CA Franchise Tax Board Offer in Compromise Overview

The CA FTB has an Offer in Compromise (OIC) program in which they will settle delinquent taxes for less than what is owed. According to the FTB,  “the amount offered [must] represent the most we can expect to collect within a reasonable period of time.” An Offer in Compromise merely involves the taxpayer asking the state to accept a lesser payment in full settlement of their delinquent tax liability. The tax settlement will include the delinquent tax due, as well as, penalties, interest, and any collection fees that have accrued.

This article discusses below more details such as information as to the general eligibility requirements, submission requirements, and a list of financial documents required.

Key takeaways

• Offer in compromise - Settle your CA FTB taxes for less than you owe.
• Settlement amount - Based on your disposable income and the equity in your assets.
• Collateral agreement - You may be required to pay a percentage of your income for five years after getting a settlement.

Eligibility

The FTB states that each case’s unique set of facts and circumstances determines acceptance. However, the following is a list of factors that are most strongly considered when they are making acceptance determinations:

• The taxpayer’s ability to pay
• The taxpayer’s equity in assets
• Present and future income of the taxpayer
• The taxpayer’s current and future expenses
• The potential for changed circumstances
• The offer is in the best interest of the state

How to Apply for an FTB Offer in Compromise

To apply, individuals should use Form 4905PIT and businesses should use Form 4905BE. Both of these booklets contain instructions, forms, and checklists for required documents. 

Taxpayers must meet the following requirements for the FTB to consider an Offer in Compromise application for acceptance:

• The taxpayer has filed all required tax returns and does not dispute the amount that is owed
• The taxpayer has completed the Offer in Compromise application and provided all requested supporting documentation (see below
• The taxpayer authorizes the FTB to obtain their consumer credit report. Furthermore, the FTB can investigate and verify the information that the taxpayer has provided on the application

Required Documents

The following is a list of documents that the FTB requires to be included with the submission of the Offer in Compromise application, if applicable:

• Verifying Income: Recent copies of pay stubs for the past three months or two years of financial statements for self-employed taxpayers.  Include any income from investments or ownership in any business entity or trust. It includes distributions, K-1 Income, or dividends for example.
• Verifying Expenses: Include copies of the most recent three months of billing statements. It may include credit card statements, other creditor billing statements, and any personal loan settlements.
• Banking Information: Include copies of savings and checking account bank statements for the most recent six months. For self-employed taxpayers, then include the last twelve months of bank statements. Lastly, provide any bank accounts that closed during that period.
• Securities: Account statements for investments like stocks, bonds, profit-sharing plans, mutual funds, and retirement accounts. For example, 401ks, IRAs, Keogh, or Annuities.
• Current Lease or Rental Agreements – Recent lease or rental agreements
• Real Property Information: Include mortgage statements and escrow statements for the property the taxpayers owns, sold, or gave away for the most recent five years.
• Medical Information: For any medical condition that the FTB must consider, including the Doctor’s letter for the diagnosis and prognosis.
• IRS Information: IRS application for an OIC and letter of acceptance or other IRS arrangements
• Legal Documents: Bankruptcy documents, trust documents, marital property settlement agreements, and divorce decrees.
• Power of Attorney: If a representative designated by the taxpayer submits the OIC, include the Power of Attorney form

Where to Send Your Offer in Compromise Application

The FTB requires that the taxpayer complete and submit a paper copy of the Offer in Compromise application. Taxpayers should mail their request and supporting documents to:

State of California
OIC Group MS A453
Franchise Tax Board
PO Box 2966
Rancho Cordova, CA 95741-2966.

In some circumstances, the FTB will only accept an Offer in Compromise if the taxpayer agrees to enter into a collateral agreement for 5 years. A collateral agreement requires the taxpayer to pay a percentage of their future earnings that exceed an agreed-upon threshold in the event that the taxpayer earns more than anticipated in those future years.

CA usually suspends enforced collection while they review an Offer in Compromise application. However, the FTB still may pursue enforced collection if they believe delaying collection jeopardizes their ability to ultimately collect some or all of the delinquent tax taxes owed.

Taxpayers should be aware that the FTB reserves the right to use any information that is provided in the Offer in Compromise application for tax collection purposes. Further, the FTB reserves the right to rescind the offer terms if the taxpayer becomes delinquent with their tax obligations in future years.

Review and Determination

Once the FTB has received the Offer in Compromise application and supporting materials, they will conduct a review. The review generally takes approximately 90 days from the date the taxpayer applies. The FTB will accept, accept with the collateral agreement, reject or counter-offer.

Once the FTB has reached a determination they will contact the taxpayer. Taxpayers are generally contacted within 90 days after filing the Offer in Compromise application. If the offer has been accepted the taxpayer will be required to make a lump-sum payment of the accepted amount. Once that payment has been made to the FTB,  they will begin the process of releasing any state tax liens. The taxpayer does not have the right to appeal a denial of an Offer in Compromise. However, they do have the ability to refile the application if their circumstances change.

Does the FTB Stop Collection Actions While Reviewing Offer in Compromise Applications?

No, the agency will not stop collection actions while reviewing your offer in compromise application, but the agency typically will not start any new collection actions. However, if the collection of the tax is in jeopardy, the agency has the right to pursue collection actions.

For example, if your wages are being garnished, they will continue to be garnished while the state reviews your application. However, if you apply before the state starts the garnishment, it usually will not happen while they review your application.

What If I Need to Settle Taxes From Multiple Agencies?

If you owe taxes to the CDTFA or the EDD as well as the FTB, you can use a Multi-Agency Form to request an offer in compromise from all three agencies. Each of the agencies will review your request separately. Note that businesses must be no longer in operation to apply for settlements from the CDTFA or the EDD.

Sole props can use the multi-agency form. Corporations, partnerships, and LLCs should use 490-C to apply for offers from the CDTFA and 4905BE for FTB offers.

What If You Don't Qualify for an Offer in Compromise?

If you don't qualify for an offer, you may need to set up monthly payments through an installment agreement. If you prove extreme financial hardship, you may be able to stop the state from taking collection actions against you by getting your account marked as currently not collectible.

Is There Any Other Way to Reduce Your Tax Liability?

If your tax liability is correct, the only other way to possibly reduce what you owe is by applying for penalty abatement. Alternatively, if the tax debt was incurred by your spouse or former spouse without your knowledge, you may qualify for relief through the innocent spouse program. That program absolves you of responsibility for your spouse's portion of the tax debt. If there is a legitimate doubt that you owe the tax debt, you may have the right to appeal, but it depends on how and when the taxes were assessed. 

Can You Get an Offer in Compromise on IRS Taxes?

Yes, the IRS also has offers in compromise for qualifying taxpayers. The application process is very similar to California's - you must provide extensive details about your finances and make an offer that reflects your reasonable collection potential. In some cases, it can be advantageous to apply with the IRS first or CA first. Talk with a tax pro to see what path will be the most effective in your situation. 

Help With California Offer in Compromise & TaxCure

If you need help with this type of filing or even getting an evaluation from a professional if you qualify, consider connecting with one of the professionals in our network. At TaxCure, professionals from all over the country have signed up and we have obtained details on their strengths with the various taxation agencies. We have made it easy for taxpayers to find professionals that can help with a particular problem or solution based upon the unique experience of the professional. You can start your search below or you can follow these links to find tax pros with experience in California:

• Tax pros with FTB experience
• California tax attorneys
• California enrolled agents
• California CPAs

Once you're on one of the directory pages linked above, you can further narrow down your results to find pros who have the exact experience you need. For example, select the CA problem experience tab and select options such as unpaid taxes. Then, expand the CA solution section and tick the box for offer in compromise. Then, the filters will ensure you only see pros who have dedicated experience with those concerns and programs. 

Disclaimer: This article is not legal or tax advice. This article should not be used as a substitute for the advice of a competent attorney or a licensed tax professional.