Maryland Bar Bulletin
Publications : Bar Bulletin : April 2005

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Maryland Offer in Compromise Tax-Liability Resolution Program
~A legitimate alternative to traditional collection tools~
By Jacqueliny Pyun

Over the years, the Comptroller of Maryland has taken many steps to insure that the taxpayers pay their tax dues, mostly by implementing new collection tools. For example, since January 2000 the Comptroller has been participating in the Federal Tax Refund Offset program, a cooperative program with the Internal Revenue Service that allows the Comptroller to intercept the federal income tax refunds and apply them to satisfy delinquent state income tax liabilities. The Comptroller has started its own new program to catch tax-evaders called “Caught in the Web” initiative, an online list of delinquent individuals and businesses. On their website, the Comptroller lists not only the individuals who owe delinquent personal income but the owners of businesses who owe some of the largest tax liabilities for corporate income, employer withholding and sales and use tax for all the world to see. Also, under the Corporate Charter Project the Comptroller sends out numerous warning letters every day to delinquent corporations that are not in bankruptcy and do not have payment plans in order to collect business tax liabilities. Upon receiving such a notice, the corporations have 15 days to contact the Comptroller to resolve the issue or possibly face forfeiture of the corporate charter. Furthermore, the Comptroller is now more empowered to collect the tax dues since the requirement that the Comptroller get a court order for a direct wage garnishment and a bank attachment no longer exists.

The basic principle behind all of these traditional enforced collection procedures is that taxpayers should be threatened, one way or another, in order for the government to effectively collect the tax dues. However, this principle leaves out a resolution for taxpayers who are in fact unable to pay their outstanding tax dues in full at any time in the foreseeable future or in their lifetime. The virtual elimination or significant reduction in income that results from the traditional enforced collection tools such as garnishment of wages, attaching assets and filing a lien can redirect the course of a taxpayer’s life and have far-reaching consequences for the entire family. The obvious outcomes would be a serious economic hardship to the taxpayers and a significant reduction of revenue to the government. How then can the Comptroller achieve a tax resolution that is in the best interest of both the taxpayers and the government?

One answer to this question is that a well-functioning Maryland Offer in Compromise program can be a legitimate alternative to these traditional enforced collection tools. The Offer in Compromise is an agreement between the Comptroller and a taxpayer who is unable to pay the tax dues in full, which settles the taxpayer’s liability for some amount that is less than the full amount due. In order to qualify for the program, a taxpayer must stay current with respect to the filing and payment requirements and must not be involved in an open bankruptcy. Under the program, the Comptroller looks at the taxpayer’s available financial resources, considers those resources in light of the taxpayer’s circumstances and arrives at an equitable resolution of the liability. The program is especially appealing to taxpayers whose taxes are not dischargeable under the bankruptcy code. When an Offer is finally accepted and the taxpayers pay the compromised amount, it is required that the taxpayers remain current with respect to future filings and payments for at least three years.

It is generally known that the Comptroller imposes much more restrictive policy and rigid guidelines for the Offer in Compromise program than the IRS does for the federal program. It fact, only less than 10 percent of the Offers submitted each year are accepted by the Comptroller. So what rules and guidelines of the state program make it more difficult for taxpayers to get the benefits from it than the federal program? First, unlike the federal program, the taxpayer is eligible for the state program only if it has been at least two years from the time the return was actually received by the Comptroller. This two-year requirement is one of the most difficult hurdles for the Maryland taxpayers who have not filed the returns on time and yet want to resolve their tax issues under the program. Second, while the taxpayer is given a review by Appeals if the IRS Offer specialist recommends the Offer for a rejection, all decisions made by the case review board at the Comptroller are final. There is no formal Appeals process under the state program for the taxpayer to engage in further negotiations with the Comptroller and to stop the collection process further. Most importantly, under the federal program, the IRS is required to be flexible to make it easier for taxpayers to enter in Offer in Compromise agreements and to adopt a liberal acceptance policy to provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes. However, the Comptroller has not adopted the liberal acceptance policy rule. In fact, the liberal acceptance policy has not been reflected in the stated purpose of the state program or any public policy statements. This is a huge drawback to submitting an Offer because if it is rejected the Comptroller may accelerate collection efforts with the financial disclosure the taxpayers initially made to the Comptroller.

The Comptroller should adopt a stronger and more effective tax enforcement policy by implementing a functional Offer in Compromise program that gives more taxpayers a fresh start. With the adoption of more flexible procedures and the liberal acceptance policy, both the Maryland taxpayers and the Comptroller will be better off. Given the adoption of the liberal acceptance policy by the Comptroller, it is highly likely that more and more Offers will be brought by the taxpayers seeking a resolution to their tax matters and a fresh start toward future voluntary compliance with all tax filing and payment requirements. More and more taxpayers will have an incentive to continue to file tax returns and get the benefits from the program. Also, it will make it easier for the Comptroller to achieve its goal to collect what is potentially collectible at the earliest possible time and at the least cost to the government.

In sum, a well-functioning Offer in Compromise program will both enhance the taxpayer’s future compliance and secure collection of revenue that may not be collected through any other means. The Comptroller needs to make more serious efforts to adopt a tax policy that serves two purposes: meeting the government’s need for revenue and valuing the taxpayer’s well-being. And one way to do this is by strengthening the Offer in Compromise program, not by implementing more traditional enforced collection tools.


Jacqueline Pyun is an associate with the law firm of Alvin Brown & Associates, LLC, where she represents taxpayers in a national IRS controversies tax practice.
 
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Publications : Bar Bulletin: April, 2005

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