Articles

FTB offers in compromise (OICs)

The FTB has the legislative authority to grant an offer in compromise. (R&TC §19443)

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.

Generally, the FTB will approve an OIC when the amount offered represents the most the FTB can expect to collect within a reasonable period of time. 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 and the amount the taxpayer is generally able to pay over the next five years. The FTB gives strong consideration to these factors in its evaluation:

  • The taxpayer’s ability to pay;
  • he amount of equity in the taxpayer’s assets;
  • The taxpayer’s present and future income;
  • The taxpayer’s present and future expenses;
  • The taxpayer’s age and health;
  • The potential for changed circumstances; and
  • The offer is in the best interest of the state.

The FTB executive officer and chief counsel, jointly, or their delegates, may approve a compromise for any final tax liability in which the reduction of tax is $7,500 or less. The three-member Franchise Tax Board must review all recommendations made jointly by the executive officer and chief counsel to approve compromises in which the reduction of tax is in excess of $7,500.

Financial hardship
The FTB uses the same financial hardship conditions for OICs as they do for an installment agreement (see ¶28-407).

Collateral agreements
The FTB may require a taxpayer to enter into a collateral agreement for a term of five years. The FTB generally requires a collateral agreement in cases when the taxpayer has significant potential for increased earnings. A collateral agreement requires a taxpayer to pay the FTB a percentage of future earnings that exceed 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.

IRS’s acceptance
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.

Joint returns
Acceptance of an offer by one debtor on a joint liability does not automatically relieve the remaining spouse from payment of the compromised liability.

Form
File an OIC using:

Form FTB 4905PIT for personal income tax;
Form FTB 4905BE for business income tax; or
Form DE 999CA, Multi-Agency Form for Offer in Compromise, for individuals who owe taxes to the FTB, EDD, and/or CDTFA.

For more information, call the FTB’s Offer in Compromise Group at:

Telephone: (916) 845-4787

No advance payment
The FTB does not follow the federal requirement that a taxpayer make a nonrefundable payment when making an OIC.

Full payment only
The FTB does not allow a taxpayer to pay the offered amount in installment payments. The full amount of the offer must be paid when the offer is accepted.

How long does the process take?
Generally, the FTB decide whether to grant the OIC within 4–6 months of the account being assigned to a specialist. More complex accounts might take longer.

Ralite
Entities and shareholders/members who are ineligible for voluntary or involuntary dissolution but 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 $1 per year. You can always increase this amount.


About the Author
D. Steven Yahnian has been a member of the California Bar and a practicing Attorney since 1980. He has also been a California CPA since 1984. Mr. Yahnian also holds the CFP® designation.

Mr. Yahnian practices in the following areas of law through YAHNIAN LAW CORPORATION:

  • Tax Planning, Tax Debt Resolution and Tax Litigation
  • Business & Corporate Law & Planning
  • Estate Planning & Administration
  • Real Property Law & Planning
  • Asset Protection Planning

As a CPA/CFP, Mr. Yahnian also has a separate accounting and tax return preparation practice called DSA ACCOUNTING.

Mr. Yahnian is a California State Bar Certified Specialist in the following
• Taxation Law and
• Estate Planning, Trust & Probate Law.

Mr. Yahnian received a B.S. degree in Accounting from USC, a J.D. from Loyola University of Los Angeles School of Law and an LL.M. in Taxation from New York University Law School. He also has a Certificate in Taxation from UCLA (with distinction).

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SPRING/2021
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