Michigan Offer In Compromise

Settle for Less Than Owed With a Michigan Offer in Compromise

If you cannot pay your Michigan State taxes, you may want to look into the state’s Offer in Compromise program. As of 2015, the Michigan Department of Treasury can offer settlements to individuals and businesses who cannot afford their tax liabilities. You may also qualify for an offer in cases where your appeal rights have expired and there is legitimate doubt that you owe the taxes. 

Key Takeaways

• Offer in compromise – tax settlements for qualifying businesses and individuals in Michigan.
  • Doubt as to collectibility – for taxpayers who cannot afford to pay their tax debt.
  • Doubt as to liability – for taxpayers who do not really owe the tax.
  • Federal acceptance – for taxpayers who have been accepted for an IRS offer in compromise
• Eligibility – up to date on state tax returns and no open bankruptcy.
• How to apply – file the version of Form 5181 that matches your situation.
• Downpayment – the greater of $100 or 20% of your tax liability.
• Offer payment options – lump sum in 30 days, five installments, or six to 24 monthly payments, 
• If accepted – must make first payment in 30 days and other payments as directed in acceptance letter.
• If rejected – may request an administrative review to appeal.

To get help now, contact us at the W Tax Group today. We can help you apply for both a state and federal offer in compromise if your financial situation indicates that’s the best path forward. If not, we can help you pursue other relief options. 

What is a Michigan Offer In Compromise?

An offer in compromise is when the Michigan Department of Treasury lets you settle your taxes for less than owed. You can apply based on the following:

• Doubt as to collectibility – You can’t afford the tax.
• Doubt as to liability – You don’t really owe the tax.
• Federal acceptance – The IRS has accepted your request for an offer in compromise.

Eligibility Requirements

Both businesses and individuals can apply for an offer in compromise, and the following must be true:

• No open bankruptcy proceedings.
• Must be current on all tax returns.
• If applying based on doubt as to liability, all opportunities for appeal of assessment must have expired.

You also must submit a downpayment worth the greater of $100 or 20% of your offer. For example, if you offer to settle your taxes for $1,000, you should include a downpayment of $200 with your offer. If you offer to settle for $300, you should include $100 as that’s more than 20% of your offer.

How to Apply

Depending on the type of offer you’re requesting and whether you are a business or individual taxpayer, you will need to file the following forms which you can obtain on the DOT’s website:

• Form 5181CI – Doubt as to Collectibility Individual
• Form 5181CB – Doubt as to Collectibility Business
• Form 5181L – Doubt as to Liability
• Form 5181F -Federal Offer in Compromise Acceptance

These forms request detailed information about your income, expenses, and assets. Be prepared to note all of your financial details and attach supporting documents such as bank statements, paystubs, and business records.

Submit application and initial offer payment to:

Michigan Department of Treasury
Offer In Compromise
P.O. Box 30190
Lansing, MI 48909

Payment Options for Michigan Offers

When you apply, you can propose the following:

• Lump sum payment, due within 30 days of acceptance.
• Five or fewer equal monthly payments, due within five months of acceptance.
• Equal monthly payments over a period of 6 months to 24 months after acceptance.

If you need more than five months to pay, the DOT will issue a state tax lien.

How Much Should I Offer?

If you apply based on doubt as to collectibility, your offer should be equal to your Reasonable Collection potential. To put it very simply, the Department wants to make sure you are offering the most possible. If the Department believes that they could get more by garnishing your wages or seizing your assets, they will not accept the offer. 

The State of Michigan wants to ensure that you are devoting as much of your disposable income to your offer as possible, and if you have assets, they will want those funds as well.

To illustrate how to compute an appropriate offer, let’s plug in some numbers.

As a general rule of thumb, then we would base the offer on the following:

Based on the number above you may offer:

Note: This is just a guideline for computing your offer. You may want to consult with an experienced Michigan Tax Lawyer to assist with the submission and offer amount.

Allowable Expenses

Michigan has very strict criteria for what constitutes a necessary monthly expense. The state’s guidelines are very similar to the IRS’s financial standards, with some variations. 

As of June 2023, the DOT allows the following expenses for a family of two. Allowable expenses are lower if you are a single person, and they are higher for larger families.

• Housing including mortgage or rent, property tax, and utilities: $2296 
• Food, clothing, etc: $857
• Clothing, personal care, etc: $532
• Vehicle ownership costs: $629 for one vehicle or $1258 for two vehicles
• Vehicle operating costs: $315 for one vehicle or $630 for two vehicles
• Health insurance: Actual cost allowed for monthly premiums.
• Life insurance: Actual cost of monthly premiums allowed.
• Medical out-of-pocket expense: $79 per person if under 65 and $154 if over 65

The Department will also include monthly payments for alimony, child support, childcare, 401(k) loan repayments, credit card payments, payments for other delinquent taxes, and union dues. You may also include tuition or education costs for the taxpayer. In contrast, the IRS does not allow you to include credit card payments or tuition as necessary expenses. 

You can find links to updated standards on the DOT’s website. 

To explain, imagine you apply for an Offer in Compromise, and you have a family of two people. You pay $2500 per month in housing expenses. As noted above, the DOT will only allow you to include $2296 as a valid expense when calculating your reasonable collection potential.

What to Expect While the IRS Reviews Your Offer

The DOT will typically stop all collection actions while they review your OIC application. However, if there is a lien against you, it will not be released until the offer is paid in full. If you have an existing installment agreement, 

Acceptance or Rejection of Your OIC Application

If the Department accepts your offer, they will send you a letter noting the amount of the offer and the timing of payments. They will also send you a letter if they reject your offer. 

If you applied based on doubt as to collectibility, the DOT may send a counteroffer, or they may recommend that you make monthly payments. You may apply rejections by requesting an Administrative Review on Form 5186 (Request for Independent Review of Rejected Offer in Compromise).

Risk of Offer Revocation

If any of the following statements are true, the DOT can revoke your offer and demand payment in full of the taxes:

1. Taxpayer withheld relevant income and asset information on their application.
2. Taxpayer deceived the state with false statements or by destroying relevant information
3. Taxpayer falls out of compliance with conditions of OIC or doesn’t file required returns.

Other Options

If you do not qualify for an offer in compromise, you may want to set up monthly payments through a Michigan Installment agreement. Alternatively, contact the DOT and ask for penalty abatement to reduce your balance due – the DOT will usually waive penalties if you incurred them due to reasonable cause.

Need assistance with a State of Michigan tax problem? Our qualified team of professionals including multiple tax lawyers, accountants and EAs will get you the answers you need. Call (877) 500-4930 or visit us at our headquarters: 300 Galleria Officentre, Suite #402 Southfield, Michigan for your free consultation to get the answers you need.