Offers In Compromise
The Department of Taxation utilizes a wide
range of collection actions in order to settle delinquent
accounts. One of the lesser known and infrequently requested
actions is the exercise of the Department's authority to
compromise the outstanding delinquent tax liabilities of
taxpayers. The compromise program applies only to the taxes
administered by the Department of Taxation. It does not apply to
unemployment insurance, insurance premiums, and real property
taxes which are administered by other state or county agencies.
This publication is intended to provide general information
concerning the submission of compromise offers and to answer
some of the more frequently asked questions regarding the
compromise program.
1. What is a compromise offer?
A compromise offer is submitted by a taxpayer to the Department
in order to settle an outstanding delinquent tax liability (tax,
penalty, and interest). The amount offered is usually less than
the amount actually owed by the taxpayer and is based upon doubt
as to liability, doubt as to collectibility, or both.
2. What is “doubt as to liability”?
“Doubt as to liability” means that there is some uncertainty
about whether the amount that the Department says is owed is in
fact the correct amount.
For example, there may be “doubt as to
liability” when all or part of the balance owed is due to an
overlooked deduction or credit that the taxpayer can
substantiate but cannot now claim because the statute of
limitations has expired.
3. What is “doubt as to collectibility”?
“Doubt as to collectibility” means that the Department does not
think that the taxpayer will ever be able to pay the full amount
of the taxes, penalties and interest owed no matter how long the
Department waits.
For example, there may be “doubt as to
collectibility” when a taxpayer with an outstanding tax
liability has no assets, is in poor health (which is
substantiated with a physician's report), and has no future
earning potential.
4. How do taxpayers submit a compromise
offer?
Complete Form CM-1, Offer in Compromise, and submit it to the
Department. Attach to Form CM-1 a Statement of Financial
Condition and Other Information (Form CM-2 for an individual
taxpayer or Form CM-2B for a corporation, partnership or other
non-individual taxpayer).
Since the taxpayer should already be working
with a collector, the collector provides the appropriate forms
and also requests any additional documents that will be
required. The request may include copies of bank statements,
copies of deeds to real property, etc.
5. Can federal compromise offer forms be
used to submit an offer to the State?
The federal offer in compromise form, Form 656, cannot be
substituted for the State's Form CM-1. However, other documents
such as the current financial statements included in a
compromise offer submitted to the Internal Revenue Service may
be submitted to the State.
6. Does the Department continue its
collection activities after a compromise offer is submitted?
No. Collection activities (additional liens, levies, garnishee,
referral to outside collection agency, etc.) against the
taxpayer are suspended while the compromise offer is being
investigated and evaluated. Also, no collection action is taken
while a rejected compromise offer is being appealed. However,
if the Department finds that the compromise offer is merely a
tactic to delay collection actions or if the delay jeopardizes
the Department's ability to collect the outstanding tax
liabilities, action will be taken to protect the State's
interests.
7. Must a taxpayer continue to make the
monthly payments required by an installment agreement after
submitting an offer in compromise?
Yes. The monthly payments required by the installment agreement
must be made while the compromise offer is being considered.
8. How is the amount offered in the
compromise determined?
The amount offered in the compromise varies depending on the
reason for the compromise.
If the compromise is offered because there is
doubt as to liability, then the amount offered may be the amount
that the taxpayer believes is the correct tax liability owed.
If the compromise is offered because there is
doubt as to collectibility, then the amount offered is usually
the amount that the taxpayer believes is appropriate given the
taxpayer's current financial condition and future earning
potential.
9. Is any part of the amount offered in the
compromise required to be paid when Form CM-1, Offer in
Compromise, is submitted?
No. However, the Department would prefer payment in full as a
sign of good faith and commitment on the part of the taxpayer.
If the compromise offer is rejected, any payment made with the
compromise offer may be returned to the taxpayer (without
interest) or, if desired, credited to the taxpayer's delinquent
balance.
10. What happens after a compromise offer is
submitted to the Department?
The compromise offer will go to the collector assigned to the
account for an initial review.
First, the collector verifies that the taxpayer
has filed all required tax returns to ensure that the taxpayer's
total tax liability is known. Next, the collector will review
and evaluate all of the compromise offer forms and documents
submitted. Selected information will be verified and additional
documentation may be requested from the taxpayer to clarify or
substantiate any claims made.
Finally, the collector makes the initial
determination to either accept or reject the compromise offer as
filed. The collector also could recommend that the offer be
accepted with modifications. For example, the collector could
recommend acceptance if the amount offered was larger or if the
taxpayer agreed to sign collateral agreements pertaining to
future earnings or tax benefits. These modifications to the
compromise offer are open to discussion and limited negotiation.
A compromise offer that has been tentatively
accepted by the collector is summarized and reviewed first by
division supervisors and then by the Director of Taxation. If
the Director of Taxation approves the offer in compromise, the
offer is forwarded to the Governor for final review and approval
signature.
The taxpayer will receive written notification
whether the compromise offer is rejected or approved by the
Governor.
11. When is a collateral agreement required?
A collateral agreement pertaining to future earnings or tax
benefits may be required for various reasons, particularly if
the taxpayer has an ongoing business or future earning
potential. For the duration of the collateral agreement, the
taxpayer must file
current tax returns timely and pay in full or the compromise
offer will be voided.
12. Are the compromise offers and all
related information kept confidential?
No. Section 231-3(10), Hawaii Revised Statutes, requires that a
statement on each approved compromise be placed on file at the
Department of Taxation and be open to public inspection. The
statement must contain the: (1) name of the taxpayer
and the amount and type of tax assessed; (2) amount of penalties
and interest imposed; (3) total amount of the liability, actual
payments made, and payment dates; and (4) reasons for the
compromise.
13. Do the Department of Taxation and
Internal Revenue Service (IRS) have a joint offer in compromise
program?
No. A joint compromise program was attempted, but statutory
requirements and other significant differences have prevented
its implementation.
14. Do the Department of Taxation and IRS
have similar procedures for reviewing offers in compromise?
Generally yes, but there are significant differences in the way
compromise offers are processed and evaluated by each agency.
For example, the IRS has personnel specifically
assigned to the evaluation of compromise offers. The Department
of Taxation does not have specialized personnel for this
purpose; the same collector initially assigned to a taxpayer's
account also evaluates and reviews a compromise offer submitted
by that taxpayer.
Another major difference that affects whether
an offer is accepted or not is that the IRS must collect
delinquent taxes within a ten year statute of limitations
whereas the Department of Taxation has no such limitation placed
on its collection activities.
15. If a compromise offer has been accepted
by the IRS, will a similar compromise offer be automatically
approved by the State?
No. Acceptance of an offer in compromise by the IRS does not
automatically guarantee acceptance by the State and vice versa.
A compromise offer tendered to the Department of Taxation is
reviewed and evaluated on its own merits.
16. If an offer in compromise is accepted,
what happens to any liens that the Department of Taxation may
have placed on the taxpayer's assets?
The liens will be released once the compromise offer is paid in
full and the lien release fee is paid.
17. Can a taxpayer go on a payment plan for
the compromise offer amount?
Yes. The compromise offer amount can be paid in monthly
installments. However, all current tax returns must be timely
filed and paid during the installment agreement or the
compromise offer will be voided. Also, liens will not be
released until the entire
compromise offer is paid in full and the lien release fee is
paid.
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