Summary of Michigan’s Offer In Compromise Program
Delinquent taxpayers should consider whether they qualify for Michigan’s Offer in Compromise (OIC) program. An OIC is a settlement program where the DOT will accept an amount that is less than what the taxpayer currently owes. However, the taxpayer must meet specific requirements. We discuss these requirements in more detail below. Let’s review first some general rules related to the OIC application process.
General Rules Regarding an MI OIC
The settlement will include delinquent tax, interest, and any accrued collection fees. The DOT will accept OIC applications that offer either a lump-sum payment, a payment in 5 or fewer, equal or unequal, monthly payments, or equal monthly payments made over six months or more, but not more than 24 months, absent special circumstances. Further, the DOT may accept an OIC but only with the taxpayer’s agreement to abide by certain conditions. The submission of an OIC will stop enforced collection actions while the OIC is pending a determination. However, it does not stop penalties and interest from accruing. Moreover, the six-year statute for collection will be tolled (suspended) while an OIC application is pending.
Michigan Offer In Compromise Eligibility
The DOT states that one of the following must exist for a taxpayer to be eligible for a Michigan OIC:
- For the same tax periods in question, the IRS has already accepted an OIC.
- The taxpayer can establish that there is a doubt as to the collectability of the taxes owed, or
- The taxpayer can establish that there is a doubt that the liability exists.
For most delinquent taxpayers, the eligibility criteria will depend on whether doubt as to collectability exists. However, the submission requirements and required documents for each eligibility criterion above will be discussed in more detail below.
OIC Submission Requirements
The following are the requirements for submitting an Offer in Compromise:
- The taxpayer must complete and submit Form 5181, Michigan Offer in Compromise.
- The taxpayer must make a 20% down payment on the OIC amount, which is non-refundable.
- All tax periods specified in the OIC application must be delinquent tax liabilities that have already been assessed.
- The taxpayer must not have ongoing bankruptcy proceedings.
- The taxpayer must be current and in compliance with all tax filing and payment obligations.
- If the basis for the OIC is “doubt as to liability,” all opportunities to contest the liability must have expired.
- The taxpayer must sign the Offer-in-Compromise application under penalties of perjury.
The taxpayer will receive a notice in writing that the DOT has received the OIC application. If the OIC is deemed by the DOT to be incomplete, the DOT may either reject the OIC or reach out to the taxpayer to seek the additional information that is required. It is essential for taxpayers to remember that the 20% deposit is non-refundable. Meaning, if the DOT rejects an OIC for being incomplete, the taxpayer will lose that deposit. The money will be applied against the taxes owed. However, the taxpayer will have to submit a new OIC application with a new 20% deposit. Therefore, it is crucial for taxpayers to make sure that they submit all required documentation so that the DOT does not reject their OIC application for being incomplete before a review is even conducted.
OIC Required Documents
The following is a list of documents that the State of Michigan requires to be included with the submission of an Offer-in-Compromise Application or Form 5181, Michigan Offer in Compromise, based on Eligibility criteria 1, Accepted Federal OIC:
- A copy of the IRS accepted OIC (Form 656), including any addendums or revisions
- Completed Form 5181 – Offer in Compromise
- Completed Form 5182 – OIC Schedule 1
- An IRS acceptance letter copy for an OIC
- For each tax period and tax type included on the IRS Form 656, DOT will require a copy of IRS Form 1040 Account Transcripts
Required Documents Based on Doubt as to Collectibility
The following is a list of documents that the State of Michigan requires with the submission of an Offer in Compromise Application or Form 5181, Michigan Offer in Compromise, based on Eligibility criteria 2, Doubt as to Collectability:
- Completed Form 5181 – Offer in Compromise
- Completed Form 5183 – OIC Schedule 2A (Individuals) Collection Information Statement for an OIC based on Doubt as to Collectability
- Copies from each employer (if applicable) of the last three months recent earnings statement
- Bank statement copies for all accounts for the previous or most recent three months
- List of all stocks, bonds, or other securities/investments owned. Include the current value of each as well.
- Most recent statements any life insurance policies with a cash value or cash loan value
- List of all real estate owned, in whole or in part, with appraisals and payoff statements for any mortgages.
- Recent statements with payoff information, from any lending institutions or creditors that clearly indicates the current balance owed and payment schedule
- A complete inventory of asset-bearing items, with fair market values, contained in all safe deposit boxes
- For the past six years, a copy of any judgments or legal decrees, including bankruptcy
- Self-employed or individuals with interest in a business:
- Must include a list with the fair market value for all business assets
- An Accounts receivables list showing the amount due, the payer, account age, and status
- A list showing all businesses in which the taxpayer has an interest, including ownership percentage in each
- Other attachments as listed on the forms (utility bills, court orders, etc.)
Required Documents Based on Doubt as to Liability
The following is a list of documents that the State of Michigan requires to be included with the submission of an Offer in Compromise Application or Form 5181, Michigan Offer in Compromise, based on Eligibility criteria 3, Doubt as to Liability:
- Completed Form 5181 – Offer in Compromise
- Completed Form 5185 – OIC Schedule 3 – Offer in Compromise Based on Doubt as to Liability
- An explanation of why the taxpayer does not owe all or any part of the tax and any supporting documentation
The taxpayer should mail all forms, schedules, supporting documentation, and the 20% down payment to:
Michigan Department of Treasury
Offer in Compromise
PO Box 30190
Lansing, MI 48909.
Review and Determination
Once the DOT receives an OIC application, they conduct an intake review and will assign the OIC application to an appropriate department depending on the basis for the OIC. This DOT department will then conduct a complete review and notify the taxpayer as to acceptance, acceptance with conditions, or rejection. The next paragraph provides general guidance that is provided by the DOT concerning their review under each of the criteria for OIC submission.
General DOT Review Guidance for Each of the Criteria
Criteria One – Accepted Federal OIC
When reviewing a submitted OIC based on criteria 1, Accepted Federal OIC, the DOT states that they generally will accept the OIC. However, they will typically not accept it when the circumstances for the grant of the federal OIC no longer exist or are now irrelevant or have no bearing on the taxpayer’s taxes owed to Michigan.
Criteria Two – Doubt as to Collectibility
When reviewing a submitted OIC based on criteria 2, Doubt as to Collectability, the DOT states that doubt as to collectability will exist if the taxpayer can establish that:
- the amount of the OIC payment is the most that can be expected to be paid or collected from the taxpayer’s present assets or income, and
- the “taxpayer does not have reasonable prospects of acquiring increased income or assets within a reasonable period of time that would enable the taxpayer to pay more of the taxes owed than the amount offered.”
Criteria Three – Doubt as to Liability
When reviewing a submitted OIC based on criteria 3, Doubt as to Liability, the DOT states that doubt as to liability exists if the DOT concludes, based on the review of the evidence, that the taxpayer would have prevailed in a contested case if the taxpayer’s appeal rights had not expired.
Notifying the Taxpayer
The DOT will send a letter to the taxpayer via mail as to their determination. Furthermore, if the DOT accepts the OIC or accepts it with conditions, the acceptance letter will state the reasons for acceptance, list the proposed conditions if any, and state the payment terms of the accepted OIC. If the DOT rejects the OIC, the rejection letter will state the reasons for rejection and provide the taxpayer with information regarding his/her ability to appeal the rejection.
Appealing an MI Rejected Offer in Compromise
When the taxpayer has received a rejection of their proposed OIC they may request an “independent review.” This is the only method for appealing a rejected OIC application in the state of Michigan. To make this request the taxpayer must file Form 5186 – Request for Independent Administrative Review of Rejected Offer in Compromise. The taxpayer has 30 days from the date on the rejection letter to file this request. An “independent review” is a form of administrative appeal which asks the DOT Office of Legal Affairs to review the determination. This review, however, will only set aside an OIC rejection if the taxpayer can establish the rejection was the result of fraud or adoption of a wrong principle or error of law by the DOT. Naturally, this is a high standard to meet.
Leveraging a Tax Professional
Most taxpayers will find the process of applying for a Michigan Offer in Compromise cumbersome. Therefore, because of the time involved in applying for a Michigan OIC, taxpayers should first check their eligibility. They can do so by reaching out to a licensed tax professional with experience in working with Michigan’s DOT. You can find a list of tax professionals who resolve Michigan state tax problems here, or you can start you search below. If you are unable to pursue an Offer in Compromise, consider an installment agreement or payment plan among other options.
Reading this article does not create an attorney-client relationship. 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. Therefore, if you are facing Michigan back taxes problems, contact a licensed tax professional.