Connecticut Tax Resolution Options and Back Tax Consequences
The Connecticut (CT) Department of Revenue Services (DRS) handles tax collection and administration in CT. You need to deal with this agency if you owe delinquent taxes or have other state-tax-related issues. The DRS uses relatively aggressive collection practices, and it is often less willing to abate penalties and make arrangements with taxpayers than the Internal Revenue Service (IRS).
You need to understand the DRS's unique rules and processes if you want to take care of your state back taxes as effectively as possible, but unfortunately, the agency is relatively vague about its guidelines, making it hard to negotiate unless you have a lot of experience.
To help you understand the basics, this guide outlines tax resolution options and explains what happens if you don't pay back taxes in CT. You can read about your rights as a taxpayer here.
Collection Activities for CT State Taxes
When you owe CT back taxes, the DRS Collection and Enforcement Division will send you a notice saying that you will face collection activities if you don't pay your tax liability in 30 days. If you do not resolve your tax bill by this deadline, the division may take the following actions.
Interest and Penalties
If you don't file or pay your CT tax returns on time, the state can assess the following penalties:
- Income tax: 1% interest per month and a penalty of 10% of the balance due.
- Sales tax: 1% interest per month and a penalty of 15% of the balance due or at least $50.
- Use tax: 1% interest per month and a penalty of 10% of the balance due.
The 10% penalty applies the very first day your payment is late. For instance, if you owe the DRS $7,000, the late penalty will be $700.
The CT DRS can use the Treasury Offset Program (TOP) to tell the federal government to send your federal tax refunds to the CT DRS. The DRS will send you a Notice of Intent to Offset by certified mail if it plans to take your federal refund. You generally have 60 days from the date of the Notice of Intent to Offset to challenge the offset. Unfortunately, the DRS can do a federal offset even if you set up a payment plan with the state.
Additionally, if you have not filed a state tax return for any year, the DRS can estimate what it thinks you owe, and it can seize that amount from your federal refunds. Generally, the DRS is going to request the last three past due tax returns (unlike the IRS that requires the last six years).
A bank levy is when the DRS takes the funds in your bank account. The DRS can issue a tax warrant and make a one-time garnishment to take everything in your account up to the amount of tax due plus interest and penalties.
If the DRS levies the funds in your bank account, your bank must withhold the amount for 15 to 21 days before sending the money to the DRS. A tax professional may get the levy released before the bank sends the funds to the DRS.
If the DRS plans to garnish your wages, it typically sends a notice, and you have 30 days to respond and make arrangements before the garnishment starts. Wage garnishments for unpaid taxes in CT are the lesser of 25% of your disposable income or the difference between your disposable income and 40 times the minimum wage.
The state determines your disposable income as your gross income before taxes but after reasonable retirement account contributions, health insurance, and union dues. For example, if you earn $1,600 per week before taxes but after the expenses listed above, the state of CT can garnish up to $400 from your paycheck every week.
The alternative wage garnishment calculation method comes into play with people who earn less than $690 per week after accounting for the above allowable expenses. In Connecticut, 40 times the minimum wage of $13/hour is $520, and if you earn $600 per week, the difference between this number and $520 is just $80. In contrast, 25% of $600 is $150. In situations like this, the state takes the lower amount from your check every week.
The state can file tax liens against your real estate and personal property, and in some cases, the DRS has refused to withdraw liens related to state tax liabilities that were over 20 years old. Liens can prevent you from buying, selling, or even transferring property, and because they are public records, they can also impair your ability to take out loans.
Ideally, you should try to make arrangements with the state before the DRS places liens on your property. To get liens removed, you typically have to pay the tax liability in full, sell the property and let the agency take the proceeds of the sale or die. Even if you die, the liens will still be attached to the property, and DRS will get paid when your estate goes through probate.
Statute of Limitations
There is effectively no statute of limitations on CT tax liabilities. After 15 years, the state cannot hire a lawyer to sue you for unpaid taxes, but it has the right to continue to use all of the agency's resources to collect your tax bill in perpetuity.
There is a statute of limitations for auditing and amending returns. If the statute of limitations is about to expire for auditing and amending returns, the DRS may ask you to sign a waiver to extend the deadline. You need to be very careful about signing waivers — you don't necessarily want to give the DRS more time. Still, on the other hand, you don't want the agency to make adjustments that increase your tax liability due to not having the right information.
Delinquent Tax Notifications From the DRS
The DRS typically gives taxpayers at least a 30-day notice before taking collection activities. It sends out a range of different notices related to different types of delinquencies and collection activities.
However, with jeopardy assessments or criminal tax violations such as willfully not filing tax returns or filing fraudulent tax returns, the agency may take immediate collection action. It doesn't need to give you a 30-day notice.
Tax Resolution Options in Connecticut
To reduce the effect of these collection activities, you need to make arrangements to take care of your state tax liability, and the CT DRS has the following options for taking care of back taxes.
Installment agreements let you pay off your tax bill in equal monthly payments over a certain amount of time, but qualifying for a payment plan in CT can be challenging.
Often, the situation varies based on who you talk to and how they feel that day, and if you're trying to set up a payment plan with both the IRS and the CT DRS, you need to approach the process strategically. Visit the latter page today for information on an installment agreement or a CT tax payment plan.
Offers of Compromise
Offers of compromise allow you to pay less than you owe. Unfortunately, obtaining a formal offer of compromise in CT can be tricky, and the right approach is critical. To understand the DRS's CT Offer in Compromise in more detail, read more here.
The CT DRS often waives penalties the first time a taxpayer incurs them, but the state has strict criteria that taxpayers need to meet to qualify for penalty abatement. When deciding whether or not to waive penalties, the state typically follows the lead of the IRS, and because of that, it's often advantageous to apply for relief from federal penalties before state penalties.
However, techniques like this need to be used very carefully to not miss tight state deadlines. For more information on requesting penalty abatement for CT state taxes, visit the page.
Connecticut Tax Amnesty Program
The CT DRS occasionally offers amnesty to individuals and businesses with unpaid taxes or unfiled returns. CT currently has a tax amnesty program in effect until January 31st, 2022. Previous amnesty programs have offered relief on interest, penalties, and criminal persecution to taxpayers who owe income tax, business entity tax, sales and use tax, withholding tax, corporate business tax, and gift tax.
At the time of writing, CT is offering tax amnesty from November 1, 2021, to January 31, 2022, for any tax periods ending on or before December 30, 2020, for all state taxes collected by the DRS. Through this amnesty program, taxpayers can receive penalty waivers and a 75% reduction in interest.
You cannot discharge CT income tax incurred in the last three years through Chapter 7 Bankruptcy, and other types of state or local tax such as sales tax are generally never dischargeable. If you discharge older state tax liabilities but the state already has a lien on your property, the lien may continue to exist.
If you file Chapter 13 bankruptcy, you may be able to get a payment plan on your state tax bill as well as your other liabilities for three to five years.
Innocent Spouse Relief in Connecticut
You can apply for innocent spouse relief in CT If you believe you should not be held responsible for the tax liability from a state tax return you filed with your current or former spouse. CT offers innocent spouse relief, separation of liability, and equitable relief, but you must file Form CT-8857 (Request of Innocent Spouse Relief) and meet strict criteria to qualify for any of these programs.
For instance, if your spouse underreported income without your knowledge, you may be able to get absolved from the tax liability related to that income. Similarly, if your spouse died or you got divorced, you may qualify for relief from the portion of your state back taxes related to them.
Appealing Audited and Adjusted Returns
If the DRS decides to audit your return, the audit may change the amount you owe. The DRS will notify you with a Tax Determination Report. If you disagree with the changes, you have the right to request an informal conference by contacting the supervisor from the office that handled the audit.
During the conference, you present your case, and adjustments may be made to your account. At that point, if you still disagree with the notice of assessment, you can file a formal appeal.
Typically, you have 60 days after the date of the notice of assessment to file a protest. If you're appealing a jeopardy assessment (which allows the DRS to pursue immediate collection activity), you only have 10 days.
To appeal assessed taxes in CT, your appeal must include a detailed description of the disputed issue and an explanation of your position. Once the DRS receives your protest, the agency will assign an Appellate Officer or Specialist to your case. If you disagree with their determination, you can appeal to the Superior Court for the Judicial District of New Britain.
Get Help With Tax Problems in Connecticut
Many people with unpaid taxes often prioritize their IRS tax bill, and this makes sense from a logistical standpoint as federal tax bills tend to be larger than state tax liabilities, but in some cases, you are better off strategically focusing on the CT tax liability first.
Because the CT DRS does not offer clear guidance on how to deal with tax liabilities and unfiled returns, experience plays a significant role in successfully working with this agency. If you have unfiled returns, unpaid taxes, or other state or local tax issues in CT, contact a tax professional such as Robert Lyon, who has deep experience dealing with the CT DRS.
Disclaimer: The content on this website is for educational purposes only. It does not serve as legal or tax advice. For specific help regarding your tax situation, contact a licensed tax professional or tax attorney.