California Income Taxes
California Franchise Tax Board Income Tax Offers in Compromise.
In order for the FTB to process an OIC application, the taxpayer must file all of the required tax returns, fully complete the OIC application, provide all supporting documentation, and agree with the FTB on the amount of tax owed.
File an OIC application using:
- Form FTB 4905PIT for personal income tax (which may be filled in online but must be mailed);
- Form FTB 4905BE for business income tax (which must be printed and prepared manually); or
- Form DE 999CA, Multi-Agency Form for Offer in Compromise, for individuals who owe taxes to the FTB, EDD, and/or CDTFA.
Generally, the FTB will approve an OIC when the amount offered represents the most the FTB can expect to collect within a five-year period. The FTB does not have a set formula for determining the amount of an OIC. They consider, among other things, the taxpayer’s age, health, and future earning potential along with the amount of the liability versus the taxpayer’s net assets.
The FTB gives strong consideration to these factors in its evaluation:
- The taxpayer’s ability to pay;
- The amount of equity in the taxpayer’s assets;
- The taxpayer’s present and future income;
- The taxpayer’s present and future expenses;
- The potential for changed circumstances; and
- Whether the offer is in the best interest of the state.
- The IRS’s acceptance of an OIC does not mean the FTB will automatically grant a California offer. The FTB will conduct an independent evaluation.
The FTB often requires a taxpayer to enter into a collateral agreement for a term of five years, particularly if the taxpayer has significant potential for increased earnings.
A collateral agreement requires a taxpayer to pay the FTB a percentage of future earnings that exceeds an amount agreed upon by the taxpayer and the FTB.
The collateral agreement is one of the tools you can use to negotiate the payment down.
Acceptance of an offer by one debtor on a joint liability does not automatically relieve the remaining spouse from payment of the compromised liability.
Being on an installment agreement will not prevent a taxpayer from being approved for an OIC. But the FTB will want all cash paid up front in an amount the taxpayer would pay on the installment agreement over the next five years.
Submit the following documentation with the offer in compromise application:
- Verification of income: Pay stubs for the past three months or financial statements for the past two years if the taxpayer is self-employed. Include any investment or ownership in any business entity or trust and income derived from these sources (dividends, K-1 income, distributions, etc.);
- Verification of expenses: Billing statements for the past three months (include copies of revolving charge card statements, bills from other creditors, and personal loan statements);
- Bank information: Bank statements for savings and checking accounts for the past six months. If the taxpayer is self-employed, you must provide bank statements for the past 12 months. Include any accounts that have been closed;
- Securities: Investment account statements showing the value of stocks, bonds, mutual funds, and/or retirement or profit sharing plans (IRA, 401(k), Keogh, annuity);
- Housing: Current lease or rental agreements;
- Real property information: Mortgage statements and escrow statements for property the taxpayer currently owns, sold, or gifted in the past five years;
- IRS information: If applicable, copy of an IRS OIC and acceptance letter or other IRS arrangements;
- Legal documents: Marital settlement agreements, divorce decrees, marital property settlements, trust documents, and bankruptcy documents;
- Medical information: Physician’s letter including diagnosis and prognosis and/or other documents to show any medical condition that should be considered; and
- Power of attorney: Power of attorney form if you are submitting the offer on behalf of your client.
No advance payment
The FTB does not follow the federal requirement that a taxpayer make a nonrefundable payment when making an OIC. Once the offer is approved, a taxpayer will then be required to pay the agreed amount by cashier’s check or money order.
How long does the process take?
Generally, the FTB will make a decision within 120 days of the account being assigned to a specialist. More complex accounts might take longer.
Entities and shareholders/members who qualify for Ralite are perfect candidates for an OIC, and the FTB will accept an offer for these businesses because there are no assets to pay the outstanding liabilities.
The process will be the same as other OICs. Most importantly:
- All outstanding returns must be filed. Remember that in those cases involving entities that never commenced operations, this means that they would only need to file no activity returns for all relevant tax years and mark the final return box on the last return;
- The FTB requires a fully completed OIC application, Form FTB 4905BE, Offer In Compromise for Business Entities; and
- There must be a payment offered. You may not make an OIC with no payment. We suggest you offer a minimal amount. You can always increase this amount.
Contact us for assistance