Reforms the offer-in-compromise program

Summary of provisions

Section 1 of this bill would amend subdivision Fifteenth of Tax Law 171 to allow tax debtors to apply for an offer in Compromise for a fixed and final liability of a tax or other imposition administered by the Commissioner of Taxation and Finance if collection in full would cause them undue economic hardship. This would be in addition to those cases in which tax debtors may apply for an offer in compromise under current law: when they are insolvent or discharged from a bankruptcy proceeding to apply for an offer in Compromise. The amount payable through an offer in compromise would no longer be limited to the amount recoverable through legal proceedings but would need to be an amount reasonably reflecting collection potential or be otherwise justified by the tax debtor. No offer in compromise would be acceptable if it would undermine tax compliance by other taxpayers or be adverse to the interests of the State. The Commissioner of Taxation and Finance would be required to promulgate regulations defining what constitutes undue economic hardship. The inability to maintain an affluent or luxurious lifestyle would not constitute undue economic hardship. Finally, this section would retain the threshold for requiring approval of an offer in compromise by a New York State Supreme Court Justice of more than $100,000, not including penalties or interest.

Section 2 of this bill would amend subdivision Eighteenth-a of Tax Law § 171 to modernize the language of the provisions for an offer in compromise for liabilities that are not fixed and final, and to raise the threshold for requiring an Opinion of Counsel to $50,000 or more, including any penalties or interest. Tax Department regulations currently apply the subdivision Fifteenth standards to offers in compromise under subdivision Eighteenth-a, and the regulations would be amended to take into account the new standards added to subdivision Fifteenth by the bill.

Section 3 of the bill provides that it would take effect immediately.

Existing law

Subdivision Fifteenth of section 171 of the Tax Law authorizes the Commissioner of Taxation and Finance to compromise fixed tax liabilities where the taxpayer has been discharged in bankruptcy or is insolvent, but the amount accepted in compromise cannot be less than the amount, if any, that is recoverable through legal proceedings.

Subdivision Eighteenth-a of Tax Law § 171 allows the Commissioner of Taxation and Finance to compromise a liability before it becomes final and is no longer subject to administrative or judicial review. An Opinion of Counsel is required for liabilities of $25,000 or more, including any penalties or interest. Pursuant to Tax Department regulations, the standards for offer in compromise set forth in subdivision Fifteenth are used in connection with the compromise of liabilities that are not yet fixed and final under this subdivision.

Legislative history

This bill was proposed in the 2010-11 Executive Budget (S.6610/A.9710, Part L), but was not enacted as part of the 2010 Budget.

Statement in support

The compromise provisions in subdivision Fifteenth of section 171 of the Tax Law, along with those in subdivision Eighteenth-a, are outdated and do not reflect current realities or the experiences of the Tax Department in administering the offer in compromise program. These provisions of the Tax Law deprive the Commissioner of Taxation and Finance of the authority to provide relief to all deserving taxpayers and inhibit the Department's ability to generate revenue on otherwise uncollectible liabilities. In addition, the offer in compromise process is often an ineffective or futile avenue for relief of overwhelming tax debts.

Currently, subdivision Fifteenth authorizes the Commissioner to compromise fixed and final tax liabilities, including penalties and interest, only if: (1) the taxpayer has been discharged in bankruptcy or been proven to be insolvent; and (2) the amount payable in compromise equals or exceeds what the Tax Department could conceivably recover through legal proceedings. These restrictions require the Tax Department to assume a full exercise of its levy and garnishment powers to establish a minimally acceptable offer, even if specific circumstances render enforcement of the debt impractical or unlikely to succeed. The existing restrictions in subdivision Fifteenth contribute to a failure of the offer in compromise program to reach its public policy goals, which include: (1) resolving tax liabilities that cannot be satisfied in full; (2) collecting what can reasonably be collected at the earliest time possible and at the least cost to the State; (3) giving taxpayers with overwhelming liabilities a fresh start, enabling them to comply voluntarily with the tax laws and become productive, taxpaying members of society; and (4) collecting funds that may not be collectible by other means; thereby encouraging taxpayers to stay, and keep their productive assets, in New York. Instead, the statutory restrictions to compromise are contributing to an increasing number of taxpayers facing overwhelmingly large, aging, and uncollectible tax debts. This is particularly true since the rapid accumulation of penalties and interest makes it impossible for some taxpayers to keep up, over time, with their growing liabilities, no matter how hard they try.

The new provisions in this bill are designed to address the unintended negative consequences of the restrictions contained in subdivision Fifteenth. Under the bill, the Commissioner of Taxation and Finance would be authorized to consider an increased pool of applicants for a potential offer, based not only on the tax debtor's status as

having been discharged in bankruptcy or having been proven to be insolvent, but also on the undue economic hardship collection in full would impose. Additionally, the bill would authorize the Commissioner to compromise such fixed and final tax liabilities as long as the amount payable in compromise reasonably reflects collection potential or is otherwise justified by proofs submitted by the taxpayer. These statutory modifications will allow the Tax Department to bring more distressed tax debtors into the offer in compromise program.

The provisions of the bill that will permit the Commissioner to accept a lesser amount in compromise are designed to bridge the gap between the collectibility requirement and accepting a fair offer in extraordinary cases. The recognition that there is a need for flexibility to craft compromises based on the unique facts of a particular case derives from actual cases where, in the Tax Department's experience, current standards do not allow it to reach a fair result, given the extraordinary financial circumstances of the taxpayer.

Under the bill, similar to federal procedures, an offer in compromise will not be accepted for any reason where acceptance of such an offer would not be in the best interests of the State or would undermine voluntary compliance with the Tax Law. These standards also make it clear that offers in compromise cannot be used as a tax planning device by businesses or individuals. In addition, the requirements of judicial oversight and an opinion of counsel for larger amounts to be compromised have been retained and updated.

Budget implications

There are no known budget implications associated with this bill.

Effective date

The bill would take effect immediately upon enactment.