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Wednesday, October 31, 2012
The New York State Offer in Compromise Program
The New York State Offer in Compromise Program allows qualifying, financially distressed taxpayers the opportunity to put overwhelming tax liabilities behind them by paying a reasonable amount in compromise. The Tax Department will not necessarily, however, accept every offer in compromise (also referred to as offer throughout this publication).
The Commissioner of Taxation and Finance is empowered to compromise taxes for qualifying taxpayers under Tax Law sections 171.15th, for liabilities considered fixed and final; 171.18th-a, for liabilities still subject to administrative review; and 171.18th-d, for certain joint personal income tax liabilities. Under section 171.15th, if the tax portion of the liability is more than $100,000 (not including penalties and interest), compromises must be approved by a New York State Supreme Court justice. Other standards set forth in the Tax Law, and requirements in Parts 5000 and 5005 of the New York State Official Compilation of Codes, Rules, and Regulations (NYCRR), are described below. In most cases, to be eligible for an offer in compromise, taxpayers must be insolvent (liabilities exceed assets), and the Tax
Department’s ability to collect more than the amount offered must be in doubt. In addition, taxpayers making an offer must have filed all applicable New York State tax returns. The taxpayer should make a reasonable monetary offer based on his or her financial situation. If an offer is withdrawn or rejected, any money sent in by the taxpayer with the offer in compromise will be promptly refunded without interest or, at the taxpayer’s request, applied to the tax liability. In addition, collection activities may continue while an offer is under review.
A taxpayer is considered insolvent when the taxpayer’s liabilities, including tax liabilities, exceed the fair market value of his or her assets. The taxpayer must conclusively demonstrate this insolvency.
The department, after an evaluation, determines an amount that it realistically expects could be collected within a reasonable period of time from the taxpayer’s assets. The amount acceptable in compromise cannot be less than what could be expected to be collected from the taxpayer over that period through legal proceedings, such as levies, income executions, and seizures.
Offer in compromise forms
Form DTF‑4, Offer in Compromise (For Liabilities Not Fixed andFinal and Subject to Administrative Review), or DTF‑4.1, Offer in Compromise (For Fixed and Final Liability), must be filed to request an offer in compromise.
A completed Form DTF‑5, Statement of Financial Condition andOther Information, must be submitted with the last three years of federal income tax returns, a credit report less than 30 days old, the last 12 months of bank statements, and Form DTF‑4 or DTF‑4.1 to:
NYS TAX DEPARTMENT
PO BOX 5100
ALBANY NY 12205-0100
Offers in compromise when the liabilities are considered fixed and final (Tax Law
Offers under this subdivision apply to tax liabilities for which further administrative or judicial review is not available. Therefore, the primary consideration is collectibility. An offer would be considered if the taxpayer has been discharged from bankruptcy within the last year or is shown to be insolvent. The amount accepted cannot
be less than what could realistically be expected to be collected from the taxpayer through legal proceedings.
Offers in compromise when the liabilities are still subject to administrative review (Tax Law
Offers under this subdivision apply to tax liabilities that are still subject to administrative review, and are not fixed and final. The offer may be based on doubt as to the taxpayer’s liability for the taxes due, or doubt as to the taxpayer’s ability to pay the taxes due, in full, over a reasonable period.
Trust tax liabilities
For trust tax liabilities (e.g., withholding tax, sales tax), an amount less than the tax amount owed, exclusive of penalties and interest, will not normally be accepted. However, upon evaluation of the facts of the specific case, the department may determine that a lesser amount is acceptable if it is in the best interest of all parties
concerned. The department considers whether the business is still in operation, and whether the trust taxes were actually collected.
Joint income tax liabilities
For joint income tax liabilities, the taxpayers may file an offer jointly on one Form DTF‑4 or DTF‑4.1, or may each file a separate offer.If only one taxpayer’s offer is accepted and paid, the remaining taxpayer continues to be liable for the outstanding balance of the liability. An accepted offer forgives further payment only for the taxpayer whose offer was accepted.
A taxpayer assessed as a responsible person liable for the
collection and payment of trust taxes for a business may
compromise his or her trust tax liability separately from the
business. Any or all of the responsible persons may apply for
an individual offer in compromise. The department will make a
separate determination on each offer, based on the circumstances
of each responsible person who applies. If the offer is accepted,
the payments made toward the offer will reduce the business’s
liability by that same amount. While the taxpayer’s responsible
person assessments are abated upon full payment of the accepted
offer, the business’s assessments and the assessments of any
other responsible person will remain open and collectible, less all
payments made under the offer.
If a business applies for an offer in compromise and the
responsible persons do not apply individually, acceptance of the
business’s offer would have no effect on a responsible person’s
liability other than reducing his or her individual liability by an
amount equal to that paid by the business
Offers in compromise when the liabilities concern
certain joint personal income tax liabilities (Tax Law
To qualify for an offer under this subdivision, a taxpayer must
have a liability on a previously filed joint income tax return and, at
the time of the offer, the taxpayer and his or her spouse must be
separated under a decree of divorce or separate maintenance or
a written separation agreement, or a judicial decree of separation,
or living apart and not considered married under section 7703(b)
of the Internal Revenue Code. It must also be determined that the
collection of the spouse’s share of the liability from the taxpayer
cannot be accomplished within a reasonable period without
imposing substantial economic hardship on the taxpayer.
Offer in compromise withdrawal
The taxpayer or the taxpayer’s representative may withdraw an
offer before an official review has been completed and before a
final decision has been made on the offer. In some cases, such
as when a taxpayer fails to supply requested information, the
department considers the offer to be withdrawn as incomplete and
advises the taxpayer in writing of the decision.
Offer in compromise acceptance
Upon acceptance of an offer, written notification will be provided to
the taxpayer or the taxpayer’s designated representative specifying
the terms and conditions. Under the terms of the accepted offer,
the taxpayer agrees to remain fully compliant with all Tax Law
requirements, including filing returns and paying tax when
required for the next five years. Any state tax refunds payable
to the taxpayer for periods prior to and including the calendar
year in which the offer is accepted will be applied to the original
outstanding liability. Any excess will be refunded to the taxpayer.
The taxpayer(s) waive(s) any statute of limitations defenses
to the assessment and collection of the liability sought to be
compromised and further waives(s) any statute of limitations
defenses against the issuance of new assessment(s) for the
compromised liability in the event the taxpayer(s) fail(s) to comply
with the terms of the Offer in Compromise.
The taxpayer also agrees to forfeit any current capital loss or net
operating loss credits taken on any future New York State tax
Offer in compromise rejection
Written notification is provided if an offer is rejected. Examples of
reasons for rejection include, but are not limited to:
• The taxpayer does not meet the statutory requirements set forth
in the New York State Tax Law.
• The taxpayer submits false or misleading information.
• The taxpayer submits a frivolous offer.
• The taxpayer fails to make full financial disclosure.
• There is evidence that assets were transferred for less than the
fair market value.
• The taxpayer shows a lack of a good faith effort to repay the
• The tax liability sought to be compromised directly relates to a
crime for which the taxpayer has pleaded or been found guilty.
Depending on the circumstances, the department may reconsider
a rejected offer if there is a material change in the taxpayer’s
circumstances, if the department misinterpreted information
contained in the original offer, or if the taxpayer offers a substantial
increase in the amount that was originally offered.
If a taxpayer fails to abide by all of the terms and conditions
of the offer in compromise, the offer is in default. Upon default
and revocation, the original liability is reinstated, including all
appropriate penalty and interest, minus any payments received on
Offers made to the Internal Revenue Service
The New York State Offer in Compromise Program is distinct from
similar programs offered by the federal government. For example,
the guidelines for the acceptance of offers differ. However, the
department will accept a copy of the federal offer in compromise
collection information statement as part of the application process.
If you have questions about the New York State Offer in
Compromise Program, please call (518) 457-9086 from 8:00 a.m.
to 4:25 p.m. (eastern time), Monday through Friday. For forms and
other information, see Need help?
Personal Income Tax Information Center: 1 800 225-5829
From areas outside the U.S. and outside Canada: (518) 485-6800
Text Telephone (TTY) Hotline (for persons with
hearing and speech disabilities using a TTY): 1 800 634-2110
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John A. Hatling, et ux. v. Commissioner, TC Memo 2012-293 , Code Sec(s) 1341; 6663.
JOHN ALLEN HATLING AND KATHLEEN ANN HATLING, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
|Code Sec(s):||1341; 6663|
|Docket:||Dkt. No. 20709-10.|
|Judge:||Opinion by Marvel, J.|
Official Tax Court Syllabus
CounselJohn Allen Hatling and Kathleen Ann Hatling, pro sese.
MEMORANDUM FINDINGS OF FACT AND OPINION
FINDINGS OF FACT
1 Unless otherwise indicated, section references are to the Internal Revenue Code (Code) in effect for the years at issue, and Rule references are to the Tax Court Rules of Practice and Procedure. Some monetary amounts have been rounded to the nearest dollar.
2 Petitioners concede the deficiencies for 2001-04 as determined by respondent in the notice of deficiency. Petitioners also concede the sec. 6663(a) civil fraud penalty for 2004.
3 Mr. Hatling was suspended from the practice of law for a period of 45 days as a result of his conviction for willfully failing to pay Minnesota State income tax for 2003. See infra p. 3.
4 Mr. Hatling's work includes estate planning, and he has attended at least one seminar covering the representation of clients before the Internal Revenue Service (IRS) and the use of alternative payment options, such as offers-in-compromise.
5 Minn. Stat. Ann. sec. 289A.63(1)(b) (West 2007 & Supp. 2012) provides that "[a] person required to pay or to collect and remit a tax, who willfully attempts to evade or defeat a tax law by failing to do so when required, is guilty of a felony."
6 In preparing petitioners' tax returns Mr. Hatling claimed a claim of right deduction for each year in the amount of gross income that was not offset by business expense deductions.
7 For 2003 in addition to disallowing a claimed business expense deduction of $32,004, respondent also disallowed $2,323 of claimed cost of goods sold.
8 On his 2001 Schedule C Mr. Hatling reported the following as other expenses: "Education, Professional" expenses of $793, "Contributions" of $150, "Dues & Subscriptions" of $2,376, "Banking & Credit Charges" of $672, "Legal Library" expenses of $2,791, "Interest" expenses of $6, "Postage" expenses of $1,599, "Telephone" expenses of $11,008, and expenses of $79,913 under an entry entitled "See Line 48 Other Expenses", for total other expenses of $99,308. On the 2001 Form 8275, however, Mr. Hatling purported to claim a claim of right deduction of $99,308. In the notice of deficiency respondent determined that only $79,913 of Mr. Hatling's claimed other business expenses deduction, rather than the entire amount, was attributable to his claim of right deduction. Respondent categorized the remainder, $19,395, as other business expenses and disallowed $2,539 of this amount. On his 2002 Schedule C Mr. Hatling reported the following as other expenses: "Education, Professional" expenses of $897, "Contributions" of $922, "Dues & Subscriptions" of $2,223, "Banking & Credit Charges" of $688, "Legal Library" expenses of $6,272, "Interest" expenses of $5,702, "Postage" expenses of $1,322, "Telephone" expenses of $6,972, and expenses of $91,726 under an entry entitled "Claim of Right Pursuant to IRC 1341(a)(5)(B) See Form 8275 attached", for total other expenses of $116,724. In the notice of deficiency respondent determined that Mr. Hatling deducted $91,726 as a claim of right deduction. Respondent categorized the remainder, $24,998, as other business expenses and disallowed $6,624 of this amount. On his 2003 Schedule C Mr. Hatling reported other expenses of $39,950 under an entry entitled "Claim of right pursuant to IRC 1341(a)(5)(B). See Form 8275 attached". Respondent disallowed the entire amount of the claimed other expenses Mr. Hatling deducted.
9 For 2001 respondent also determined that petitioners failed to report $2,820 in gross profits from rents and $80 of dividend income. For 2002 respondent also determined that petitioners failed to report $27,166 in gross profits from rents, $23 of dividend income, and $376 of capital gain. For 2003 respondent also determined that petitioners failed to report $6,759 in gross profits from rents, $63 of dividend income, and $159 of capital gain.
10 In the case of a joint return the sec. 6663(a) penalty does not apply with respect to a spouse unless some portion of the underpayment is due to the fraud of that spouse. See sec. 6663(c).
11 These factors are not exclusive. See Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).
12 For each of the years at issue the record contains two versions of profit and loss statements with respect to Mr. Hatling's law practice: a copy petitioners provided during the audit process (audit PandL statement) and a copy they provided during formal discovery (discovery PandL statement). Petitioners reported gross receipts with respect to Mr. Hatling's law practice on the documents as follows:
Year Audit PandL statement Discovery PandL statement Return 2001 $187,627 $187,741 $187,741 2002 261,448 146,796 261,448 2003 188,940 191,836 173,278
13 Petitioners also appear to contend the claim of right deductions were not fraudulent because the deductions clearly were impermissible and therefore Mr. Hatling could not have been attempting to conceal his income. We reject petitioners' contention for several reasons. First, the Code provides that taxpayers may deduct from income an amount received under a claim of right.See sec. 1341. Petitioners have failed to convince us that simply by including the claim of right deductions on their returns, they disclosed that the deductions they were claiming were clearly improper. Second, while the U.S. Court of Appeals for the Eighth Circuit, to which an appeal in this case would lie absent a stipulation to the contrary, see sec. 7482(b)(1)(A), (2), has not addressed the issue of whether a taxpayer's disclosure may preclude a finding of fraudulent intent, at least two other Courts of Appeals, as well as this Court, have held that disclosure does not preclude a finding of fraudulent intent, see Edelson v. Commissioner, 829 F.2d 828, 832-833 (9th Cir. 1987), aff'g T.C. Memo. 1986-223; Granado v. Commissioner, 792 F.2d 91, 93-94 (7th Cir. 1986), aff'g T.C. Memo. 1985-237; Price v. Commissioner, T.C. Memo. 1996-204; Cloutier v. Commissioner, T.C. Memo. 1994-558. But see Zell v. Commissioner, 763 F.2d 1139, 1144 (10th Cir. 1985) ("Clearly, where the taxpayer has informed the IRS of his refusal to file or to pay, and of the reasons for that refusal, the government has not been deceived. In addition, the disclosure clearly negates any intent to deceive."), aff'g T.C. Memo. 1984-152; Raley v. Commissioner, 676 F.2d 980, 983-984 (3d Cir. 1982) (holding that a taxpayer did not act with fraudulent intent because he "went out of his way to inform every person involved in the collection process that he was not going to pay any federal income taxes"), rev'g T.C. Memo. 1980-571. Third, petitioners deducted the claim of right deductions with the intent of underreporting their taxable income and evading their obligation to pay their proper income tax liabilities when due.
14 With respect to 2002 the gross receipts shown on the audit PandL statement, $261,448, equal the gross receipts Mr. Hatling reported on the 2002 Schedule C. However, the gross receipts shown on the discovery PandL statement for 2002 are $146,796. The difference is attributed to the fact that on the audit PandL statement, Mr. Halting reported fee income of $261,448, but on the discovery PandL statement, he reported fee income of only $103,130. Petitioners have not introduced any evidence to explain this discrepancy. While this discrepancy is suspect, we note that the audit PandL statement appears accurate and the expense amounts on the discovery PandL statement are generally consistent with the expense amounts shown on the audit PandL statement and Mr. Hatling's Schedule C. Accordingly, this discrepancy does not compel us to find that petitioners failed to maintain adequate books and records.
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