A Review of the Arkansas Offer in Compromise for Taxes
The Arkansas Department of Finance and Administration (DFA) may be willing to settle back taxes for less than you owe if you are financially distressed and meet strict application criteria.
To apply for a reduction in your tax bill, you need to complete Form 2000-4 (Arkansas Department of Finance and Administration Settlement or Compromise of Tax Liability) and submit the requested supporting documents. Here is an overview of the process.
Qualifications for an Offer in Compromise
To qualify for an offer in compromise in Arkansas, you must have an established tax liability with no further administrative or judicial review available, and you must prove that you are financially insolvent. The DFA defines insolvency as when an individual's or business's expenses exceed their income and/or their liabilities exceed their assets.
You also must be current on all tax filing requirements. If you aren't required to file a tax return, you can note that on your offer-in-compromise application.
How to Apply for an Offer in Compromise
To apply for an offer in compromise, you need to fill out Form 2000-4, provide the requested supporting documents, and make an offer to the DFA. You can send a payment with your application, but if the state doesn't approve your offer, the DFA will still cash the check.
Alternatively, you can make an offer without sending a payment, and if the state accepts the offer, you must pay it in full within 30 days.
Information Required on the Application
You need to include the following details when you apply for an offer-in-compromise:
- Individual name and contact details or business name and contact details.
- Social Security Number of the individual taxpayer or business owners.
- Sales tax permit number if applicable.
- Federal Employer Identification Number (EIN) or other permit numbers, if applicable.
- Type of tax.
- Tax period.
- List of all prior bankruptcies including date filed, docket number, and date of discharge or dismissal.
- Written explanation of why you need a settlement and can't make monthly payments.
- The amount of your offer.
- The source of the offered funds -- for example, if you cashed out a retirement account, received a bonus at work, or borrowed money from a family member.
- Written explanation of why the tax wasn't paid on time and why you need a settlement.
To ensure you make a compelling case for your situation, you may want to work with a tax professional who has experience dealing with offers in compromise in Arkansas. You must include a signed POA form if you have an attorney, accountant, or other tax professional complete your application.
When you apply for an offer in compromise in Arkansas, individuals and sole proprietors need to include IRS Form 433A (Collection Information Statement for Wage-Earners and Self-Employed Individuals) or 433F (Collection Information Statement). Businesses should include Form 433B (Collection Information Statement for Businesses). Partnerships, single-member LLCs, and closely held corporations should include the forms for both individuals and businesses.
You also must include the following supporting documents:
- Last two years federal and state income tax returns.
- Income and financial statements from the last two years if you are not required to file a tax return.
- Copy of last three paychecks stubs.
- Proof of other income such as pensions, Social Security, alimony, or rental income.
- Copy of bank statements for the last six months if the tax due is $25,000 or under.
- Copy of bank statements for the last 12 months if the tax due is over $25,000.
- Recent credit report.
- Affidavit of property transfers made in the last two years.
- Copy of most recent real and personal property tax assessments.
- Order of discharge from bankruptcy.
- Power of attorney if applicable.
If you have applied for an offer in compromise with the IRS, you must also include a copy of your application or the acceptance letter from the IRS.
Required Financial Information
The Arkansas DFA requires very detailed financial information from people who apply for an offer in compromise because the state wants to ensure that the offer reflects the most money it would likely be able to collect from the taxpayer.
As noted above, you can use the IRS's Collection Information Statement to provide full financial disclosure to the Arkansas DFA, and this form requires the following details:
- Bank accounts
- Virtual currency
- Real estate
- Other assets
- Credit cards
- Accounts receivable (for businesses)
- Employment information
- Non-wage household income
- Monthly living expenses
The state will assess your offer based on the information you provide on this form as well as the other details noted on your application. However, it's important to keep in mind that both the IRS and the Arkansas DFA have very strict guidelines on the type of expenses they allow.
For instance, if you claim that you cannot pay your tax bill because you are insolvent but the IRS or the DFA thinks your monthly expenses are too extravagant, your request may be denied. This can happen even if your monthly expenses exceed your income.
Offer Due to Controversy Over Amount Owed
In addition to applying for an offer in compromise due to insolvency, you can also apply for an offer in compromise due to a controversy over the amount of tax due.
If you're applying based on a tax controversy, you must complete form 2000-4 and provide a written explanation of why you believe that you do not owe the tax, but you don't need to include any of the supporting documents except the Power of Attorney form if applicable.
Requests for Penalty Waivers
In Arkansas, you can use the offer-in-compromise application to request a waiver of penalties and interest, and in this situation, you only need to fill out the application. You don't need to provide the supporting documents.
Note that Arkansas recently released a form that is specifically designed to request penalty waivers, and if desired, you can use that application instead.
Rejected Offer in Compromise
The Director of the DFA has sole discretion over whether to accept or deny an offer in compromise and if they reject your offer, you cannot request an administrative or judicial review of their decision.
Accepted Offer in Compromise
Once an offer in compromise has been accepted and the closing documents have been signed, the state cannot make any additional assessments, and the taxpayer cannot attempt to recover any of the tax liabilities that they have paid.
The agreement cannot be changed by the taxpayer or the Arkansas DFA unless one of the following two conditions applies:
- The taxpayer falsified or concealed facts.
- The DFA and the taxpayer made a mutual mistake concerning a material fact forming the basis for the offer in compromise.
Get Help Applying for an Offer in Compromise in Arkansas
Obtaining an offer in compromise can be very tricky, and to improve your chances of success, you should contact a tax professional who has experience dealing with the Arkansas DFA. They can also help you determine if another tax resolution option is better for your situation.