If you have been unable to reach an arrangement with the CDTFA and they have recorded a lien against you, all is not lost. It is possible to have the lien released. While the damage to your credit report has been done, releasing the lien is the first step to rebuilding your financial life.
The first and most obvious way to release the lien is to make payment in full, including any interest, fees, and penalties. It is also possible to request a partial release of the lien if there is a need to sell or transfer a specific piece of property and there are insufficient funds or equity to satisfy the tax debt, or when the party with the lien does not actually have any rights to the title of the property.
To request a partial release of a lien, you must provide the CDTFA with a variety of documents outlining the need for a partial release and evidence of the proposed disbursements to both seller and buyer. If the partial release is granted, the lien will remain in effect on all other property.
How to Resolve Your Debt
In some instances, the CDTFA will let taxpayers set up a payment plan. Approval of the plan is usually contingent on the amount due and whether the CDTFA is satisfied that there are no assets available to pay off the liability.
- Outstanding balances less than $25,000 that will be paid in full within
- Outstanding balances $25,000 and greater that will be paid in full within 36 months
Payment plan applications will not be automatically accepted under the following circumstances:
- An active bankruptcy
- All periods discharged from bankruptcy
- An outstanding delinquency
- A revoked license
- An active earnings withholding order for taxes (EWOT), levy, or notice to withhold
- An existing active payment plan
- A prior payment plan that was in default or terminated within the last 12 months
- A prior payment plan that was completed within the last 12 months
- An active keeper warrant or till-tap
- A dealer or liquor license cancellation/ suspension
- Listed on the Top 500 Sales and Use Tax Delinquencies in California
- A jeopardy determination billed within the past 30 days
- An accepted and approved offer in compromise (OIC)
- The taxpayer is registered as a Receivership/Fiduciary
- Investigation Indicator
Before making a final decision, the CDTFA will request financial information (applicable to both individuals and business) to determine whether the taxpayer has resources to pay off the debt immediately.
Some documents include:
- A CDTFA-403-E, Statement of Financial Condition
- Bank statements (both personal and business)
- Merchant card statements,
- Income tax returns,
- Accounts receivable listings (including names, addresses, phones numbers, and amounts owed)
- Income and expense (or profit and loss) statements
- Balance sheets
- Cash flow statements
- Other documentation relating to the taxpayer's finances
The CDFTA will look at the complete picture, including the taxpayer’s household income and valuations of assets in terms of Fair Market Value or Quick Sales.
The taxpayer will be required to submit their household expenses, which the CDTFA categorizes into “necessary” and “conditional.” Regardless of which kind of expenses the taxpayer is trying to claim, they will need documentation to justify them.
Examples of necessary expenses include:
- Housekeeping supplies
- Apparel and services
- Personal care products and services
- Miscellaneous - The miscellaneous allowance is for expenses a taxpayer may incur that are not included in any other allowable living expense items, or for any portion of expenses that exceed the standards.
In addition to the table of allowable living expenses for food, clothing, and other items, the IRS website has links to tables for out-of-pocket health care expenses, housing and utilities, and transportation. There is also a broad category, “other,” where “necessary” expenses claims are scrutinized as to whether they meet the criteria.
Examples of conditional expenses include
- Accounting and legal fees are necessary only if they meet the necessary expense test (health and welfare or production of income).
- An expense incurred for private education (unless it meets the criteria for a necessary expense, as previously stated) is considered to be a conditional expense.
- Housing costs other than for the taxpayer's primary residence are conditional expenses.
- Other expenses not associated with the maintenance of the primary residence are considered conditional expenses
- Transportation charges falling within the standards in the IRS tables are generally allowable. Excess transportation charges and claimed expenses for more than one vehicle must pass the necessary expense test.
Once the payment plan is established and approved by the CDTFA, it is the taxpayer’s duty to make all payments on time.
The CDTFA expects the taxpayer to report any changes in income that could satisfy the debt sooner than the established pay-off date. The taxpayer can terminate the payment plan at any time and the CDTFA can terminate it for non-payment.
CDTFA Offer in Compromise
The other way to release a lien is to have your balance set to zero by the CDTFA. This may be possible by requesting relief. In some circumstances, you may be eligible to make an Offer in Compromise, where you settle with the CDTFA for an amount less than what you owe, but as much as they believe you can reasonably pay.
You may be eligible for an Offer in Compromise if you meet all of the following criteria:
- You have a final tax or fee liability on a closed account.
- You are no longer associated with the business that incurred the liability.
- You do not dispute the amount of tax or fee you owe.
- You cannot pay the full amount you owe in a reasonable amount of time.
The rules around the CDTFA Offer in Compromise program are very strict and only apply to businesses which have been closed.
If you were the spouse or domestic partner of a taxpayer with a lien against them and have ended your relationship, you may be able to apply for Innocent Spouse or domestic partner relief.
Regardless of which repayment plan you end up with, it is very important that you uphold your end of the bargain by making your scheduled payments in the full amount and on time. The consequences of not paying could lead to termination of the agreement.
An installment agreement can be terminated due to:
- late payments,
- delinquent or partial payments,
- failure to disclose assets or income on the financial statement,
- failure to increase payment levels as requested on new assets or income, or
- failure to comply with a review of financial status.
Once a lien is released, the CDTFA will issue a “Release of the Notice of State Tax Lien'' to the county office where the lien was recorded. You can also request that copies of the lien release be sent to yourself, title companies or escrow agents.
All Is Not Lost
My recommendation for payment plans when you're dealing with the state, is to bring somebody in to help you negotiate, especially if you start having problems with the representative.This is particularly true for any state liability $20,000 or over.
If you need help setting up a payment plan with the state, they're generally pretty quick and will send us documents within a week. After that, a decision comes very quickly. There’s usually a lot of pressure that goes along with this, so if you're dealing with the state, know that you might be in for a rough ride.
In fact, one of the reasons why our practice is centered around California tax issues is we know there's more pain at the state level. The lack of a judicial check on the administrative tax agencies in California creates a lot of problems for people and settling up with collections is very difficult.
The CDTFA in particular is very inflexible, especially for active businesses. If you have a sales tax liability with California, it's very difficult to get those negotiated. First, get your attorney involved in protecting the cash flow of your business. That way, it is far less likely that California can come in and drain everything out of operations.
From an individual perspective, you don't want to commit to a payment plan that's going to be too aggressive and that you're going to struggle to keep up with, either.
We’ll consider your situation, your family situation and how much you need to live on. Then we’ll negotiate collections resolutions that satisfy the interests of the government but still protect you and the cash flow you need to live.