Massachusetts Offer in Compromise: Eligibility Criteria and How to Apply
How to Settle Your MA Back Taxes for Less Than You Owe
If you cannot afford to pay your Massachusetts back taxes, you may want to apply for an offer in compromise. An offer in compromise is when the Massachusetts Department of Revenue (MA DOR) allows you to pay off your taxes for less than you owe. The offer must be at least $5,000, and you must meet eligibility criteria.
To help you out, this guide explains how to apply for an offer in compromise in Massachusetts. It also covers what to expect if your offer is accepted or rejected.
Who Can Apply for an Offer in Compromise in Massachusetts?
Individuals and businesses can apply for offers in compromise on Massachusetts taxes. By law, the Commonwealth can accept an offer if it represents the most the state is likely to be able to collect. The offer must also be in the best interest of the state.
You cannot apply for an offer in compromise if you have attempted to defraud the government. You also cannot use this program if you dispute the tax owed or believe you're not liable for the tax.
How to Apply for a MA Offer in Compromise
The MA offer-in-compromise booklet contains everything you need to apply. This 33-page document includes instructions and offer-in-compromise FAQs. It also includes the following documents:
Form M-656 (Offer in Compromise Application)
On the OIC application, you include your basic contact information and details about your tax liability. Then, you write an explanation of your circumstances and explain where you are getting the funds for the offer. Finally, you note the offer and opt between a one-time lump sum payment or monthly payments over 24 months. Form M-656 also outlines the terms of the offer.
Form M-433-OIC (Statement of Financial Condition and Other Information)
The M-433-OIC form collects detailed information about your financial situation. Individuals need to complete part one. Part two is for corporations and business taxpayers. Corporate officers, individual partners, and responsible persons must complete both sections.
This form requires basic contact details plus information about your income, investment accounts, retirement accounts, life insurance policies, real estate, personal assets, expenses, and debts. You must include supporting documents for all of the information you include on the M-433. In section three of the M-433-OIC, you present your offer.
Electronic Transfer Authorization Form
You must include this authorization form if you request to pay your offer in monthly installments. It requires your bank name, account, and routing number. Then, you note the installment payment amount and sign to authorize the payment.
Form M-2848 (Power of Attorney and Declaration of Representative)
You can represent yourself when you apply for an offer in compromise. But the MA DOR suggests working with a tax professional. If an enrolled agent, a CPA, or a tax lawyer is representing you, you must include this form with your application.
Once you have completed the offer in compromise application, you can email it to [email protected]. Or, you can send the paperwork through the mail to this address:
Massachusetts Department of Revenue
P.O. Box 7021
Boston, MA 02204
Downpayments for MA OICs
When you submit your MA OIC application, you must include a downpayment. If you're applying for a lump sum offer, you should include a 20% downpayment. You should include the first month's payment if requesting an installment plan offer. Then, you should continue making monthly payments until you hear about your application.
How Much to Offer for a MA Offer in Compromise
Section three of Form MA-433-OIC guides you through the calculations to make an offer. Basically, you add together your available business and personal assets plus 12 or 24 months' worth of disposable income. Here's an overview of the calculations.
The MA DOR considers all of the money in your bank accounts as available assets. It also considers the cash value of life insurance policies minus loans against them as available assets. To calculate the available amount of your investment accounts, real estate, vehicles, and assets such as artwork or firearms, the DOR takes 80% of the asset's value minus the amount owed.
For instance, if your home is worth $400,000 and you owe $300,000, the available amount is $20,000. That is the home's fair market value ($400,000) times 0.8 minus the loan amount. The available amount of retirement accounts is 70% of their value minus any outstanding loans.
Your disposable income is your monthly household income minus your household expenses. Then, you add on net self-employment income and net business income.
If you want to make a lump sum payment, you take your available assets plus 12 months' worth of disposable income. To make an installment payment offer, you take the value of your available assets plus 24 months of disposable income. Installment payment offers are always higher than lump sum offers, but they can be easier to manage. In all cases, offers must be at least $5,000.
What If You Offer Less Than the Minimum Amount?
In some cases, you may not be able to offer the minimum amount. This doesn't necessarily mean that the MA DOR will reject your offer. But you need to explain why you can't pay the minimum amount.
Be ready to explain why paying the offer would cause economic hardship. In other words, how would paying the minimum offer prevent you from covering essential living expenses? Some possible reasons for offering less than the minimum include advanced age, serious illnesses, or similar factors.
Does the DOR Always Accept the Minimum Offer Amount?
Remember that working through the minimum offer calculations doesn't guarantee success. The DOR can reject offers even if you offer more than the minimum amount. For instance, if your living expenses are extravagant, the DOR may reject your offer. Or, the DOR may reject your offer if it believes that you could sell an unnecessary asset to cover your tax liability.
Basic Eligibility Criteria for an OIC
To apply for an offer in compromise in Massachusetts, you must meet basic eligibility criteria. When the DOR receives your application, they will review it to ensure it meets the eligibility criteria.
If not, they will automatically reject the application and return your payment. This is the only situation where the DOR returns the payment with an OIC application.
You must meet the following criteria to apply for an OIC in MA:
- Filed all required tax returns and reports.
- Paid the entire liability for the most recent tax year.
- Current on estimated tax payments.
- Received a Final Notice of Assessment for all MA taxes owed.
- Don't want to dispute the amount due or contest your responsibility for the liability.
Ideally, you should not apply if you don't meet the criteria. The OIC application lists these criteria and says not to apply if you don't qualify.
What Happens When You Apply for a MA Offer in Compromise?
When you apply for an offer in compromise, the MA DOR will pause collection actions on your account, but only if you meet the basic eligibility criteria. In both cases, interest and penalties will continue to accrue on your account. Tax liens will also remain in place.
The DOR will review your application closely. The financial audit part of the process can take five to six months. If the DOR requests more information, make sure to respond promptly. If you fail to respond, the DOR can reject your application.
During the financial audit, the DOR can continue discovery on your account. This includes responsible person determinations, audits, and return reviews. While your OIC is processing, the DOR can take gambling and lottery winnings, offsets, tax refunds, insurance proceeds, and any other government payments and apply them to your balance. These payments are not considered part of your offer.
You must continue to file and pay tax as required while the offer is pending. During this time, the statute of limitations pauses on your account.
Who Approves MA Offers in Compromise?
The Commissioner of Revenue and two deputy commissioners must approve your offer. The Massachusetts Attorney General must also approve your offer if you're saving over $20,000 or more than half of your tax bill.
These people consider your ability to pay, the equity in your assets, and the potential for your financial situation to change. They also consider if your offer is in the best interest of the Commonwealth and whether or not it has fraudulent or misleading information.
What Happens if MA Accepts Your Offer in Compromise?
The MA DOR will notify you by mail if your offer has been accepted. Then, you must sign the settlement agreement and pay by the date on the agreement.
Typically, you must pay lump sum offers within 60 days. Installment agreement offers are spread out over 24 payments. Because you must make payments while the DOR reviews your offer, you will generally have around 17 or 18 payments left after acceptance.
What Happens if MA Rejects Your Offer in Compromise?
If the MA DOR rejects your offer, you will also receive a mailed notice. The DOR will keep your initial payments and apply them to your tax liability. You should contact the DOR to make arrangements to pay off the rest of your tax liability. Unfortunately, you cannot appeal a rejected offer in compromise in Massachusetts.
Common Reasons for Rejections
Here are some of the reasons that the MA DOR may reject your offer in compromise:
- The DOR believes that you can pay the balance in full now.
- The DOR believes that you can pay the full balance over time through an installment agreement.
- You failed to respond to requests for more information.
- You requested an installment payment offer but didn't make payments while your application was being processed.
- You omitted income or assets from your application.
- You failed to disclose other important information.
- You submitted fake or misleading information.
- You have a history of willful non-compliance with MA tax laws.
- You have a history of criminal tax convictions, including guilty and no-contest pleas.
Does the MA Counteroffer OIC Applications?
The MA DOR usually only makes counteroffers if the original offer is very close to what the DOR wants to see. The DOR doesn't make counteroffers in other situations. It also doesn't accept counteroffers from taxpayers. The MA DOR says that it will not negotiate over offers in compromise.
Can You Apply for a MA OIC When You're Filing Bankruptcy?
Normally, the DOR will not consider an offer if you're in an active bankruptcy case. Contact the Bankruptcy Unit to talk about options. If you submit an OIC application while you're filing bankruptcy, the MA DOR will forward your application to the Bankruptcy Unit.
What If You Dispute the Amount of Tax Due?
As indicated above, you cannot use the OIC program if you want to dispute the amount of tax you owe. In this situation, you need to File Form ABT (Application for Abatement), and you may also need to file Form DR-1 (Office of Appeals Form). If applicable, you can amend your return to show the correct information. Contact a MA tax pro to learn more about what to do when you disagree with a tax liability.
Get Help Applying for a MA OIC
Applying for an offer in compromise can be a confusing and complicated process. To ensure you get the best outcome, you should work with a tax professional who is experienced with the Massachusetts Department of Revenue. They know what type of offers the DOR will likely accept, and they can help you work through the process.
Get help today. Use TaxCure to search for a MA tax pro who is experienced with MA OICs. Then, contact them directly to talk about your situation and find the best path forward for your unique situation.