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Michigan Income Tax Debt

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Many people have the misconception that the IRS is more difficult to work with when resolving income tax debt as opposed to state taxing authorities. However, typically, it is actually more difficult to resolve tax debt with the state.

State taxing authorities typically give taxpayers less time to resolve their tax debt. The IRS may allow payment plans up to 72 months. Most states require taxpayers to pay their balances in full within one to three years.

Plus, when levying and garnishing taxpayers the IRS sends notices in sequential order to forewarn taxpayers. States typically do not use such a protocol. Understand your particular state’s tax rules of engagement since there is no uniformity from state to state.

STATE OF MICHIGAN BACK TAXES

What do you do if you owe the state of Michigan back taxes? For starters there is the Michigan Collections Department and the MARCS System {Michigan Accounts Receivable Collection System}.

When a taxpayer incurs a tax balance owed to the state, it is first assigned to the Michigan Collections Department. If it remains unresolved for an extended period of time, it is then transferred to MARCS. Then if it is still unresolved, it is transferred to a private collection agency in the same manner as credit card charge offs and other defaulted debts.

MICHIGAN TAX PAYMENT INSTALLMENT AGREEMENTS

Michigan offers installment agreements to individuals and entities. For individuals, twenty-four month installment agreements are automatically accepted and no financial form has to be submitted to the state. Installment agreements beyond 24 months require a financial form with supporting documents and approval. 

When a business entity is in question and it no longer exists, the state offers 36-month installment agreements and no financials are required. If the balance cannot be paid in full within 36 months for non-existent business entities, there is no maximum length of time for extended installment agreements. However, a financial form with supporting documents must be provided to the state. If the business entity is open and operating, the maximum time frame for an installment agreement is 36 months.

Unlike the IRS, Michigan taxpayers can enter into installment agreements for tax years which the taxpayer owes a balance{s}, even if further tax returns are required to be filed. However, the taxpayer is then required to file the delinquent tax returns and establish a new installment agreement to include the modified balance owed.

In order to enter into an Installment Agreement, taxpayers and entities must submit Form 990: Michigan Installment Agreement. However if the taxpayer or entity is incapable of paying the full balance in 2 years, than Form 3189: Collection Information Statement – Individual must be submitted in addition to Form 990. 

CSEDS/STATUTE OF LIMITATIONS FOR TAX COLLECTION

The statute of limitations on state tax collection for Michigan is 6 years. However, the statute of limitations is renewed every time the taxpayer reaffirms their debt—either by signing an acknowledgment (required to set up a payment plan or receive non- collectible status,) or by making a voluntary payment.

Reaffirmation of a tax debt will occur if the taxpayer:

  1. Makes voluntary tax payments,
  2. Signifies to the debt on a letter of acknowledgment, or
  3. Mutually agrees to extend by signing an agreement with the Commissioner of Revenue.

TAX PENALTY ABATEMENTS

State of Michigan tax penalty abatements are only approved when there is reasonable cause. Reasonable cause can include: (1) “I moved and no longer received state notices”, terminal illness, fire and or natural disaster, and can possibly include tax practitioner error. Reasonable cause does not include inability to pay, unemployment, financial hardship, or duress due to tax debt.

In Michigan, business entities can request an abatement of penalty for a particular period or year after paying in full the tax and interest.

MICHIGAN CNC: CURRENTLY NOT COLLECTIBLE

Michigan does offer a non-collectible status that is similar to the IRS Currently Not Collectible Status (CNC). To qualify, “allowable” monthly expenses must exceed monthly income. The taxpayer or the entity must submit Form 990: Installment Agreement indicating a monthly payment of $0 per month, Form 3189: Collection Information Statement – Individual, and supporting documents to substantiate an economic hardship. For individual taxpayers, allowable living expenses include only expenses that are considered necessary expenses. Necessary expenses are expenses that are required to provide for a debtor’s (and his or her family’s) health and welfare and/or production of income. The Michigan State Treasury adheres to financial standards similar to the financial standards published by the IRS for housing, utilities, transportation, medical costs, food, clothing, and other appropriate items when possible.

MICHIGAN OFFER IN COMPROMISE

The Michigan Department of Treasury Offer in Compromise program began January 1, 2015. This program allows taxpayers to submit an offer to compromise a tax debt for less than the amount due based on the following specific criteria:

  1. A doubt as to the liability based on evidence provided by the taxpayer. Doubt as to the Liability occurs when the taxpayers feel they do not owe the debt. The taxpayer must include an explanation as to why they feel they do not owe all or part of the tax debt and supply any supporting documentation. The taxpayer must provide evidence that they don’t owe all or part of this liability.
  2. A doubt exists as to the collectability of the tax due based on the taxpayer’s financial condition. Doubt as to Collectibility occurs when taxpayer is unable to pay the debt now or in the future. The taxpayer must show: (1) the amount offered is the most that can be expected to be paid or collected from taxpayer’s present assets and income; AND (2) the taxpayer does not have reasonable prospects for acquiring increased income or assets that would enable the taxpayer to pay a higher amount than that which is offered, within a reasonable period of time.

At the time a taxpayer submits an offer in compromise to the Michigan State Treasury, all of the following must be true:

  1. The taxpayer must have been assessed for the tax debts specified in the offer in compromise application.
  2. All opportunities for the taxpayer to appeal the assessed tax debt at informal conference, Michigan Tax Tribunal or the Court of Claims, must have expired.
  3. The taxpayer must have filed returns for all applicable taxes for all outstanding tax years.
  4. The taxpayer must have no open bankruptcy proceedings

If an individual taxpayer is eligible to submit an Offer in Compromise due to Doubt as to Liability, the following documents are essential:

  1. Form 5498: Offer in Compromise Checklist Doubt as to Liability
  2. Form 5181: Michigan Offer in Compromise
  3. Form 5185: OIC Schedule 3 Offer in Compromise Based on Doubt as to Liability 

Link to the above Michigan Offer in Compromise forms

If an individual taxpayer is eligible to submit an Offer in Compromise due to Doubt as to Collectibility, the following documents must be used:

  1. Form 5499: Offer in Compromise Checklist Doubt as to Collectibility
  2. Form 5181: Michigan Offer in Compromise
  3. Form 5183: OIC Schedule 2A {Individuals} Collection Information Statement for an Offer in Compromise Based on Doubt as to Collectibility

The above tax collectability forms are available at: 

If an entity is eligible to submit an Offer in Compromise due to Doubt as to Liability, the following documents need to be prepared and submitted:

  1. Form 5498: Offer in Compromise Checklist Doubt as to Liability
  2. Form 5181: Michigan Offer in Compromise
  3. Form 5185: OIC Schedule 3 Offer in Compromise Based on Doubt as to Liability 

View OIC Doubt as to Liability forms 

If an entity is eligible to submit an Offer in Compromise due to Doubt as to Collectibility, the following documents are essential:

  1. Form 5500: Offer in Compromise Checklist Doubt as to Collectibility – Business
  2. Form 5181: Michigan Offer in Compromise
  3. Form 5184: OIC Schedule 2B {Business} Collection Information Statement for an Offer in Compromise Based on Doubt as to Collectibility

The OIC forms above are available at:

Eligible Offers:

Tax debt collection action, including telephone calls, garnishment and levies, and tax due notices will stop once your submission becomes pending and throughout the review process. Note that penalty and interest will still accrue while your submission is pending. 

Your submission becomes pending when the Treasury receives the required Form, along with required schedules and documentation, and the required initial payment of $100 or 20% of the offer, whichever is higher. The Michigan Treasury will notify you in writing when your submission is received.

Please visit www.michigan.gov/oic to review the exact Guidelines for the Offer in Compromise Program and for more information on the eligibility requirements.

A Michigan tax lien will remain until the Michigan Treasury completes the review of your offer in compromise.  If your offer is rejected, the tax lien will not be released until the tax debt is paid in full. If your offer is accepted, the tax lien will not be released until the compromised amount is paid in full.