Overview of AR State Tax Options for Back Taxes
The Arkansas Department of Finance and Administration (DFA) is the primary agency responsible administers tax laws and takes care of tax collections. Its Revenue Policy and Legal Office is responsible for the Revenue Division as well as supervising the Hearings and Appeals Office and the Resolution and Tax Information Office. The DFA also provides key services such as driver’s licenses and ID cards, vehicle registration, child support services, sales permits, motor fuel permits, and other fiscal and administrative duties. Arkansas has personal income tax, a corporation franchise tax, a graduated corporate income tax, sales taxes, and property taxes.
Arkansas does provide a tax relief framework or options for taxpayers they can pursue if they cannot pay off tax liabilities in full. Below we will review some of these tax relief options for taxpayers owing personal income taxes..
Navigating these complex layers of state tax administration can be extremely confusing, but to help you out, this guide explains tax resolution options, the appeals process so you know what to expect if you have unpaid taxes in Arkansas.
Tax Resolution Options
The Arkansas DFA understands that people often need extra time to pay their taxes or may not be able to pay their tax liabilities in full. The state offers the following arrangements.
Tax Payment Plan Agreement in Arkansas
The DFA may allow you to set up a payment plan, but typically, the state issues a lien (Certificate of Indebtedness) while you're making payments. However, if you set up electronic payments to pay off the balance in 12 months or less, the state will generally not issue a tax lien on your account. Each request for a payment plan the DFA considers on a case by case basis. A payment plan agreement does allow the taxpayer to pay the tax liability off over time but the taxpayer must pay penalties and interest as well. You can read more about this option here.
Offer in Compromise on Arkansas Tax Bills
An offer in compromise allows you to reduce your tax liability for less than you owe. To qualify, you must be financially distressed, and you must submit a detailed application explaining your financial situation. To apply, use Form 2000 - 4 (Arkansas Department of Finance and Administration Settlement or Compromise of Tax Liability). In addition, provide a completed IRS form 433A or 433F and/or 433B. 433A or 433F for an individual and/or sole proprietor and 433B for a business. Both forms are required if the offer is for a partnership, single member LLC, or closely held corporation. You can read more about the Arkansas state offer in compromise program here.
Innocent Spouse Relief
The Arkansas DFA does not offer a formal Innocent Spouse Relief program. However, if your federal tax liability is adjusted through the Internal Revenue Service's (IRS) Innocent Spouse Relief program, you may be able to request an adjustment to your state tax liability as well.
The DFA's application for an offer in compromise has an option where you can request to reduce your back taxes due to a controversy over the amount of tax due, and although results are never guaranteed, you can use this form to report a controversy related to your spouse or ex-spouse's actions.
You cannot apply for hardship or currently uncollectible status with the Arkansas DFA as you can with the IRS. However, you may qualify for a reduction in your tax bill through an offer in compromise if you are insolvent. Insolvency means that your expenses exceed your income and/or your debts exceed your assets.
The DFA generally does not waive penalties or interest, but you can try to get penalties waived by filing an Individual Income Tax Penalty and Interest Waiver Request form. Alternatively, you can request penalty and interest abatement using the state's offer-in-compromise application.
The agency will remove any penalties that are due to incorrect advice provided to the taxpayer by the DFA in writing.
Arkansas taxpayers have the right to request a review of any proposed tax assessment within 30 days of the assessment. The review can consist of an in-person hearing or a review of written documents.
If you don't agree with the decision from the administrative review, you have 20 days to appeal to the Commissioner. You have the right to record interviews with the Commissioner at your expense as long as you inform them that you are recording, but they also have the right to record you.
If desired, you can appeal the Commissioner's decision to the Chancery Court, but to do so, you must pay the tax, interest, and penalties under protest or file a bond for double the amount owed within 30 days of the Commissioner's final assessment. Then, you have one year from the date of protest or 30 days after obtaining the bond to file a lawsuit.
Taxpayers with jeopardy assessments only have five days to request an appeal, and the state can issue jeopardy assessments if it believes any of the following statements are true:
- The taxpayer's tax bill exceeds any bonds on file.
- The taxpayer intends to leave the state or remove their property from the state.
- The taxpayer plans to hide themselves or their property from the state.
- The taxpayer plans to shut down their business without making arrangements to pay their tax bill.
- The taxpayer is taking other actions that may prevent the state from computing, assessing, or collecting tax.
Arkansas Amnesty and Voluntary Disclosure Programs
Arkansas does not have an active amnesty program, but it has offered amnesty programs in the past. However, the state does have a Voluntary Disclosure Program. To take advantage of this program, you must not have been contacted by the state about the tax, and in exchange for you coming forward voluntarily, the state will waive all interest and penalties if you pay the total tax bill as soon as the amount has been determined.
Additionally, the state will typically limit your prior period exposure to the lesser of three years or the date a nexus was established for the tax. However, the state reviews voluntary disclosures on a case-by-case basis, and it does not limit prior period exposure in cases where you have collected taxes from customers but not remitted them to the state.
Consequences of Unpaid Taxes in Arkansas
If you or your business has unpaid taxes in Arkansas, you may face a variety of collection actions. Here are the strategies the DFA uses to collect unpaid taxes.
The Arkansas DFA may file a state tax lien, also called a Certificate of Indebtedness, in your county of residence if you have back taxes, and you have not responded to any of the state's notices. After the lien has been filed, you will not be able to sell the property, and interest will continue to accrue on the unpaid taxes until the bill has been paid in full.
Once you pay your tax bill in full, the state will release the tax lien approximately 30 days after processing the payment.
The Arkansas DFA does not typically use tax levies such as bank levies. The most common approach to collect unpaid state taxes for the Arkansas DFA will be, wage garnishments, andor asset seizures as part of its collection efforts used for to collect unpaid state taxes. However, but the state has the right to use levies and additional measures.
Interest and Penalties
Arkansas assesses interest of 10% per year on unpaid taxes, and it starts to accrue the first day your taxes are late. For example, if you owe $1,000 in taxes, your annual interest will be $100.
The state also assesses a failure-to-file penalty of 5% of the tax due per month on unfiled returns, up to a total of 35%, and this penalty is also assessed the first day your tax return is late. For instance, if you owe $2,000, you will incur a failure-to-file penalty of $100 every month until you file your return, but the penalty will never exceed $700 or 35% of the balance.
If you file your tax return but don't pay the taxes, you will face a 1% failure-to-pay penalty every month. The total penalties for both failure-to-file and failure-to-pay cannot exceed 35% of your total balance, but interest will continue to accrue until your balance is paid in full.
You may also face an additional $500 penalty if you file a return that contains substantially incorrect information or if you engage in conduct that attempts to avoid a proposed tax assessment or delay the administration of state tax laws.
Tax Collection Notices in Arkansas
The state sends three notices: Notice of Tax Adjustment, Notice of Proposed Assessment, and Final Assessment and Demand for Payment. Typically, you receive the Final Assessment and Demand for Payment if you have not paid your balance within 70 days of receiving the other letters.
If you do not take action within 15 days, your account will be referred for additional collection actions, and at that point, the state may file a tax lien or pursue other collection activities against you.
Statute of Limitations on Arkansas Back Taxes
The state of Arkansas has a 10-year statute of limitations on back taxes. This means that the state can pursue collection activities including property liens for up to 10 years after the taxes have been assessed. If the taxpayer is filing bankruptcy, the statute of limitations is tolled (paused) until 180 days after the bankruptcy has been discharged.
Get Help With Arkansas State Tax Issues
If you have unpaid taxes in Arkansas, you should work with a tax professional who understands the laws in this state and how to deal with the Arkansas DFA. At TaxCure, we have curated a a list of experienced tax resolution specialists from around the country — find a tax pro to help you today.