Review of Some Michigan Back Taxes Resolutions
The State of Michigan Department of Treasury is responsible for Michigan’s income tax, business tax, sales and use tax, and more. Within the Department of Treasury (DOT), a division called the Collection Services Bureau (CSB), has the responsibility to collect Michigan’s delinquent taxes. The DOT also leverages MACRS or the Michigan Accounts Receivable Collection System. It is a private collection agency tasked with helping collect delinquent tax, penalties, and interest.
Generally, when an income tax liability becomes due as a result of either the taxpayer filing a tax return without payment or a DOT audit leads to an assessment, the taxpayer will receive a final notice to pay the liability. Therefore, if the taxpayer fails to make a tax payment within the time prescribed on the final notice, DOT will forward the account to CSB for enforced collection. Usually, before sending a taxpayer’s account to CSB, the taxpayer will receive a “Letter of Inquiry, Notice of Intent to Assess,” and/or a “Bill For Taxes Due (Final Assessment).”
Michigan’s Enforced Collections
CSB has various enforced collection actions that they are authorized by Michigan law to utilize to collect delinquent taxes. CSB has six years to collect on unpaid taxes. They can use any of these enforced collection actions against delinquent taxpayers during the six years. Specifically, these enforced collection actions are:
- Liens – Filing a tax lien on real or personal property will establish a record of the State of Michigan’s interest in the taxpayer’s assets. A tax lien may show on the taxpayer’s credit reports. Moreover, a tax lien can negatively affect the taxpayer’s ability to obtain credit or sell or buy assets.
- Tax Warrants (Seizure of Property) – Tax warrants allow the DOT to seize a taxpayer’s business or personal property. Furthermore, the DOT can then sell it to pay off or reduce the taxes owed.
- Wage Levies – A wage levy requires the taxpayer’s employer to withhold a percentage of the taxpayer’s wages. The employer needs to remit this withholding to the DOT and apply it against the delinquent tax liability.
- Financial Institution Levies – Financial Institution Levies attach to a taxpayer’s bank account(s). They require the financial institution to remit all funds in the bank or financial account, up to the delinquent balance due and apply it against the delinquent tax liability.
- Other Levies – The CSB may use other levies, which act in the same manner as financial institution levies, but against other sources of income or funds that are due to be paid to the taxpayer and that are currently held by third parties who are not the taxpayer’s employer or financial institution.
- Offset Refunds – A Refund Offset allows the State of Michigan to seize federal or other state tax refunds. Any refunds taken by the state gets applied against the delinquent tax liability
Other Enforced Collection Actions
- Refer the Account to a Collection Agency – The DOR and CSB reserve the right to forward the account to the Michigan Account Receivable Collection System (MARCS). Specifically, MARCS is a Michigan Department of Treasury program operated by a privately owned collection agency.
- Refer Account to Michigan Department of Attorney General (MDAG) – The state can refer your account to the MDAG for additional legal actions.
For businesses, the state taxation authorities can hold the business owner or members, manager, or partners of a corporation, LLC, LLP, LP or a partnership personally liable for tax liabilities as well as interest and penalties. Moreover, the DOT can request a revocation or non-renewal of business liquor licenses by sending the request to the Michigan Liquor Control Commission.
Some Possible Michigan Tax Resolutions
If individual taxpayers owe the state of Michigan back taxes, here are a few options taxpayers may pursue or investigate:
- Offer in Compromise (OIC) – With an OIC, the taxpayer requests the MDT to compromise an assessed tax amount for less than the full amount owed.
- Installment Agreement (IA) – Although the taxpayer first needs to receive a bill for taxes due, taxpayers can request a monthly payment plan with MDT to pay taxes off over time.
- Non-Collectible Status – This tax resolution puts everything on hold. The taxpayer will still accrue penalties and interest. However, the DOT will not pursue enforced collections until the taxpayer has the financial ability to pay. In summary, the taxpayer must prove financial hardship by showing their monthly expenses exceed their monthly income. The DOT’s financial standards are used to determine the taxpayer’s ability to pay a delinquent liability.
- Penalty Waiver – Some may refer to this as penalty abatement. The taxpayer can request a penalty waiver with the State of Michigan. He or she must show reasonable cause for failing to file or pay on time (discussed below).
Below you will find additional tax options. Moreover, to find more information on each one of the solutions listed above, visit the corresponding link.
Statute of Limitations (SOL)
As discussed above, Michigan’s Collection Services Bureau has six years to collect a taxpayer’s tax liability. A court-judgment, among other actions, can extend the six years or statute of limitations on collection. Moreover, the state has four years to assess a penalty, interest, or tax deficiency from the date set for filing the required tax return or the actual date the return was filed, whichever comes later.
The statute of limitations on collection may also be extended by reaffirmation of the tax liability. Reaffirmation of tax amount will occur if the taxpayer:
- Makes voluntary payments
- Signifies to the liability on a letter of acknowledgment
- Mutually agrees to extend by signing an agreement with the Commissioner of Revenue.
- The statute may also be tolled if the Department is unable to locate the taxpayer.
Other Options Taxpayers May Want to Pursue
A taxpayer may request a penalty waiver with the State of Michigan if one can show reasonable cause for the failure to file or pay timely. The DOT states that examples of reasonable cause are: death or serious illness of the taxpayer or the individual primarily responsible for filing returns and making tax payments; extenuating circumstances (such as fire, theft, or criminal acts against the taxpayer; or misapplication of payments by DOT). Further, the DOT states that lack of funds or poor bookkeeping practices will not constitute reasonable cause.
The penalty waiver request must be made in writing. Taxpayers need to mail it to:
Michigan Department of Treasury
Collection Services Bureau
PO Box 30199, Lansing, MI 48909.
Innocent Spouse Relief (ISR)
According to Michigan law, if personal income taxes have been jointly assessed to spouses and one of the spouses has been granted relief from the joint assessment under I.R.C. § 6015, then the DOT will give relief for the corresponding Michigan liability. Furthermore, Michigan will still make innocent spouse relief possible for those who cannot establish that they have already received similar tax relief from the Internal Revenue Service but meets the federal qualifications. In fact, the DOT will use the standards outlined in I.R.C. § 6015 and related federal provisions when making innocent spouse determinations.
The standards outlined in I.R.C. § 6015 provide that for a taxpayer to qualify for innocent spouse relief, all of the following conditions must be met:
- For the tax year in question, the taxpayer seeking tax relief filed a joint tax return.
- There is an understatement of tax attributable to erroneous items of the other spouse filing the joint return
- The innocent spouse establishes that in signing the return he or she did not know, and had no reason to know, of the understatement
- By taking into account all facts and circumstances, it is inequitable to hold the individual liable for the deficiency in tax for such taxable year attributable to such understatement, and
- The innocent spouse elects the benefits under this section not later than the date which is two years after the date on which the IRS first began collection activity against the individual making the election.
Where Taxpayers Can Mail Their Request for ISR
Taxpayers should mail their request for relief in writing to:
Michigan Department of Treasury
Customer Service Center
Individual Taxes Unit
Treasury Building, Lansing, MI 48922.
Informal Conferences and Appeals
If the taxpayer has an Intent to Assess Notice for additional income tax due, they may seek an informal conference to raise any disputes they may have. The taxpayer can attend the informal conference in person or by telephone. Furthermore, the taxpayer will need to support their position with documentation. Taxpayers need to request the conference within the timeframe provided by the statute governing the tax. Generally, for an Intent to Assess (Bill for Taxes Due) or Refund Adjustment or Denial, the taxpayer must request the conference or hearing within 60 days of notice issuance. The taxpayer can make the request by mail or by fax. The informal conference does not cost the taxpayer anything and the DOT assigns a neutral Hearing Referee. Moreover, hearing referees are impartial attorneys who gather facts and provide recommendations to the DOT regarding disputes between taxpayers.
If this does not resolve the matter and the DOT issues a Final Assessment to the taxpayer, the taxpayer has other options. They may first appeal to the Michigan Tax Tribunal. Alternatively, the taxpayer can appeal to the Michigan Court of Appeals. Still, if the taxpayer does not get a resolution, the taxpayer may appeal to the Michigan courts.
Filing for bankruptcy along with hiring a bankruptcy attorney can cost a lot of money. Therefore, delinquent taxpayers with substantial personal tax liability may want to consider this option. Taxpayers can discharge some types of Michigan back taxes in bankruptcy but not all. For example, a taxpayer cannot usually discharge payroll and/or sales taxes. Hence, taxpayers should reach out to an experienced bankruptcy attorney if they believe this option is right for them.
The Michigan Tax Amnesty Program
Michigan offered a “Tax Amnesty Program” in 2011. Specifically, the program was available for individuals and businesses who failed to report income or who did not report enough income. Consequently, if these taxpayers entered the program, the DOT would waive all penalties if the taxpayers filed, or amended, their tax returns and remitted the total tax due. Unfortunately, no active amnesty program exists currently. However, if Michigan ever decided to restart the program, delinquent taxpayers should look into it.
Taxpayers should consider escalating any issues to a supervisor or manager within the DOT. In other words, sometimes a manager or new personnel with authority can help resolve issues. If, after speaking with a supervisor, the taxpayer still believes that he/she has no voice, was discriminated against, had their rights violated, or the DOT is not following Michigan law, they should contact the Office of Taxpayer Advocate.
The Office of Taxpayer Advocate’s (OTA) purpose is to ensure that taxpayer rights are protected. Moreover, it ensures that the DOT’s fairly administers processes. The taxpayer can find out more information regarding the Office of Taxpayer Advocate here.
Once a taxpayer pays all taxes owed including interest and penalties, the DOT will release the associated tax liens. Moreover, they will also release tax liens if the tax amount owed becomes satisfied through an Offer-in-Compromise Agreement. Upon satisfaction, the tax lien will be released, and the Register of Deeds notified.
Penalties and Interest
The most frequently assessed penalties against taxpayers with Michigan back taxes are the failure to file and the failure to pay penalty. Furthermore, the failure to file penalty and the failure to pay penalty is 5% of the tax due for the first two months, then 5% per month of the tax due, with a maximum penalty of 25%.
Additionally, interest is applied for each month that a delinquent tax goes unpaid. The current interest rate is 5.9% (May 2019).
If you are facing a Michigan back taxes issue, connect with a licensed tax professional. Specifically, a licensed tax professional (EA, CPA, or tax attorney) can diagnosis your specific concerns. They can help you formulate the best course of action for resolving your tax problems. Therefore, connect with a licensed tax professional with experience in resolving Michigan state tax problems by clicking here, or by starting your search below.
The content on this website is for educational purposes only and does not serve as legal or tax advice. Moreover, this article should not be used as a substitute for the advice of a competent attorney or tax professional admitted or authorized to practice in your jurisdiction. If you are facing Michigan back taxes problems, contact a licensed tax professional.