Can You Settle Michigan Sales Tax Debt for Less Than You Owe?

Michigan businesses that fall behind on their sales tax deposits often find it hard to catch up. Not only are they trying to deal with unpaid sales tax, but they’re also trying to stay current on new tax liabilities. However, failing to address your growing sales tax debt can put your business in jeopardy, so it’s important to look into options—and for some businesses, that means considering an offer in compromise.

The Michigan Department of Treasury has an offer in compromise program that is somewhat similar to the one offered by the IRS. However, getting an offer approved for sales tax debt can be challenging, and it’s important to know the limitations of this program. To get experienced help now, contact us at the W Tax Group.

Key Takeaways

• Michigan does have an offer in compromise plan that extends to all tax types administered by the state.
• Sales tax offers in compromise are very rare and subject to intense scrutiny by the Department of Treasury.
• A Michigan tax lawyer can help you explore all available options, including an offer in compromise or a payment plan.

Why Sales Tax Debt is Different From Other Taxes

Business owners may find it considerably harder to get a MI offer in compromise approved for sales tax than for other forms of tax debt. This is because sales tax debt is a trust fund obligation. When a business collects sales tax from customers, they are doing so on behalf of the state of Michigan. Businesses are expected to hold those funds in trust until their next due date, at which point they must remit the full amount to the government. 

When a business fails to do so, the government is more likely to view it as mishandling government funds, rather than just falling behind on taxes.

This doesn’t mean that getting a Michigan offer in compromise for sales tax debt is impossible or that it’s not worth trying. It just means that you should know what to expect going into the process and be prepared to show that you have a genuine financial need when requesting a Michigan Treasury tax settlement.

Michigan Offer in Compromise: What It Is and Isn’t

The Department of Treasury allows taxpayers to request an offer in compromise on three separate grounds: 

• Doubt as to collectability. This is the most common option, as it’s used for those who just don’t have the funds to pay the tax bill in full. 
• Doubt as to liability, which is for those who don’t believe they owe the tax. 
• Federal acceptance. It’s for taxpayers who have an accepted OIC with the federal government. 

However, federal acceptance doesn’t really apply to state sales tax debts – under Michigan’s OIC program, you cannot apply for any offer based on IRS acceptance if it’s not a tax that the IRS administers. Since there is no federal sales tax, you can only apply on the grounds of doubt as to collectability or liability.

Michigan law does state that any tax they collect can be settled via offer in compromise. However, it’s important to recognize that getting an accepted OIC for sales tax is very rare and extremely difficult. The state generally views failure to pay sales tax as a more serious violation than failure to pay other types of tax. 

The state may prefer to recover what they are owed via liens, levies, and personal liability of officers or owners. They view sales tax as money that never actually belonged to the business in the first place, and generally want payment in full whenever possible.

When Settlement Might Be Possible

While an OIC for sales tax is rare, it isn’t unheard of. There are situations in which an offer in compromise is better for both the business and the state.

The Department of Treasury may be more open to an offer in compromise if the business is closed down and has no remaining assets to pull from. In this case, liens and levies on business assets won’t do anything, and pursuing personal liability plus aggressive collection actions may be more work than they want to sign on for.

This is especially true if the responsible parties—owners, officers, and so on—are facing such significant financial hardship that personal liability would not get the state any closer to collecting what they are owed. 

If a business is still operating, it can be much harder to get a settlement – the DOT may not let you get away with not paying taxes that you’ve collected from customers if you’re still operating, and if it looks like you won’t be able to keep up with future tax obligations, they may decide to revoke your sales tax permit.

If a business is requesting an offer in compromise for doubt as to liability, the Department may be open to it. When a taxpayer has evidence that the state may have assessed more than is actually owed, the Department may prefer a quick settlement over drawn-out appeals. However, these cases can be very hard to argue – for best results, make sure you have an attorney experienced with the MI DOT on your side. 

Why Most Businesses End Up in Payment Plans Instead

In general, the Department of Treasury prefers installment agreements on back sales tax when a business is still operating. In these cases, the business is still bringing in money and has assets that can be used to pay off sales tax debt. It’s important to understand that if you are approved for a sales tax payment plan, ongoing compliance with sales tax requirements is mandatory—so you should have your financial affairs fully in order and know that you are able to pay sales tax in full moving forward before applying for an installment agreement.

The Role of a Tax Attorney in Pursuing Settlement and Other Alternatives

There are several ways a Michigan sales tax attorney can help you when it comes to applying for a sales tax offer in compromise. To start, they can help you determine if it’s even a realistic option for you. 

When you apply for an OIC, you have to pay $100 or 20% of your offer, whichever is greater—and you don’t get that money back if your offer is denied. The funds simply go to the tax debt. This can be a significant chunk of money for many businesses, especially those that are struggling to keep up. Paying that and applying when you have no chance of approval is a waste of both time and money when other relief options are available. If an OIC isn’t the right option for your business, a tax lawyer can help you look into other options.

If you do have a shot at getting approved for an offer in compromise, a tax lawyer can help gather financial documentation proving your business’s financial need. This makes it easier to demonstrate that paying in full would cause severe financial hardship.

If an offer in compromise isn’t approved, an installment agreement may be the best way to pay off the debt and protect your personal assets. A tax lawyer can negotiate on your behalf for fair repayment terms.

Settling your sales tax debt in Michigan is rare, but it isn’t impossible. In general, business owners find more success with penalty abatement, payment plans, and other options that involve payment in full. But if you act early and with the help of a tax attorney, you can protect yourself and your business from more aggressive collection efforts.

When you’re ready to discuss the possibility of an offer in compromise and finally get your sales tax debt under control, the team at W Tax Group is here to help. Call us at 877-500-4930 or fill out our online contact form to schedule a time to discuss your case.

Frequently Asked Questions

Does Michigan ever forgive sales tax debt?

Yes, but it’s fairly rare. The government is stricter with regard to sales tax and other trust fund taxes than it is with income tax. 

How long does an offer in compromise take?

The state strives to process offers as quickly as possible, but many cases take several months to review. More complex offers, including a lot of financial documentation, may take up to a year or more.

What do I have to pay to request an OIC?

You have to submit a payment of $100 or 20% of what you’re offering, whichever is greater. If you do not pay, your offer request is considered ineligible.

What if I’ve never paid sales tax in Michigan?

The right option depends on your situation, if you’ve never paid sales tax. Depending on whether you’re still operating and whether or not you can afford the taxes, you may want to look into a voluntary disclosure or a settlement. A tax attorney can be critical.

Sources:
https://www.michigan.gov/taxes/collections/oic
https://www.michigan.gov/taxes/-/media/Project/Websites/taxes/MISC/2022/Guidelines-for-Offer-in-Compromise-Program.pdf
https://www.michigan.gov/taxes/collections/oic/guidelines/section-1—guidelines-for-offer-in-compromise-program/2—submitting-an-offer-in-compromise
https://www.michigan.gov/taxes/collections/oic/guidelines
https://www.michigan.gov/taxes/collections/oic/forms