General Information for the OIC program
The OIC for the State of California is not filed as often for either individual or businesses as for the IRS. However, I am going to give you some general information that I have found trolling the internet and what I have experienced filing the OIC's with the Franchise Tax Board.
The State of CA Franchise Tax Board has developed a rather distinctive Offer in Compromise program. In recent years, the Franchise Tax Board's acceptance of offers has increased dramatically and appears now to roughly parallel the federal acceptance rate.
Turn-around time at the Franchise Tax Board is more rapid. On average it is 90 days from the date of mailing the offer, wheras the IRS is 180+ days. This can create complications if the taxpayer is submitting an offer to both the federal and state agencies. The state agency, with its one offer group, works on a more intuitive basis. In cases where there is a possibility of changed circumstances and full payment, the state counteroffer is likely to be the amount of tax due (compromising the penalties and interest). This policy has been codified. If the taxpayer makes the case that he cannot pay the full amount, the Franchise Tax Board will review the offer emphasizing fairness in a less rigid context than the IRS.
It is the Franchise Tax Board's policy generally not to pursue collection while an Offer in Compromise is in progress. However, collection efforts are not stayed by law while the offer is being processed as is the case federally.
If the taxpayer wants to settle with both California and the IRS and lists all assets at full value on both offers, he will end up paying twice their value when settling with both agencies. The state is much more amenable to taking an offer at less than full asset value when a federal liability is involved, as long as the state is receiving an amount equal to the proportionate obligation (if the state obligation is one-third of the federal, the offer should be one-third of the federal).
One possibility is to raise enough cash to make a deposit with the state of its proportionate share of the offer funds available. This deposit will then be excluded from the assets available for the federal offer. Unfortunately, with the state processing offers more rapidly than the federal, the taxpayer is left with the dilemma of whether to accept the state offer before knowing whether a federal offer will be successful. However, the state has been extremely patient while waiting for the IRS determination.
The financial statements sought by the Franchise Tax Board in many respects parallel that sought by the Internal Revenue Service. It is the monthly income and expense analysis where the Franchise Tax Board tends to depart from the federal offer format. While the focus of the federal offer is on gross income, the state offer looks to net income.
The Franchise Tax Board asks for both the gross and net income from businesses and rentals. Strangely, the Franchise Tax Board does not ask for backup data for the business and rental income other than bank statements.
The Franchise Tax Board also asks for a three-year income summary, which allows the Franchise Tax Board to compare gross income reported by the taxpayer to that on filed returns. These issues arise in fairly few offers and the Franchise Tax Board may find it easier to deal with businesses and rentals on a case-by-case basis.
It is the expense side that differs significantly from the federal offer and frequently results in a somewhat different analysis. Their policy is to allow all reasonable expenses that are actually being paid. This may include tithing, college for the kids, and payments on credit card debt. The Franchise Tax Board does not use the national standard expense, and does not cap housing and auto expense.
The Franchise Tax Board requires a separate breakout of grocery, auto insurance, gasoline, estimated tax payments, and payments on delinquent taxes. This itemization makes the state form a much harder form to complete. However, as in the case of the federal offer, the larger the gap between income and expense, the larger the amount that will have to be offered. Because of the multiplier, it is important that the gap between income and expense be narrowed as much as possible.
In the best of circumstances, the taxpayer will keep the monthly budget electronically and will be able to account for all expenses by merely printing out a profit and loss statement on Quicken or a similar software program. If not, the taxpayer should compile a list of all expenses from the taxpayer's checkbook records. Unless the taxpayer has savings from which to draw or receives help from friends or family, all expenses, whether necessary or not, should be listed.
As with every aspect of preparing the offer, the expense statement should be as complete as possible. If there is any question on an item, the taxpayer should include the item and let the professional determine which items are appropriate and how much supporting material should be included. Most preparers have software programs that allow him to enter the information the taxpayer supplies to create a finished product.
The taxpayer is asked to describe why the offer is fair and where the offer funds are coming from. The IRS does not seek an explanation why the offer is fair, but preparing a response is a good exercise, since the strongest argument the taxpayer has is that the offer is fair (not something that the taxpayer is entitled to). The state will also seek a copy of the Internal Revenue Service Offer in Compromise (but not the attachments) and a state Power of Attorney.
The federal and state offers, if both are appropriate, should be prepared simultaneously. Many of the materials and much of the thought process is similar.