Connecticut State Tax Offer In Compromise Overview
An offer of compromise is when the Connecticut (CT) Department of Revenue Services (DRS) agrees to let you pay off your back taxes for less than you owe. It's called an offer of compromise because you make an offer and the DRS compromises by letting you pay less than your bill.
The DRS will only grant offers of compromise if it believes that you will never pay your tax bill in full or that your tax bill is incorrect. The first is called doubt of collectibility, while the latter is doubt as to liability. Obtaining an offer of compromise is not impossible, but it's difficult, especially without professional tax help. Here's an overview of the process.
How to Apply for an Offer of Compromise in Connecticut
If you agree with the tax amount owed, you can apply for an offer of compromise in CT by filing Form CT-656a (Offer in Compromise). The form requires the following details:
- Date of birth
- CT tax registration number
- Social Security Number
- Number of dependents claimed on your federal income tax return
- Tax type that you owe
- Period the tax is from
- Whether or not the tax bill is under appeal
- The amount you are offering to pay.
You also must make a full financial disclosure on your application. This includes all your bank accounts, real estate, and other assets, as well as your loans, credit cards, and other debts. Then, you note your monthly income, including wages, business profits, rental income, child support and alimony, and any other income. Finally, you list your monthly expenses such as rent/mortgage, utilities, transportation, debt payments, groceries, child support and alimony, and other expenses.
You also need to attach the following:
- Your last two federal income tax returns with all supporting schedules and supporting forms such as W-2s and 1099s.
- A current copy of your consumer credit report.
- Last two pay stubs from your employer.
- A copy of the discharge notice if you filed for bankruptcy in the last five years.
Once you have all the materials together, you can mail your application to the Collections & A/R Management Division of the DRS.
How to Apply for an Offer of Compromise on Business Taxes
Businesses can apply for an offer of compromise using Form CT-656, and they must provide the following supporting documents:
- Last two federal income tax returns for the corporation and corporate officers, the owner, or the partnership and partners
- All supporting schedules and forms such as 1099s or W-2
- Copy of current consumer credit report for owner, partners, or corporate officers
- Info on salary, draws, and loans to the proprietor, partners, or corporate officers
- Business's profit-and-loss statements for the last two years
Offer of Compromise When There Is Doubt as to Liability
If you disagree with the amount owed and you want to apply for an offer of compromise, you also need to file Form CT-656a, but there are different rules and a slightly different process.
To qualify for an offer of compromise based on doubt as to liability, there must be a genuine doubt that the tax bill is correct, and you can only use this reason to apply for an offer in compromise if the liability comes from a tax assessed by an audit assessment. You can't use this option if the tax bill is based on the information you put on your own return.
Additionally, you cannot apply for an offer of compromise due to doubt as to liability if any of the following apply:
- A notice of assessment was issued, but you didn't protest it in a timely manner
- You protested the assessment and received a final determination letter upholding the assessment, but you didn't appeal to the Superior Court in a timely manner.
- You appealed to the Superior Court, but the court of last resort has upheld the final determination letter.
If you have appealed but haven't received a final determination letter, you should send Form CT-656a, your supporting documents, and any additional information to the Director of the Appellate Division.
If you have already received your final determination letter but haven't appealed to the Superior Court, you should send your offer of compromise application to the Director of the Legal Division. If you have already appealed to the Superior Court, you can send your offer to the General Counsel.
The DRS will send you a letter of receipt when it receives your application, and after they make a decision, it is final. You cannot appeal a rejected offer to the Superior Court.
Requirements for Offer of Compromise in CT
In addition to convincing the DRS that your tax bill will never be collectible in full, that the liability isn't really yours, or a mixture of both, you have to meet additional criteria to qualify for an offer of compromise in CT. In particular, if any of the following apply, the DRS won't consider your offer:
- You have unfiled CT state tax returns.
- You have filed for bankruptcy.
- You are in the midst of an involuntary bankruptcy due to someone else's actions.
- The State of Connecticut is criminally prosecuting you for unpaid taxes.
- Your tax bill has not been formally assessed.
- The audit assessment on your tax bill is final.
Negotiating an Offer of Compromise
Negotiating an offer of compromise with the CT DRS is challenging and often impossible, and for best results, you should work with a tax professional experienced with this agency. In fact, setting up offers of compromise in CT tends to be more difficult than obtaining offers in compromise from the IRS.
The IRS has a 10-year statute of limitations on its tax liabilities, and if you're close to the expiration date, you can leverage this fact in your favor while negotiating a deal. The CT DRS, by contrast, doesn't have a statute of limitations, and the agency is willing to wait forever to get paid.
In one case, the DRS maintained the collectability of liabilities that were 20+ years old and had been previously discharged in a Chapter 7 bankruptcy case. Although the taxes had been discharged, the lien from those liabilities survived the bankruptcy and was attached to real property owned by the taxpayer.
The DRS was unlikely to foreclose on the liens, and it hadn't taken any meaningful collection activity on these liabilities in over ten years, but it still wasn't willing to settle the tax bill. Instead, the DRS was willing to just wait for the owner to die or sell the property.
CT Offer of Compromise Vs. IRS Offer in Compromise
The basic principle of an offer of compromise is the same with both the IRS and the CT DRS, but these agencies have vastly different rules and processes.
If you apply for an offer in compromise with the IRS, you must make a 20% downpayment with your offer and pay off the rest of the offer within five months of acceptance. Or, you can request to pay off the settlement in 24 months and include the first proposed payment with your application.
The CT DRS doesn't require you to submit a downpayment with your offer of compromise application but you must pay the whole settlement within 30 days if your offer is accepted, .
These agencies also use different processes to assess the collectability of your tax liability. The IRS subtracts your available equity from your tax balance. Then, it calculates your ability to make monthly payments based on standard budget allowances and multiplies that amount by the number of months left before the collection statute expires.
Here's a very basic example of that process. Imagine someone owes $10,000, and they have $3,000 in available equity. The IRS believes they can afford to pay $100 per month, and the collection statute expires in 12 months. In this case, the IRS can see that it will only be able to collect $4,200. That is $3,000 plus $100 x 12 months.
Because the DRS doesn't have a statute of limitations on state tax liabilities, you cannot replicate this process in CT. In other words, outside of a taxpayer being retired or disabled, it's hard to convince the DRS that tax liabilities are not collectible because the agency has time on its side.
Negotiating an Offer With Both the IRS and CT DRS
If you want to settle your state and federal taxes, a strategic approach can help you negotiate the best deal possible.
The DRS doesn't require a downpayment, making it easier to apply, and this agency tends to review offers faster than the IRS. However, if your offer is accepted, you need to be able to access the funds quickly. If you're taking a loan against property, for example, you may want to secure the funds before you submit your offer.
The IRS takes into account your arrangements to pay state tax liabilities, and if the state has accepted your offer, the IRS won't consider those funds as available equity when reviewing the offer on your federal tax liability. However, the IRS provides a monthly allowance for state and local tax liabilities, and if you've already made arrangements with the state, the IRS may not make this concession.
Ultimately, you need to consider the viability of each offer you make in the context of the other offer being accepted and paid first.
Informal Offers of Compromise
In the past, the DRS has accepted informal settlements called "closing agreements" on old tax bills. Typically, made over the phone, these arrangements typically involved the taxpayer paying their entire tax liability plus 20 to 30% of the interest on their account in exchange for a waiver on the rest of the interest and penalties.
This informal process saved taxpayers money while also allowing them to avoid the offer-of-compromise application process. Still, the DRS seems to be moving away from these practices and requiring taxpayers to formally apply for an offer of compromise.
Get Help Requesting an Offer of Compromise in Connecticut
Applying for an offer of compromise is a complicated process. For the best results, you should work with a tax professional. They can help you craft your offer of compromise and work with you to find other solutions to your CT tax issues. Contact a tax professional such as Robert Lyon, who has years of 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.