Ohio Tax Resolutions

Introduction: An Overview

The State of Ohio has a multi-faceted approach for dealing with delinquent income tax matters. The Department of Taxation is responsible for the collection and administration of the Ohio tax code, while the Attorney General’s office is responsible for collections enforcement. Further, the Attorney General’s office employs private collection firms, they call “special counsel,” who perform most of their collection activities. These private collection firms are given the full power of the Attorney General while handling their collection matters.

Taxpayers who owe back income taxes to the State of Ohio have 3 main options available in order to reach a reasonable resolution to their delinquent tax liability. These are:

· Installment Agreement (Payment Plan),

· Offer-in-Compromise, and

· Penalty Abatement

An Installment Agreement, otherwise known as a Payment Plan, is an arrangement where the taxpayer reaches an agreement with the State of Ohio to make monthly payments until the past due tax liability is paid in full. An Offer-in-Compromise is a program where a taxpayer may offer to settle their delinquent tax liability for less than the amount that is owed. In Ohio, an Offer-in-Compromise may be granted for Economic Hardship, including innocent spouse relief, Doubt as to Liability, or, in limited instances, a substantial probability that the claim, if collected, would be subject to refund under the Department of Taxation’s statutes, rules or regulations. Finally, a Request for Penalty Abatement is a written request asking the State to waive some, or all, of the penalties that have been assessed. Each of these options will be discussed in further detail in this article.

Statute of Limitations

The first factor that must be taken into account before a possible resolution is considered is to determine the taxpayer’s legal rights under Ohio law with respect to the statute of limitation rules for the collection of delinquent tax debt.

In Ohio, the Attorney General’s office may file a tax lien against the taxpayer in the county in which the taxpayer resides for any delinquent tax debt that has been certified to them by the Department of Taxation. The Attorney General’s office has 7 years from the date of the original tax assessment to begin legal proceedings to collect the debt. These proceedings include garnishment of bank accounts, garnishment of wages, garnishment of certain retirement or investment accounts, foreclosures or conducting a debtor’s examination through the Court. If the Attorney General’s office fails to begin proceedings to collect the delinquent tax debt within the 7-year period, they are time-barred from ever being able to use these enforced collection methods.

Unfortunately, this does not affect the status of any tax lien filings. Under Ohio law, tax lien filings have a separate statute of limitations. This limitation only requires the State to refile the lien every 15 years – and they may keep the lien active for up to 40 years. Therefore, even if the State may be time-barred from conducting enforced collection of a delinquent taxpayer, they may still keep their lien on the taxpayer’s property for up to 40 years. Naturally, this creates an undesirable position for many taxpayers’. The taxpayer may still need to reach a resolution with the State despite the fact they are protected by statute from garnishments, foreclosures and other enforced collection measures.

Installment Agreement (Payment Plan)

Ohio law does not authorize the Department of Taxation to set up a payment plan. The Attorney’s General’s office is responsible for collection of Ohio’s delinquent tax; therefore, they have sole power to set up payment arrangements with taxpayers. This means that a taxpayer must wait until the Department of Taxation “certifies” the debt to the Attorney General’s office for collection. This will happen after the original assessment from the Department of Taxation expires – which is generally 60 days. The taxpayer may still make a full or partial payment on the tax debt, however, interest and penalties will accrue if the balance is not paid in full. Often, making a partial payment is still beneficial for the taxpayer, especially for those with very large debts, as the amount of penalty and interest that a taxpayer will owe is based upon the amount of tax debt owed, which will be discussed in more detail later.

Once the tax debt has been certified to the Attorney General’s office for collection, they will issue their own notice to the taxpayer, including penalties and interest. Practically speaking, the taxpayer has a very short time to deal with the actual Attorney General’s office before they send the debt to one of their private collection firms. These private collection firms, called “special counsel,” are granted all power and immunity that the state of Ohio reserves for collection of government debt. Therefore, they are not subject to the Federal Fair Debt Collection Practices Act (FDCPA). It is critical that taxpayers promptly work to resolve their delinquent tax debt at this stage in order to avoid enforced collection by these private firms. Further, these firms will assess additional collection fees on top of the already accruing penalties and interest.

The Attorney General's office will accept your request for installment payments for payment plans of up to one year. This means, the taxpayer must agree to a monthly payment amount that pays off the entire delinquent tax debt, plus penalties, interest and collection fees, within 12 monthly payments. Naturally, based on this formula, the monthly payment figure for those taxpayers who have significant delinquent tax debt is, in most situations, too high for the average taxpayer to afford.

If the taxpayer is unable to afford to pay off the debt in 12 monthly payments, and otherwise does not qualify for any other form of relief as discussed herein, the Attorney General may accept a lesser monthly payment figure if the taxpayer can establish a financial hardship. A taxpayer establishes a financial hardship by providing financial information which shows he/she is unable to pay the standard 12-month payment amount. Each special counsel will determine a financial hardship in a different manner, but generally, they seek the same or similar financial information discussed below for an Offer-in-Compromise Application.

Taxpayers, or their representatives, should be mindful to include a hold, or stay, on enforced collection as part of the written payment agreement to protect the taxpayer from later being subject to enforced collection.

Offer-in-Compromise

The State of Ohio has established a formal Offer-in-Compromise Program to allow certain taxpayers to settle their delinquent tax debts for less than the amount they owe. The settlement will include not only delinquent tax due, but also penalties, interest and any collection fees that may have accrued. The program is administered by the Attorney General’s office, with consent of the Department of Taxation, and has specific requirements that a taxpayer must meet in order to qualify.

The program allows taxpayers the opportunity to settle their delinquent tax debt under 3 circumstances, (1) economic hardship, (2) doubt as to liability, or (3) in limited instances, a substantial probability that the claim, if collected, would be subject to refund under the respective agencies’ statutes, rules or regulations. The State of Ohio processes innocent spouse relief under the economic hardship Offer-in-Compromise program.

The Attorney General’s office only provides general guidance as to what specific criteria a taxpayer must meet in order to qualify for each of the 3 types of acceptable Offers-in-Compromise. They define an Economic Hardship as, “having insufficient assets and income to pay the full amount and that requiring full payment would cause a severe economic hardship.” They do not elaborate on how they view – or calculate – a severe economic hardship. Further, they define having Doubt as to Liability as, “the taxpayer having a belief that they do not owe the amount and/or did not receive service of the assessments.”

The guidance that the Attorney General’s office does provide is general eligibility requirements, submission requirements, and a list of financial documents that they require to be submitted. These items will be discussed in more detail below.

Eligibility

In order for a taxpayer to be eligible for an Offer-in-Compromise the following must be true:

· The delinquent tax debt must have been certified for collection to the Attorney General’s office for greater than 1 year

· The principal must be greater than $500 (except for innocent spouse)

· The taxpayer must not currently be in bankruptcy or have an administrative appeal pending with the Department of Taxation

Requirements

The following are the requirements for submitting an Offer-in-Compromise:

• The taxpayer must complete and submit an Offer-in-Compromise application. This application can be found at, https://www.ohioattorneygeneral.gov/Files/Forms/Forms-for-Business-and-Nonprofit/Collections-Forms/Offer-in-Compromise/OICApplication_CE-pdf.aspx

• The taxpayer must be current with all tax return filing and estimated payment requirements

• The taxpayer must sign the Offer-in-Compromise application, agreeing to all terms and conditions stated therein, specifically:

o Disclosure of each and every obligation owed to the State of Ohio

o Payment of the proposed settlement amount, in full, within 60 days of execution of the Offer-in-Compromise Agreement

• The taxpayer must agree to remain in continued compliance with all filing and estimated payment requirements for a period of 5 years after the execution of the Offer-in-Compromise Agreement. Failure to comply with this requirement will result in the reinstatement of the original delinquent tax debt, including accrued interest.

• Full financial disclosure is required. A failure to fully and completely disclose and attach any information required by the Offer-in-Compromise Application may result in outright rejection or, if previously accepted, reinstatement of the full amount owed plus accrued interest.

• The Attorney General’s office encourages applicants to also submit any and all relevant information or documents that pertain to their specific situation, even if they are not specifically requested in the Offer-in-Compromise Application.

Required Documents

The following is a list of documents that the State of Ohio requires to be included with the submission of an Offer-in-Compromise:

• Copies of all Offer-in-Compromise forms and supporting documents submitted to the Internal Revenue Service, if applicable; including, all related notices received from the Internal Revenue Service

• Copies of the last two years’ Federal income tax returns, including all W-2’s, 1099’s, schedules and attachments

• Copies of the last two years’ State income tax returns including all W-2’s, 1099’s, schedules and attachments

• A credit report dated within the past year

• Copies of the last three months’ pay stubs or proof of income

• Copies of the last three months’ complete bank statements for any and all open accounts at all banks, credit unions, and any and all other financial institutions

• Copies of the last three months’ complete credit card statements for any and all open credit cards

• Copies of all insurance policies and/or most recent renewal declaration pages, including homeowners, renters, automobile, etc.

• If applicable, a copy of an official statement of social security or other government benefits received

• If applicable, list any bankruptcy cases filed and attach copies of the discharge documents

• Applicant’s monthly budget including a list of all monthly income and a list of all monthly living expenses

• Provide copies of the current month’s bills for all budget items listed including lease agreements, mortgage statements, utility bills, car payments, etc.

• List of assets with copies of the last three months’ investment statements including IRA’s, 401k’s, stocks, bonds, etc.

• List of any other debt that is currently in collections, i.e. medical bills, credit cards, pay day loans, utilities, etc.

• Documentation, if applicable, showing payment on the above debts

• List, and provide documentation of, any collection proceedings that have been filed against the applicant, including, but not limited to wage or bank garnishments

• List all civil or criminal cases, including court and case number, in which any applicant is a party

• List any professional licenses from any and all state or federal agencies

• Please specify if any of these licenses are impaired because of the applicant’s debt or for any other reason

Filing Process and Considerations

The State of Ohio requires that the Offer-in-Compromise Application be submitted in paper copy only. Taxpayers should submit their application and supporting documents to the Office of the Attorney General, OIC Unit, 150 E. Gay Street, 21st Floor, Columbus, Ohio 43215.

Taxpayers should be aware that the submission of an Offer-in-Compromise Application does not prevent the Attorney General’s office from filing tax liens, tax refund offsets, or stay any pending enforced collection actions, including garnishments or foreclosures. However, the Attorney General’s office will not undertake any new enforced collection actions. Further, the filing of an Offer-in-Compromise Application does not protect the taxpayer from otherwise making payments pursuant to a previously negotiated installment agreement.

Taxpayer’s should be aware that the Attorney General’s office reserves the right to use any information that is provided in the Offer-in-Compromise Application for debt collection purposes.

Review and Determination

Once the Attorney General’s office has received the Offer-in-Compromise Application and supporting materials from the taxpayer they will conduct a preliminary review to ensure that all eligibility requirements, submission requirements and required supporting documentation have been met or included. If the application is incomplete, or if the taxpayer does not meet the eligibility or submission requirements, the application will be rejected without review. If particular documents do not exist, the taxpayer may submit the application with a notarized statement explaining why the records do not exist. The Attorney General’s office will base its recommendation on the information provided, however the Department of Taxation may investigate further.

Next, the Attorney General’s office will perform a review of the application and issue a recommendation of acceptance, rejection or counter-offer. This, along with the application, is sent to the Department of Taxation for review. The Department of Taxation will also perform a review of the application and ultimately issue an acceptance, rejection or counter-offer.

The Attorney General’s Office and the Department of Taxation have stated they will consider all of the following during review of an Offer-in-Compromise Application:

• Earning potential, current employment and future employment/income

• All sources of income, past, present and future

• Applicant’s age with respect to earning potential

• Borrowing potential

• Assets

• Dependents

• Litigation, including tax litigation

• AG Collection notes

• IRS and other state and local tax returns

• IRS or other state Offers-in-Compromise

• Whether the applicant has made a good faith attempt to pay the liability prior to submitting the Offer-in-Compromise Application

• Whether the offer is sincere (rejections and counteroffers are not negotiable)

• Does the Applicant have a history of tax compliance? Applicants who cannot demonstrate that they have filed and paid their taxes timely for at least two years will generally be rejected outright

• In cases of an active business applicant, the fairness to competitors

They further advise that, “[i]t is the burden of the applicant to prove each basis for the request for relief. If the applicant believes a specific issue should be considered, such as an ongoing medical condition or pending legal proceeding, documentary evidence in support of that issue, such as medical records and/or pleadings, must be submitted along with the application. Do not rely on the State to request information.”

The Attorney General’s office will issue a notice to the taxpayer stating whether the Offer-in-Compromise Application has been accepted, rejected, or a counter-offer proposed. Taxpayers will usually receive this notice within 3-6 months after the filing of their Offer-in-Compromise. The taxpayer does not have the right to appeal a denial of an Offer-in-Compromise; however, they do have the ability to refile the application if their circumstances change.

Innocent Spouse

Pursuant to Ohio law, if there is a joint assessment of spouses for personal income tax and one of the spouses has been granted relief from the joint assessment under I.R.C. § 6015, there is a rebuttable presumption that this spouse is entitled to similar relief for any Ohio assessment of the same liability. The spouse must complete an Offer-in-Compromise Application, as discussed above, and also include all correspondence with the Internal Revenue Service related to the innocent spouse relief and all tax returns, including all attachments, for the tax years in question.

Ohio will still consider innocent spouse relief for those who cannot establish that they have already received similar relief from the Internal Revenue Service, however, the taxpayer must seek that relief by filing an Offer-in-Compromise Application under the circumstances Doubt as to Liability.

Penalties and Interest

With respect to delinquent income tax debt there are 2 penalties that a taxpayer should be mindful of. The first is the failure to file penalty. The failure to file penalty will be assessed when a taxpayer fails to file his/her tax return by the due date, including extensions. The failure to file penalty is the greater of $50 per month, but not exceeding $500, or 5% per month, but not exceeding 50% of the total tax that is due. This penalty will be assessed for each month, or fraction of a month, that the tax return is late.

The second is the failure to pay penalty. The failure to pay penalty is determined by the tax commissioner, but pursuant to Ohio law, may not exceed twice the amount of the federal short term interest rate. Currently, that rate is 4% per annum.

Additionally, interest is applied for each month that a delinquent tax goes unpaid, not to exceed the federal short term interest rate, which as previously stated, is currently 4% per annum.

As one can see, the penalty for a taxpayer failing to file their income tax return on time (the first penalty) is very steep. Therefore, even if a taxpayer is unable to pay the tax due they should strive to file their income tax return on time in order to avoid the failure to file penalty.

Penalty Abatement

Ohio law permits the Department of Taxation to abate penalties if the failure to comply with the provisions of the tax code were due to reasonable cause and not willful neglect. There is no published guidance as to what the State of Ohio considers “reasonable cause and not willful neglect.” However, some examples provided by the IRS are: death of a family member, incapacitation of the taxpayer, unavoidable absences, fires, floods, natural disasters, or other like situations resulting in circumstances beyond the taxpayer’s control. A taxpayer must pay the underlying tax due before the Department of Taxation will consider a penalty abatement request.

A taxpayer, after paying the underlying tax, should submit a request for abatement in writing to the Attorney General’s office. Include any supporting documentation that may be relevant. The current address for submission of penalty abatement requests is Ohio Attorney General, Collections Enforcement Division, 150 E. Gay Street, 21st Floor, Columbus, Ohio 43215.

The Attorney General’s office will forward the request to the Department of Taxation. The Department of Taxation will make a determination, usually within 60 days. The Department may abate all, some or none of the penalty. The taxpayer cannot appeal penalty abatement request determinations; however, they may refile the request if circumstances change.

Alternative Options That May Be Available

Challenge the Assessment

If the taxpayer has a proposed assessment for additional income tax due as a result of an Ohio Department of Taxation audit, they have the opportunity to appeal the proposed assessment. The taxpayer may first appeal to the Department of Taxation Appeals Office. Here, an informal hearing will be conducted, usually via telephone, with a tax attorney from the Department of Taxation.

If a resolution is not reached with the Department of Taxation Appeals Office, the taxpayer may appeal to the Board of Tax Appeals. The Board of Tax Appeals is an administrative judicial body that works in a formal, court room type manner. While a taxpayer may represent him/herself in front of the Board of Tax Appeals, it is advised to hire a licensed attorney who has experience practicing in front of the Board of Tax Appeals.

The Department of Taxation is represented by the Attorney General’s office for cases in front of the Board of Tax Appeals. The taxpayer will have the opportunity to reach a settlement with the Attorney General’s office attorney; however, if a settlement is not reached between the parties the case will precede for a hearing in front of the Board. The Board will then issue a ruling based on the evidence presented, applying Ohio law to the facts of the case. Decisions of the Board of Tax Appeals may be appealed to the Ohio Appellate Courts.

Bankruptcy

Bankruptcy can be a costly endeavor; therefore, this option is likely only practical for taxpayers who have significant personal debt in addition to their delinquent tax debt. Generally, State tax debts may be discharged through bankruptcy proceedings. Taxpayers should seek the advice of an experienced tax and bankruptcy attorney if they believe this option is right for them.

The Ohio Tax Amnesty Program

From January 1, 2018, through February 15, 2018, the Department of Taxation offered a “Tax Amnesty Program.” This program was available for individuals and businesses with unreported or underreported income. If these taxpayers enrolled into the program the Department of Taxation would waive all penalties and only assess half interest if the taxpayers filed, or corrected, their returns and paid the entire tax due. This program is currently closed, however, if the State decides to reopen the Program, delinquent filers should take advantage.

Appeal Rights

As discussed herein, Ohio law does not provide taxpayers with the right to appeal determinations of the Attorney General or Department of Taxation with respect to collection of delinquent tax debt. However, there are a couple practical tips that the taxpayer, or their representative, should follow in an attempt to reach a reasonable resolution.

First, do not be afraid to escalate contentious issues to a manager at the Attorney General’s office or the Department of Taxation. Often times, a fresh set of eyes, and the authority and experience of a supervisor, can help resolve some issues.

Second, if you believe that your case manager is not following Ohio law, or discriminating against you, file a request for investigation, in writing, with the Department of Taxation Problem Resolution Office. The Problem Resolution Office serves as a liaison between the Department of Taxation and taxpayers when the normal lines of communication break down or when a problem remains after attempts to solve it through designated channels have failed. More information about this office can be found at, https://www.tax.ohio.gov/other/problem_resolution.aspx.

Lien Releases

The Attorney General’s office will release tax liens only after the delinquent tax debt, including any penalties, interest or collection fees, have been paid in full or satisfied through an Offer-in-Compromise Agreement. The Attorney General’s office will forward to the taxpayer a certificate of release for the tax lien in question. The taxpayer must file this certificate of release with the court where the tax lien is filed in order for the tax lien to officially be released. This is often something that is overlooked, or misunderstood, by taxpayers.

Conclusion

Given the information contained herein, taxpayers have many tools at their disposal when dealing with delinquent tax debts with the State of Ohio. With that said, Ohio has a very government friendly statute of limitations to conduct enforced collection and hold tax liens against taxpayers. Additionally, the penalty, interest and collection fees system results in reasonable tax debts ballooning into crippling debt. Therefore, taxpayers should consult with a qualified tax professional as soon as these problems arise in order to determine which course of action is most appropriate for their situation.

Disclaimer

Reading this article does not create an attorney-client relationship. This guide should not be used as a substitute for the advice of a competent attorney or tax professional admitted or authorized to practice in your jurisdiction.