NYS – "Undue Hardship" Is Now Basis For Offer In Compromise

Previously, Offers in Compromise (OIC) were only accepted from individuals and businesses that were bankrupt or insolvent. Effective August 17, 2011, the New York State (NYS) Department of Taxation and Finance began accepting OIC applications from individuals based on a more lenient test of “undue economic hardship.”

Individuals unable to afford basic, necessary living expenses (including health & welfare expenses, and costs incurred to generate income) now qualify for this program. These individuals must be up-to-date in filing all their NYS tax returns (including returns for every entity they are associated with). If otherwise personally liable, individuals may also apply for relief from business tax debts. However, businesses still must be insolvent or bankrupt to secure OIC relief.

The OIC program allows “qualifying, financially distressed taxpayers the opportunity to put overwhelming liabilities behind them by paying a reasonable amount in compromise” (NYS Department of Taxation and Finance Publication 220). Individuals and NYS will now approach the OIC process on a more business-like arm’s length basis. An offer must be such that NYS is convinced it will receive more than it would otherwise collect from the individual taxpayer, under present circumstances.

Individuals attempting to sustain a luxurious lifestyle are ineligible for the program. College expenses, charitable contributions, and credit card payments will not be considered as creating an “undue economic hardship.” Furthermore, NYS will not consider applications to compromise withholding or sales tax.

To apply under this more liberalized program, an individual taxpayer must submit:

• Credit report issued within the past month
• Bank statements issued during the past twelve months
• Three most recently filed Federal Income Tax Returns
• Statement describing the “undue economic hardship” faced by the taxpayer
• Documentation supporting the “undue economic hardship” statement
• Statement of Financial Condition and Other Information (Form DTF-5)
• Offer in Compromise For Fixed and Final Liability (Form DTF-4.1). If the NYS tax liability is fixed and final, and exceeds $100,000 (excluding interest and penalties), a NYS Supreme Court justice must approve the compromise.
• Offer in Compromise For Liabilities Not Fixed and Final and Subject to Administrative Review (Form DTF-4). When the tax liability is not fixed and final (initially subject to administrative review), and exceeds $50,000 (including interest and penalties), NYS Tax Counsel must be involved with the compromise.

NYS will use its discretion when determining whether to approve an application. The following elements will also be considered when making this determination:

• Age
• Job history and current job status
• Health condition(s)
• Dependent obligation(s)
• Extraordinary circumstances (ex. natural disasters)

The expanded OIC program now provides a less onerous pathway for distressed taxpayers to satisfy their NYS tax obligations. Ultimately, NYS seeks an agreement that is beneficial to the State, while not setting an unfavorable precedent for dealing with taxpayers in the future.

Please contact your Marcum tax advisor if you have any questions, or if you think you may benefit from this liberalized OIC program.