A Broad Overview of Virginia’s Offer In Compromise Program
Many taxpayers that owe back taxes in the State of Virginia are unaware that there are alternatives to endless tax collection efforts. Not only are taxpayers frightened when they receive a collection notice from the Virginia Department of Taxation, but there is also a general lack of knowledge about their options. One such option is known as an Offer in Compromise (OIC). An OIC, or more commonly known as a “tax settlement,” is a formal proposal to the Department of Taxation to settle your outstanding back taxes for less than you owe.
Below we explore the advantages of an OIC. Furthermore, we review the procedures for requesting an OIC and eligibility requirements. An OIC can be confusing and cumbersome. Therefore, a taxpayer may want to consult with an experienced Virginia tax professional to determine if they should pursue an offer in compromise.
How Does an Offer in Compromise Work and What are the Benefits?
An Offer in Compromise is a formal proposal to the Virginia Department of Taxation, essentially setting forth a partial payment plan for settling back taxes. The total of all payments the taxpayer makes under an OIC will be less than what they owe in back taxes, penalties, and interest.
Unlike a payment plan, an OIC is a formal procedure that requires the taxpayer to complete the appropriate form. We cover the necessary tax forms in the following section. Depending on which tax form the state requires, the taxpayer may have to complete a detailed financial statement. The taxpayer may also pay a $50 administrative fee and include supporting documentation, such as:
- A Letter of circumstance detailing your situation -- This is one of the most important parts of your application so write the letter very carefully or work with a tax attorney.
- Recent pay stubs
- Copies of statements for assets like retirement accounts
- Documents evidencing all other income, such as rental income or social security benefits
- Copies of recent account statements from lenders evidencing your liabilities
- Documentation supporting any exceptional circumstances
- For business taxpayers – a profit and loss statement for the preceding 12 months and information on any receivables
Setting Forth Payment Terms
The taxpayer must also set forth the payment terms of the OIC by completing the designated space on the form. Payment options can range from just a one-time upfront payment to periodic payments. When opting for periodic payments, often, taxpayers will propose a payment upfront and enclose that payment when returning the OIC form, although a down payment is not required. If the Department of Taxation accepts the OIC, the taxpayer must timely make all payments as provided in the OIC. If the taxpayer fails to make all payments, the OIC will become void, and he or she will be liable for the full amount of the taxes owed.
An Approval or Denial
The Department does not have to accept an OIC. The Tax Commissioner has the authority to accept or deny an OIC. It is possible to propose what the taxpayer believes are reasonable payment terms, even including a sizeable initial payment, only for the Department to deny the offer. Even worse, the Department will not return their enclosed payment. However, it does get applied toward the outstanding balance. Even if the Department rejects the OIC, the taxpayer can sometimes resubmit the offer. While every case is different, it usually takes three months to hear back from the Department regarding an OIC.
When reviewing your application, the Department looks closely at your letter of circumstances. If you make a compelling case about why you can't pay the balance in full, the Department of Taxation is more likely to approve your request and discharge part of the tax bill. If you don't make a compelling case, they will deny your request. However, they sometimes take the middle road and offer an alternative such as making a counter-offer or offering you a payment plan.
Alternatives to OIC
An OIC is not an ideal fit for every taxpayer. In addition to meeting eligibility requirements, the taxpayer will require sufficient financial resources to make lump sum or large payments to the Department. Taxpayers that are not eligible or who receive an OIC denial can still explore other remedies such as setting up a payment plan or requesting a waiver of penalty discussed here.
Who is Eligible for an Offer in Compromise in Virginia?
There are three instances in which an individual or business may be eligible for an Offer in Compromise in Virginia:
- The taxpayer is not liable for the amount assessed (known as doubtful liability)
- The taxpayer is experiencing financial hardship and is unable to pay the amount owed (known as doubtful collectability)
- As a request for waiver of penalties over $2,000 where extenuating circumstances kept the taxpayer from filing on time
Relevant VA Offer In Compromise Documents
Depending on which category the taxpayer falls into, he or she needs to complete the appropriate form. Where the OIC is based on doubtful liability or the taxpayer is requesting a waiver of penalty over $2,000, he or she must complete and submit the following form:
With OICs based on doubtful collectability, the taxpayer needs to use the following forms:
The documentation required for OICs based on doubtful liability does not need an extensive financial statement like doubtful collectability. Generally, the taxpayer needs to submit documents supporting their claims of illness, extenuating circumstances, and a letter detailing your conditions justifying an OIC. Regardless of the type of OIC requested, all forms must be completed and mailed along with supporting documentation and payment (if you are making an initial payment) to:
Once a Taxpayer Submits an OIC to the Department
Once the Department of Taxation receives your OIC, they will notify you by mail of their decision. In addition to accepting or denying the OIC, they may also accept the OIC with changes. For example, they may require a modification of the payment terms. To avoid defaulting under the OIC, you will need to timely make all payments, as well as timely filing of all future returns and making all required tax payments. Please note that even if you submit an OIC, the Department may still file a tax lien against your property. If you timely make all payments under the OIC, however, the lien will be removed.
An Offer in Compromise is an excellent way for Virginia taxpayers to resolve back taxes. The requirements and procedures for requesting an OIC can be complex. If you have questions about submitting an Offer in Compromise contact an experienced Virginia tax professional today.
If you owe VA back taxes and are unsure of your rights or options, reach out to a licensed tax professional today that has experience resolving VA state tax issues. Start your search below to find the top-rated professional to help with your unique tax situation.
Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific help regarding your tax situation, contact a licensed tax professional or tax attorney.