Misinformation abounds as to whether a taxpayer owing North Dakota state income tax may file an offer in compromise to resolve North Dakota state income taxes. An offer in compromise permits the taxpayer to pay less than the full amount of the tax in settlement of the entire tax liability.
Offers in compromise are well known at the IRS, with significant information available on how to submit and how the IRS implements offers in compromise. However, the same is not necessarily true with state tax authorities. Not all states permit formal offers in compromise. Some have informal, unpublished rules on when the state tax authority may consider an offer in compromise.
There appears to be uncertainty by many as to whether the state of North Dakota permits an offer in compromise of state income tax debt. That uncertainly may even reach into the North Dakota Tax Commissioner’s office itself. This uncertainty is demonstrated by two recent experiences.
First, a potential client called me about a North Dakota tax liability he owed. I asked whether he had considered an offer in compromise. He insisted that North Dakota does not permit offers in compromise. On his side were several prominent national tax resolution websites which state, “There is no State Tax Offer In Compromise program for taxpayers in North Dakota.”[1] Further, North Dakota is listed among the states under another prominent website heading which states: “Not all states have Offer in Compromise as an option. The following states currently have no OIC options to resolve tax debt: . . . North Dakota.”[2]
Second, in another inquiry about an offer in compromise in North Dakota, an attorney colleague informed me that he had called the North Dakota Tax Commissioner’s Office to see about filing an offer in compromise. The attorney informed me: “According to the Office of the North Dakota Tax Commissioner, Collections/Accounts Receivable Department, North Dakota does not have a similar process by which an individual can offer to settle their tax liability for less than the full amount. Call with Collections/Accounts Receivable Department, April 29, 2019.”
Fortunately for the taxpayer, both of these scenarios are incorrect. North Dakota law specifically provides for offers in compromise of North Dakota income tax debt. In North Dakota Century Code 57-01-02(14) the North Dakota Tax Commissioner is granted the power and duty to enter into offers in compromise:
Notwithstanding the provisions of this section, if a debtor and the internal revenue service enter into an offer in compromise pursuant to section 7122 of the Internal Revenue Code [26 U.S.C. 7122], as amended, the tax commissioner may reduce a debtor’s individual income tax liability. However, if the federal offer in compromise, for any reason, is subsequently declared void by the internal revenue service, the debtor is liable for the original amount of tax due.
A prerequisite to a North Dakota offer in compromise is the filing of an offer in compromise with the IRS.
These recent examples of misinformation demonstrate the importance of selecting tax advisors that know the law and processes of state tax authorities, something that national tax resolution conglomerates out of California or Florida may not be experienced with in “flyover states” like North Dakota, Montana, Wyoming and Idaho. Please do not hesitate to contact me if you have questions about resolving tax issues in those states.
Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] https://trp.tax/tax-guide/state-tax-offer-in-compromise/#:~:text=There%20is%20no%20State%20Tax,visit%20their%20state%20tax%20portal. (accessed
July 16, 2020).
[2] https://www.getcanopy.com/blog/a-crash-course-in-state-specific-offers-in-compromise (accessed July 16, 2020).