Maryland Offer in Compromise
Tax-Liability Resolution Program
~A legitimate alternative to
traditional collection tools~
By Jacqueliny Pyun
Over the years,
the Comptroller of Maryland has taken many steps
to insure that the taxpayers pay their tax dues,
mostly by implementing new collection tools. For
example, since January 2000 the Comptroller has
been participating in the Federal Tax Refund
Offset program, a cooperative program with the
Internal Revenue Service that allows the
Comptroller to intercept the federal income tax
refunds and apply them to satisfy delinquent
state income tax liabilities. The Comptroller
has started its own new program to catch
tax-evaders called “Caught in the Web”
initiative, an online list of delinquent
individuals and businesses. On their website,
the Comptroller lists not only the individuals
who owe delinquent personal income but the
owners of businesses who owe some of the largest
tax liabilities for corporate income, employer
withholding and sales and use tax for all the
world to see. Also, under the Corporate Charter
Project the Comptroller sends out numerous
warning letters every day to delinquent
corporations that are not in bankruptcy and do
not have payment plans in order to collect
business tax liabilities. Upon receiving such a
notice, the corporations have 15 days to contact
the Comptroller to resolve the issue or possibly
face forfeiture of the corporate charter.
Furthermore, the Comptroller is now more
empowered to collect the tax dues since the
requirement that the Comptroller get a court
order for a direct wage garnishment and a bank
attachment no longer exists.
The basic
principle behind all of these traditional
enforced collection procedures is that taxpayers
should be threatened, one way or another, in
order for the government to effectively collect
the tax dues. However, this principle leaves out
a resolution for taxpayers who are in fact
unable to pay their outstanding tax dues in full
at any time in the foreseeable future or in
their lifetime. The virtual elimination or
significant reduction in income that results
from the traditional enforced collection tools
such as garnishment of wages, attaching assets
and filing a lien can redirect the course of a
taxpayer’s life and have far-reaching
consequences for the entire family. The obvious
outcomes would be a serious economic hardship to
the taxpayers and a significant reduction of
revenue to the government. How then can the
Comptroller achieve a tax resolution that is in
the best interest of both the taxpayers and the
government?
One answer to this
question is that a well-functioning Maryland
Offer in Compromise program can be a legitimate
alternative to these traditional enforced
collection tools. The Offer in Compromise is an
agreement between the Comptroller and a taxpayer
who is unable to pay the tax dues in full, which
settles the taxpayer’s liability for some amount
that is less than the full amount due. In order
to qualify for the program, a taxpayer must stay
current with respect to the filing and payment
requirements and must not be involved in an open
bankruptcy. Under the program, the Comptroller
looks at the taxpayer’s available financial
resources, considers those resources in light of
the taxpayer’s circumstances and arrives at an
equitable resolution of the liability. The
program is especially appealing to taxpayers
whose taxes are not dischargeable under the
bankruptcy code. When an Offer is finally
accepted and the taxpayers pay the compromised
amount, it is required that the taxpayers remain
current with respect to future filings and
payments for at least three years.
It is generally
known that the Comptroller imposes much more
restrictive policy and rigid guidelines for the
Offer in Compromise program than the IRS does
for the federal program. It fact, only less than
10 percent of the Offers submitted each year are
accepted by the Comptroller. So what rules and
guidelines of the state program make it more
difficult for taxpayers to get the benefits from
it than the federal program? First, unlike the
federal program, the taxpayer is eligible for
the state program only if it has been at least
two years from the time the return was actually
received by the Comptroller. This two-year
requirement is one of the most difficult hurdles
for the Maryland taxpayers who have not filed
the returns on time and yet want to resolve
their tax issues under the program. Second,
while the taxpayer is given a review by Appeals
if the IRS Offer specialist recommends the Offer
for a rejection, all decisions made by the case
review board at the Comptroller are final. There
is no formal Appeals process under the state
program for the taxpayer to engage in further
negotiations with the Comptroller and to stop
the collection process further. Most
importantly, under the federal program, the IRS
is required to be flexible to make it easier for
taxpayers to enter in Offer in Compromise
agreements and to adopt a liberal acceptance
policy to provide an incentive for taxpayers to
continue to file tax returns and continue to pay
their taxes. However, the Comptroller has not
adopted the liberal acceptance policy rule. In
fact, the liberal acceptance policy has not been
reflected in the stated purpose of the state
program or any public policy statements. This is
a huge drawback to submitting an Offer because
if it is rejected the Comptroller may accelerate
collection efforts with the financial disclosure
the taxpayers initially made to the Comptroller.
The Comptroller
should adopt a stronger and more effective tax
enforcement policy by implementing a functional
Offer in Compromise program that gives more
taxpayers a fresh start. With the adoption of
more flexible procedures and the liberal
acceptance policy, both the Maryland taxpayers
and the Comptroller will be better off. Given
the adoption of the liberal acceptance policy by
the Comptroller, it is highly likely that more
and more Offers will be brought by the taxpayers
seeking a resolution to their tax matters and a
fresh start toward future voluntary compliance
with all tax filing and payment requirements.
More and more taxpayers will have an incentive
to continue to file tax returns and get the
benefits from the program. Also, it will make it
easier for the Comptroller to achieve its goal
to collect what is potentially collectible at
the earliest possible time and at the least cost
to the government.
In sum, a
well-functioning Offer in Compromise program
will both enhance the taxpayer’s future
compliance and secure collection of revenue that
may not be collected through any other means.
The Comptroller needs to make more serious
efforts to adopt a tax policy that serves two
purposes: meeting the government’s need for
revenue and valuing the taxpayer’s well-being.
And one way to do this is by strengthening the
Offer in Compromise program, not by implementing
more traditional enforced collection tools.
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