic payments, interest will be due at the annual rate established under the Tax Law on any deferred amounts of the offer from the date of notice of acceptance until the offer is paid in full.

(3) No liability will be considered compromised nor any warrant satisfied until all obligations of the taxpayer under the compromise agreement are performed.

(e)Withdrawal or rejection.

(1) An offer in compromise may be withdrawn by the taxpayer making the offer at any time prior to its acceptance. Further, the department may hold an offer made by the taxpayer in abeyance if the application and any other required information/documentation are not complete. In such a case, the taxpayer will ordinarily have 30 days after notification from the department in which to submit the information required to complete the application and/or any other forms, unless the taxpayer can demonstrate to the satisfaction of the department that more time will be needed. If the required information is not timely submitted to the department, the offer in compromise will be deemed to be formally withdrawn.

(2)

(i) The department may reject an offer in compromise. The following exemplify reasons for rejecting an offer in compromise:

(a) failure to meet the statutory requirements (e.g., the taxpayer has not been discharged in bankruptcy is not insolvent, or does not show by proof that collection in full would cause the individual taxpayer undue economic hardship and/or the amount acceptable in compromise does not reasonably reflect collection potential or is not otherwise justified by proof offered by the taxpayer;

(b) making a frivolous offer or filing an offer for the purpose of delaying the collection of tax liabilities;

(c) failure to verify financial information, where required;

(d) failure to make full financial disclosure (e.g., not fully disclosing all assets or income);

(e) where there is evidence of conveyance of assets for less than fair market value after the taxpayer has knowledge of the liability;

(f) for public policy considerations;

(g) where the taxpayer has not demonstrated a good faith effort to repay/resolve the tax debt (i.e., where the taxpayer has displayed a wanton disregard for the tax debt over an extended period of time and disposed of significant assets and other holdings); or

(h) where the tax liability sought to be compromised directly relates to any crime for which the taxpayer has been convicted.

(ii) The causes for rejection of an offer in compromise set forth in subparagraph (i) of this paragraph are not all-inclusive nor should any one cause be interpreted as restricting or otherwise limiting the department's discretion with respect to other causes.

(3) Receiving acceptance of an offer in compromise is a privilege, not a right, available to financially distressed taxpayers in order to put overwhelming liabilities behind them. In the event an offer is rejected, the taxpayer making the offer shall be promptly notified in writing.

(f)Defaults.

Where a taxpayer does not comply with the conditions of the taxpayer's offer in compromise (including any requirements with respect to collateral agreements) as accepted by the department, or where there is evidence of a substantial misrepresentation of a material fact subsequent to the acceptance of the offer by the department, the department may reimpose the full tax liability (including all applicable interest and penalties), apply all amounts previously deposited under the offer against the amount of the liability sought to be compromised, and proceed to collect the balance of the original liability.

N.Y. Comp. Codes R. & Regs. Tit. 20 § 5005.1