Responding to a Michigan Department of Treasury Notice Regarding a Tax Liability or Refund Adjustment
There are several ways to respond to a notice from the Michigan Department of Treasury (“Treasury”) regarding an outstanding tax liability or refund adjustment. The options available to individuals and businesses generally include the following:
1. offer in compromise;
2. informal conference and appeals; and
3. alternative dispute resolution.
Below, we provide a brief description of each option and an in-depth analysis of the newest option, the alternative dispute resolution settlement offer. A taxpayer should carefully weigh each option with an experienced tax attorney to determine his or her best strategy, the taxpayer’s likelihood of success, and opportunities to negotiate a preferable outcome.
Offer In Compromise
The offer in compromise program in Michigan began in 2015. Under this program, taxpayers may submit an offer in compromise of his or her full tax liability. The offer is submitted along with supporting documents and an initial payment. The initial payment is the greater of $100 or 20% of the offer. The Michigan Treasury will then evaluate the offer and determine whether to accept it. A taxpayer eligible for offer in compromise must meet one or more criteria, including:
- doubt as to the liability based on evidence provided by the taxpayer;
- doubt as to the collectability of the tax due based on the taxpayer’s financial situation; or
- the taxpayer has been given a federal offer in compromise for the same tax years they are seeking.
In addition to the criteria above, the taxpayer must (1) have filed tax returns for all outstanding tax periods, (2) not be in an open bankruptcy proceeding, (3) agree to the conditions of the offer in compromise, and (4) personally sign the form, among other requirements.
The Treasury cannot levy against property or assets to collect the tax liability while the offer in compromise is pending. However, submitting an offer does not prevent interest from accruing or penalties from being issued. The taxpayer may choose to appeal the Treasury’s decision if the Treasury rejects the taxpayer’s offer.
Informal Conference and Appeals
An informal conference is the opportunity for a taxpayer to discuss his or her position. The informal conference process is limited and only applies to Michigan income tax, sales tax, use tax, withholding tax, Michigan business tax, single business tax, corporate income tax, motor fuel tax, and tobacco products tax, among others. The taxpayer has sixty days from the notice of adjustment or denial of a refund to request an informal conference.
After a taxpayer requests an informal conference, there will be a preliminary review to determine whether the dispute can be decided based on information submitted instead of a conference. Many matters are resolved without holding an actual conference. A taxpayer who participates in an informal conference process should be prepared to provide all documentation that supports his or her position to the hearing referee five business days prior to the conference. At the conference, the taxpayer will be given the opportunity to defend his or her position.
Following the conference, the conference’s hearing referee will be issued a written recommendation. The Treasury will review the hearing referee’s recommendation and issue a decision and order from the Department. Once the decision and order is issued, the taxpayer has a right to appeal the decision to either the Michigan Tax Tribunal or the Michigan Court of Claims. If the taxpayer appeals the Treasury’s decision then the matter is referred to the Michigan Department of the Attorney General. The parties may pursue settlement negotiations with the Department of the Attorney General at this time.
Alternative Dispute Resolution
The newest option for taxpayers with outstanding tax liability is the ADR option. This option came into existence in December 2017. Previously, the Department of Treasury was unable to compromise with a taxpayer prior to litigation. This law provides for an alternative dispute resolution mechanism whereby taxpayers are able to submit an offer to settle outstanding debt.
This law covers some, but not all taxes. See the lists below for an overview:
Taxes that may be resolved through ADR
- Corporate Income Tax
- Equalization Tax
- Individual Income Tax
- Sales Tax
- Severance Tax
- Single Business Tax
- Michigan Business Tax
- Motor Carrier Fuel Tax
- Motor Fuel Tax
- Use Tax
Taxes that cannot be resolved through ADR
- General Property Tax Act Tax
- State Real Estate Transfer Tax
- Tobacco Products Tax Act Tax
- Heath Insurance Claims Assessments
- City Income Tax
If the tax owed falls under one of the categories covered by the law, then the process for applying for this option includes requesting an informal conference and submitting a valid ADR request prior to the informal conference. The ADR request must be submitted no later than 21 days after the informal conference.
A valid ADR request must meet several requirements.
- First, the offer must be the party’s best, good-faith offer.
- Second, the offer should include both a factual and legal basis for the taxpayer’s position.
- Third, the request must contain the amount in dispute and the issues that need to be settled.
- Fourth, the request should include a proposed settlement amount.
- Fifth, the form should be accompanied by supporting documentation.
If any of these items are missing, the Treasury may not consider the request and will instead return the form to the taxpayer for additional information.
Once the taxpayer has submitted a valid and timely Form 5573, the Treasury Department may do one of three things. The Treasury may:
- accept the offer;
- reject the offer; or
- reject the offer and make a counter offer
If the offer is accepted, the parties will enter into a settlement agreement and the taxpayer will pay the outstanding liability.
If the Treasury rejects the offer, the taxpayer’s case will be removed from abeyance and will proceed with the informal conference procedure to determine the outcome.
If the Treasury makes a counter-offer, the taxpayer and Treasury will then have the opportunity to negotiate. All offers and subsequent correspondence between the taxpayer and the Treasury related to offers must be in writing and have a legal and factual basis. If a final settlement is reached between the taxpayer and the Treasury, the settlement is final and may not be challenged or appealed.
If you or your business has received a notice from the Michigan Department of Treasury, it is important to consult with an experienced tax attorney to determine which of the above options are the best fit based on the facts and the Treasury’s allegations. If you would like to discuss your options to settle an outstanding tax liability, please contact us.
Taylor helps businesses and business owners solve and prevent problems as a member of Foster Swift's Business and Tax practice group. He handles business formation and transactions, tax controversies, employee benefits, and technology related issues.View All Posts by Author ›
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