2011 Changes to Offers-in-Compromise

Acknowledging that New York was missing opportunities to collect revenue from otherwise uncollectable accounts, in August, 2011, the State Legislature amended New York's Offer-in-Compromise ("OIC") law to make it similar to the more successful federal program.

Historically, New York offered overwhelmed tax debtors little incentive to seek a settlement of their tax problems because the OIC program, due to the limited compromise authority granted to the Tax Department, offered little, if any, meaningful relief. While the federal and state programs both seek to " collect what is potentially collectible at the earliest possible time with the least cost to the government", historically New York's OIC program was available only to taxpayers who could prove either insolvency or that their taxes were discharged in bankruptcy, and then only if they could offer at least what the Tax Department could theoretically recover through levy or garnishment over the entire collection period (up to twenty years). Accordingly, solvent debtors with overwhelming tax debts (including those who successfully filed federal OIC's) and little likelihood of ever paying, were ineligible for the State program and were forced to quickly learn the limits of New York's collection powers in order to make themselves collection-proof, and were likely to leave the state to avoid tax collection, resulting in a loss of future collections. Arguably, for years New York's failed OIC program has cost the State revenue due to:

1. missed opportunities to collect something from solvent debtors;

2. State tax liabilities often have a lower collection priority than those of IRS or other creditors; and

3. Statutory collection restrictions often limit access to the debtor's assets (ex. pensions are exempt) or income (ex. Maximum 10% gross wage levy).

By changing the law, New York is now offering the solvent debtors with overwhelming, likely to never be satisfied, state tax liabilities (the same persons taking advantage of the federal program) a chance for a fresh start, while simultaneously seeking to obtain some tax revenue from otherwise lost causes.

Accordingly, on August 17, 2011, two important changes to the New York program became effective.

First, the law now authorizes the Tax Department to evaluate the adequcy of any amount offered by determining the reasonable collection potential, based on the total realizable value of the taxpayer's assets (the amount expected from a sale within 90 days, less prior liens) and collection potential of the taxpayer's future income (generally limited to ten years, but can be shortened based on the taxpayer's circumstances, and including consideration of non-collection factors, such as whether exercise of the State's full collection powers would deprive the taxpayer of sufficient resources to pay basic living expenses). Historically, New York's program required that the amount offered equal at least what the Department could recover through legal proceedings, which was often an amount far in excess of their ability to pay. Obviously, this requirement served neither the best interests of taxpayers nor New York State because, since no offers were adequate, no offers could be accepted and no payments on tax bills were received.

Second, eligibility for the program was expanded beyond the bankrupt and insolvent, to now include solvent taxpayers who can demonstrate that collection in full would cause them ‘undue economic hardship.'

"Undue Economic Hardship” is defined as "an inability to pay reasonable basic living expenses,” and the determination of what constitutes a reasonable amount for the taxpayer's basic living expenses will be made by the Tax Deparment after consideration of the taxpayer's unique circumstances. Basic living expenses are those expenses that provide for the taxpayer's and family's health, welfare, or production of income, and will be determined by the Tax Department based on IRS guidelines. Basic living expenses do not generally include tuition for private scools, college expenses, charitable or retirement contributions, unsecured debt (like credit card lills), cable television bills, or similar expenses.

Other factors that may affect the State's determination include:

1. the taxpayer's age, health, employment history and earning ability;

2. Number, ages and health of dependents;

3. Cost of living for area residing;

4. Extraordinary items, such as special education or medical requirements; or

5. Any other facts causing economic hardship.