By A.J. Gross, C.P.A., E.A.
Governor Snyder signed into law HB 4003. HB 4003 allows the State of Michigan to negotiate Michigan taxes. This is exciting news for Michigan taxpayers! For the first time ever, Michigan residents will be able to negotiate Michigan taxes for less. The new law will start in 2015.
Michigan is one of the last states to establish an offer in compromise program. An offer in compromise is a program that allows you to settle your taxes for less. The IRS and 40 other states have an offer in compromise program.
Establishing the Michigan Offer in Compromise Program was sorely needed. Michigan can be difficult to work with when you owe back taxes. This is especially true if you can’t afford to pay your Michigan back taxes. It is not uncommon for a taxpayer to go into hiding or leave the state to escape from paying back state taxes.
The new Michigan Offer Program will be modeled after the IRS Offer in Compromise Program. The state may settle your taxes in three circumstances. 1) Doubt as to collectability. You are unable to fully pay the back taxes. 2) Doubt as to liability. This means you believe the state taxes are incorrect and you can prove it with sufficient evidence. 3) The IRS approved an offer in compromise.
The third provision is interesting. The state may settle your state taxes for less if the IRS did the same for IRS taxes. According to the new law, the state may reduce your state taxes based on the percentage of the IRS reduction. For example, you owed $60,000 in IRS taxes and $10,000 in state taxes. You filed an offer in compromise to the IRS. The IRS accepted $5,000 to settle your $60.000 of back IRS taxes. The IRS tax settlement reduced your taxes by 92%. According to the law the state may accept 92% less for your state taxes. This comes out to be $800. Overall, you would pay $5,000 to settle your IRS taxes and $800 to settle your state taxes.
The new law will start on January 1, 2015. The Department of Treasury is responsible for setting up the program. It will be interesting to see how the new Michigan Offer Program is rolled out to the public.
IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.
A.J. Gross, C.P.A., E.A. is President of ALG Tax Solutions. A.J. Gross can be contacted at AJGross@algtaxsolutions.com.
This was printed in the July 13 - July 26 edition.