A Review of Common Maryland State Tax Resolution Options
Dealing with Maryland back taxes? If you have delinquent tax liabilities in the State of Maryland, some options can help you avoid collection actions and save you money. Short of making a lump sum payment to satisfy the taxes in full, in Maryland, here are some standard tax resolution options:
- Enter into an Individual Payment Agreement
- Submit an Offer in Compromise (OIC)
- Request Penalty Abatement
- Request Innocent Spouse Relief
- Request Hardship Status (short-term)
We discuss these options in some more detail below. However, realize these are not an exhaustive set of options. Therefore, work with a professional tax firm or licensed tax professional to ensure you understand all tax options.
Who is Responsible for Collecting Taxes in the State of Maryland?
In the State of Maryland, the Office of the Comptroller is the entity responsible for collecting taxes. In fact, Maryland is one of only nine states that use the title of Comptroller – an archaic term meaning “financial officer.” The Office of the Comptroller collects some $16 billion each year in state taxes. Furthermore, in addition to individual and business income tax, some other forms of taxes that the Comptroller collects include sales and use, estates, admissions, and amusement, and alcohol and tobacco.
If you owe back taxes in Maryland, the Comptroller is the entity that will attempt to collect. However, the Comptroller may assign some cases to an external collection agency instead. The Comptroller’s initial collection efforts will consist of a formal notice (Personal Income Tax Balance Due Notice) advising you of the back taxes and requesting payment. Many taxpayers make the mistake of ignoring these notices, which can result in more aggressive collection efforts down the road.
What Can the Comptroller do if I Fail to Pay Back Taxes?
Like the Internal Revenue Service (IRS), the Comptroller has broad collection powers. As stated in the previous section, the Comptroller’s initial collection efforts will consist of a series of written letters demanding payment. Consequently, if you fail to pay the balance or work out another payment arrangement, the Comptroller will attempt to collect the taxes.
The Comptroller’s office can do any of the following to collect:
- File a tax lien against your property
- Garnish your wages (wage garnishment)
- Execute a bank levy
- Prevent you from renewing your driver’s license or vehicle registration
- Prevent you from renewing a professional, occupational, or business license
- Take your state or federal income tax refunds
- Publish a list online listing your name as a delinquent taxpayer
- Take other legal actions against you
In addition to the above, the Comptroller can charge you 13% interest per year and up to 25% in penalties until the taxpayer pays the taxes in full.
Time for the Comptroller to Assess and Collect Maryland Back Taxes?
The Comptroller’s ability to collect back taxes is generally not limited. The Statute of Limitations (SOL) is essentially a period prescribed by law in which certain kinds of legal action must be brought. If the claim in a timely fashion, it will be waived forever. With regards to assessing taxes in Maryland, usually, the Comptroller’s Office has three years to make an income tax assessment from:
- the date the taxpayer files the return or
- from when the taxes were initially due, whichever is later
In some cases, MD may make an income tax assessment at any time if:
- If the taxpayer files a false tax return with the intent to evade the tax
- The taxpayer makes a willful attempt to evade the tax
- The taxpayer does not file a tax return when it is required
- MD state receives an incomplete tax return for the taxpayer
- A report of federal adjustment is not filed within 90 days of issuance. If the taxpayer does file in these 90 days, the Comptroller must assess within one year after receiving the report.
Statute of Limitations on Collections
With regards to the statute of limitations on collection for income tax, you could not wait out Maryland. In theory, the collection SOL is seven years from the date of assessment, but for all practical purposes, there was no SOL until recently. Why? Once the state filed a tax lien, they could not collect indefinitely unless the tax lien became satisfied or released. Governor Hogan signed a new law (effective July 1st, 2019) stating that certain tax liens on personal or real property would terminate 20 years from the date of assessment. Therefore, there is a 20 year SOL. Exceptions include whether the law specifies another time or for if it is for inheritance tax. Moreover, the new law does not specify if the changes take effect retroactively.
What are my Options if I Owe Back Taxes in the State of Maryland?
If you or your business owe back taxes to the Comptroller, you have options that can help you avoid or cease the collection actions listed above. The following options apply if you owe the amount that the Comptroller is claiming. If you receive a notice from the Comptroller’s Office and you do not agree that you owe the taxes, or if the amount is incorrect, you have the right to appeal the assessment. Taxpayers must file appeals within 30 days of receiving the initial notice from the Comptroller. Following the appeal, the Comptroller will hold an informal hearing to consider the merits. If the Comptroller rules against you, you have the right to appeal the decision to the Maryland Tax Court.
If you owe back taxes, there are several options available to you. The availability and usefulness of each remedy depend primarily on your personal and financial circumstances. If you are unsure which option is the best for you, consult with an experienced Maryland tax professional.
Individual Payment Agreement
In similarity to the IRS, the state of Maryland allows taxpayers to pay off their taxes over time in some instances. An Individual Payment Agreement will enable you to pay off past due MD taxes over a series of months. While short-term repayment plans are generally freely given, more extended duration plans can present more of a challenge. The most crucial factor the Comptroller will consider when applying for an Individual Payment Agreement is your ability to pay the outstanding taxes. You may be required to complete a Collection Information Statement (MD 433-A) when applying. The statement requires a detailed list of your assets and income.
Repayment terms can vary. Durations of 36 to 60 months are possible. Generally, if you don’t have a lien, you can get a 36-month payment plan with no financial required (MD 433-A). If you already have a tax lien, taxpayers can set up a 60-month payment plan with no financials. In cases involving financial hardship, the state may grant repayment terms of up to 99 months but usually requires manager approval. You can read more about payment plans here.
Offer in Compromise
An Offer in Compromise (OIC) allows qualified taxpayers to pay a settled amount for less than the total amount of the taxes owed. Unlike Individual Payment Agreements where you repay the full balance over time, an OIC is a form of lump-sum payment arrangement. Most importantly, the OIC program applies to all tax types handled by the state. The significant advantage that an OIC has over other remedies is the Comptroller will agree to accept a lesser amount, potentially saving you a lot of money.
Not every taxpayer is eligible for Maryland’s Offer in Compromise program. The state has specific requirements. For example, the OIC program has time limitations. Moreover, it requires all tax returns filed, and the taxpayer must have exhausted other options to resolve their tax liabilities.
You could apply for an OIC if you doubt you owe, doubt the state will collect what they owe, or if you would face financial hardship if you paid. To apply for an OIC, you must submit several forms, such as an Offer in Compromise Application (Form 656) and a Collection Information Statement. Furthermore, you must comply with some critical procedural requirements. Also, the Comptroller’s Office will likely ask for supporting documentation, like credit card statements, pay stubs, and bank statements.
As mentioned above, the Comptroller can tack on an additional 25% in penalties to your outstanding taxes. As a result, tax penalties can make it very difficult for you to pay off what is owed, not to mention you will end up paying much more. It is possible to have penalties abated in full or in part. Generally, to qualify for penalty abatement, you will need to demonstrate sufficient grounds for your inability to pay. Some examples include unemployment, major health issues, and even the loss of tax records due to a natural disaster. While you will still be required to repay the outstanding principal balance, penalty abatement can save you a lot of money and help pay off your balance faster.
Innocent Spouse Relief (ISR)
Innocent Spouse Relief is a remedy available when your back taxes are the result of your spouse’s errors or fraud. You must show that you were not aware of the mistakes at the time that you signed your return and that you were not otherwise involved in the misconduct. If you meet the requirements, you may not owe any back taxes to the Comptroller.
The Comptroller generally mirrors the decision the IRS made with regards to Innocent Spouse Relief. In other words, to request ISR from the Comptroller, you need to send the letter showing the IRS determination on the matter.
Unlike the IRS, a hardship status granted from the Comptroller does not last very long. Generally, hardship status will last only for a few weeks or months. The taxpayer usually must complete the appropriate 433 Form and submit it with other documentation to substantiate certain financial information. It requires managerial approval.
What About Sales and Use Taxes?
With sales and use taxes, or trust fund taxes, Maryland state may allow taxpayers to enter into a payment plan or consider an offer in compromise. Above all, it usually depends on the taxpayer’s tax and financial situation. However, generally, some tax professionals will say to at least offer the amount you owe in taxes as your offer (the tax amount). You can pay off the offer sometimes over a period of years.
Connect With Tax Professionals When In Doubt
A licensed tax professional will have your best interests at heart in determining the best tax resolution for your situation. Certainly, the state wants you to pay as much as possible and as quickly as possible. Having an experienced tax resolution professional working on your behalf can save you money and stress. You can find a list of tax professionals that resolve Maryland state tax problems here.