Hawaii Offer in Compromise: What You Need to Know
An Offer in Compromise is an agreement between you and the State Government to settle your back taxes for less than you owe.
An Offer in Compromise is strictly based on numbers; basically, your income versus your expenses and the equity in your assets.
If you can prove to the State you do not have the ability to pay back your taxes in full before the Statute of Limitations expires, then you may be eligible to file an Offer in Compromise. However, it will depend on your Reasonable Collection Potential and how much time is left before Statute of Limitations on the debt expires.
Qualifying for an Offer in Compromise
The State of Hawaii OIC program is similar to that of the IRS. There are three options to submit under:
1. Doubt as to liability;
2. Doubt as to collectability, and;
3. Effective tax administration (exceptional circumstances). Meaning you could pay your tax bill in full, but it would cause an extreme hardship for the State to ask you to do so.
As always, the State will only process an OIC application if all required tax returns have been filed.
Submitting Your Offer in Compromise
The documentation the State of Hawaii requires is as follows:
- Complete Form CM-1.
- Attach a statement of Financial Condition and Other Information Form CM-2 for Individuals. Form CM-2B for Businesses.
To obtain these forms, visit www.tax.hawaii.gov
No, you cannot use IRS forms for submission.
Offer in Compromise Pros and Cons
The Pros of submitting an Offer to the State of Hawaii is they may allow your debt to be compromised and thereby removed. The State also posts pending Offer which have been tentatively accepted on the website, so you don’t have to wait for the mail to find out.
The Cons are if the State rejects your Offer, it is not subject to administrative or judicial review. In this State, the director needs the approval of the governor if your tax balance exceeds $50,000. If you owe less than $50,000, you don’t need the governor’s approval.
In addition, a collateral agreement is required. Meaning, it requires you to make additional payments in the future if certain conditions are met. The instructions read as: “Usually, the collateral agreement is effective for a five- to ten-year period after your offer in compromise is accepted. If your annual income exceeds a certain amount in any year covered by the collateral agreement, you are required to pay to the state a percentage of that excess amount.
The Department may require a collateral agreement as a condition for accepting your offer in compromise, particularly if you have an on-going business or if you have the potential for future earnings. While the collateral agreement is in effect, you must file all your tax returns on time and pay any tax owed in full; if not, the offer in compromise will be voided.
Obtain Collateral Agreement Forms CM-3 (for individuals) and CM-4 (for corporations) from the Department collector who is handling your account.”